Carton conundrum

Will packaging end-users be buying their cartons from Central and Eastern Europe in a few years? Will innovation at the best price be the secret in their dealing with carton converters? And will the secret to the UK carton industry surviving be a marketing-led, flexible sector with an eye to developing smart cartons printed with electronic circuits?

Yes to all three is the answer, that is if the nearly 140 strong audience accepted the well-prepared thoughts of an impressive array of speakers whose presentations were held together by the seamless hosting of the BBC’s Nick Higham.

The News 24 presenter, part of whose impressive knowledge of the industry may well be laid at the door of his father who worked for Metal Box, split the day into “box half empty” and “box half full” sessions, even changing his tie to reflect either “gloom” or “opportunity”. He opened the event with an “on the couch” interview on the state of trade (a technique featured throughout the conference) with Mark Kerridge.

The managing director of Benson Box had welcomed delegates to the company’s state of the art plant just outside Leicester the day before. “I prefer customers who put demands on converters,” he said, putting the company’s acknowledged success down to an ability to make quick decisions and drive costs out of the business.

Asked about the retailers’ position and how they “often get a bad name” Kerridge replied: “I have a lot of regard for the retailers. They are driving a very good business model – investing in their business for growth. They are using the leverage they have, but at the end of the day they have core beliefs to deliver value for the customer and choice for the customer. And they do understand that cartons can convey differences between products to the customer.”

But Tim Rothwell, senior vice-president at Lansdowne Capital UK, was not so kind. “I believe the huge growth of Tesco and Wal-Mart has been largely financed by the cash flow of their suppliers,” said the paper and plastic packaging sector specialist at the corporate finance company. His thought-provoking analysis of the global market and the major issues facing the carton industry and its users pointed to a decline in or flat consumption per capita of cartons in the western economies since the mid-1990s and a vigorous growth in China, Eastern Europe and South America. Asking why folding carton growth in Western Europe was disappointing he stressed the importance of “cartonboard competitiveness”. He likened the price trends of folding box board (FBB) over the past decade to “the vapour trail of an orbiting space station – up in the stratosphere defying gravity. That is surely not right.

“The major paperboard manufacturers are still constrained by shareholder structures dominated by the forest owners who are basically looking to get the highest price for wood.”

Michael Clarke of M-Real took up the baton for the cartonboard maker during questions. “Our prices have not moved in 22 years,” he retorted. He took the point on ownership and the forest owners, but added: “We are trying to meet our customer needs.” Tim Rothwell came back: “You have been kind and measured, but the Finnish strike said it all.” Integrated companies should de-merge, he suggested. “You supply a marvellous product, but it costs.”

At the conference dinner President of BPIF Cartons John Monks used the Saxa Salt carton to show just how the carton industry had changed yet prices had slid over the decades. “The order in 1956 was for 45 million units. (2.25 million sheets were printed.) It took 52 weeks to produce on letterpress machines, board cost £50/t, the working week was 45 hours and the printer’s wage was £15/week. A packet of salt was 2.5 old pence (£0.1p) and the carton price was 35 shillings (£1.75)/,000.

“Today, it wouldn't be produced in one run, but if it were it would take around 270 hours, which at continuous 24 hour working is two weeks. The board price would be £380-£400/t (x 8 compared to 1956); the carton price would be £15/1,000 (x 8). The printer’s wage is £600 per week (x 40); the salt costs 27p in Tesco (x 27); and inflation over the period is around 6% per annum. “So board and carton prices have effectively more than halved in real terms.”

He had set the tone of the conference in the programme. “We live in challenging times – hopefully participation here will ease them. There are reasons for optimism for the industry, but we shall continue to be pressurised unless or until we adopt a fresh approach, and adapt better to our changing environment.

“Fortunately, our sector does have successful businesses and these are to be congratulated and emulated. In recent years however, our industry has lost over 50 businesses – a third of our number.” He hoped the delegates would “seize the opportunities to ensure you avoid their fate. “

Many references were made to the growth in Central and Eastern Europe and the future structure of supply. And with the opening up of these countries following the fall of communism in the late 80s, not only was there a huge local market opening up, but also opportunities to produce packaging at cost effective rates.

Head of global business development at PIRA Andy Rushforth said: “Poland and Hungary were quick to adapt and westernise. Russia and the Ukraine were very unstable with GDP collapsing by 50% in the early 90s. But by 2000 Russia was growing solidly and attracting investment. Key drivers are the macro economic conditions. In the UK growth is running at around 2% whereas in Eastern Europe this is 5-6%.

“In central Europe brand owners tended to acquire local players whereas in Eastern Europe the tendency was to go for green field site start ups. Packaging suppliers virtually always follow their customers and having done that then diversify into the local market.” A good example was Gillette and Sonoco’s move to Poland. “Emerging markets have room for best in class converters. So partnerships with brand owners are an opportunity,” he said.

“Will migration of production continue at a heavy pace?” posited Rushforth. Yes, we are a long way from equilibrium. Short lead time products, for example salads, and high weight to cost items such as shampoos will be protected, but Gillette is packaging razors for several markets in its site in Poland.”

He also offered some advice for sustainability. “Firstly avoid the commodity cul-de-sac. Second make sure the culture of innovation goes right through the workforce. That is critical. Third, foster collaborative partnerships across the supply chain. And you can always join the game – expand regionally.” Companies did not need to be large to do this, he said, they can be SMEs, citing Robinsons as an example of a company that will grow by 50% by building in Poland.

Much travelled technical member of Unilever’s Paperboard Global Supply management team John Pollard deliberated on the opportunities and challenges from a customer perspective. His company has an operation in every country of the world except for North Korea and Burma. “Quite frankly I can’t remember when we made things in the UK to satisfy the home market,” he began. Offering an insight into Unilever’s sourcing strategy he told delegates there were three business models. “The first is a collaborative relationship with one supplier. The key to this is innovation; the company must also offer financial security, low cost and geographical coverage. We find this model difficult to do with the paperboard industry.”

The second model is “Lead and Alternative” where “the lead company gets most of the business and the alternative gets enough to keep it on-stream. We sometimes use this where we don’t want to commit to a particular company. The third is the commodity model, but it is not preferred.”

He was adamant that with the developing middle classes, low costs and high growth in the emerging markets “we will continue to manufacture there. The western world has no technology advantage; the same presses are available. The South Americans can do impressive things, for example.” He offered some words of advice: “The biggest mistake you can make is to underestimate them.

“Converters are likely to remain locally to the product packaging sites. If the product moves then the carton will move too,” stressed Pollard, a salutary warning to those converters unprepared to invest outside the UK. And there were examples of carton imports based purely on price. “An Egyptian company can import pizza boxes to the UK at a cheaper price than those produced here.” It is assisted by the USA as well as by Egypt offering incentives. “I tell you it is not a level playing field – we never said it was!”

“But we need self sustainable suppliers. And we need them to be able to invest. We are not in the business of squeezing people out of business and taking money away from their investment.We do need innovation. We don’t want you to say ‘tell us what we want and we’ll make it for you’.”

Innovation was the underlying theme to the message “Adding value through technology” of PrintCity’s Tony Kenney. He stressed that carton converters should investigate their investments thoroughly and “become sharper telling your customer about it. You must ask yourself whether you are production or marketing driven. A successful company like Benson Box thinks in terms of marketing opportunities first, then tonnes at the end of the week. Do you buy equipment from the stomach? Or do you do the research? Make sure it offers an advantage – it makes you different to the competition, gives you something to tell Unilever about!”

Three areas he highlighted as well worth looking at for success were brand protection, primary packaging and RFID/printed electronics.

“Brand owners need more activity from us and at a low cost. We must contribute. Lone rangers don’t change the future. You have to ask your key accounts ‘Are you involved with brand protection’. “Kenney advised converters to investigate the technologies (he identified 16) and make the investment. On primary packaging he suggested delegates talk to the board and ink suppliers and look at what can be converted to primary packaging. “And the bunny huggers, as we call the greens in Australia, love it if you can get rid of secondary packaging."

Last, but not least as an opportunity, was RFID. “We have the stick on tag, but what we want to be able to do is print it. Can we print the chip or bury it in the board?”

The lasting impression of the day was that the carton business had to change and move. Tony Kenney concluded: “Standing still is not an option. Eastern Europe may be great for 15 years, but it is just a speed bump for China.”

And as Andy Rushforth said: “To paraphrase Darwin: it is not the strongest of the species that survives, nor the most intelligent. It is the one that adapts.”