Under pressure

The labelling industry thrives on constant change. It is relatively innovative in terms of new applications and offers a generally high standard of output. But the aesthetic gloss that plays a key role in building brand awareness for end-users' products is not necessarily reflected in the industry's own performance.

In fact, the profitability of the UK label industry has declined markedly with many companies posting large losses. Too many are fighting for extra business at a time when market growth is not large enough to sustain good operating margins.

If we are to believe what Plimsoll Publishing says, then things are pretty grim. It publishes financial reports for various industries based on its own weighted ratios, giving a 'Plimsoll line' for a company's financial health. In its latest half-yearly analysis of the top 75 label-related companies, almost all have seen their performance slip compared to three years ago.

Currently, 23 companies are in the red while 13 of the industry's largest players are 'racing towards major problems as they pursue extra market share and profitability'. Poor market growth is frustrating their appetite for extra capacity: last year it was only 2.1% in revenue terms.

Senior analyst David Pattison suggests that acquisitions will form part of a consolidation of the industry. "There is just enough room for all these companies to breathe. We have identified 25 companies likely to be acquired by an aggressive competitor."

While there are undoubted managerial shortcomings in many firms, it is equally true that – as in packaging – the trading balance greatly favours the customer. Supermarkets, with their growing own-label brands, are infamous for predatory buying policies that dictate how much they will pay and the exact time they want delivery.

With excess capacity to fill, many companies are only too happy to oblige but the long-term effects on planning any kind of strategy to ensure survival have proved corrosive.

The other unsettling factor for converters is when they lose key accounts following mergers and acquisitions among customers.

In the current economic climate this has become less of an issue, but the risk remains that work related to pan-European consumer brands will be divided among just two large converters, whereas before five or six regional converters handled it.

This has caused several high profile failures among companies that had invested heavily in technology to service major accounts.

Not all buyers are fixated by competitive total-applied costs. However, most do expect suppliers of prime-product labels to work to ISO 9002 quality assurance standards, while conforming to hygiene and environmental performance levels. They must also be sufficiently flexible to supply all that is needed for individual products.

"Decoration techniques need to be easily adaptable," says Jan T. Hart, senior product manager, Avery Dennison Roll Materials Europe. "Equally, label materials must support production-line efficiencies within the supply chain. That is maximising the possibility for high speeds and minimising the chance of web breaks at the conversion and applications stages.

"Functionality is increasingly important as a way of enhancing the security and reliability of products. Solutions for tamper-evidence, product tracking and theft protection are increasingly in demand, as are materials that give good resistance to oil, UV light, chemicals and weather conditions.

The EU Packaging Directive has also caused industry to look at ways of reducing the weight of packaging. Thinner films play a key role here."

Of the dozen or so labelling types, pressure-sensitive (self-adhesive) labels take around 52% of the total European label market.

The latest market analysis from the European Pressure Sensitive Manufacturers Association shows that self-adhesive label stock consumption grew by an average of 5.5% in 2001 compared with 7.6% in 2000.

That meant the market increased by 209Mm2 to reach a total of 4028Mm2. This total accounts for one-third of the global self-adhesive label usage – roughly on a par with the US.

Last year paper rolls increased to 2945Mm2 or 73% of the total but the real growth came from non-paper rolls which increased to 715Mm2 or nearly 18% of the total. This reflects the popularity of filmics, as typified by the popular 'no-label look'.

These polymer-based materials are not only more durable than paper but are capable of being printed with all processes. Their individual characteristics can also be matched to those of a container, such as squeezability on a shampoo container, while being environmentally compatible.

While there are variations in usage between individual countries, the principle product segments are fairly universal – food and drink, pharmaceuticals, cosmetics and toiletries.

They are relatively recession proof but intense competition and low margins have encouraged many converters to turn to the so-called 'industrial' applications which include DIY, agricultural, automotive, electronics and general manufacturing.

They include logistic and tracking labels for courier services, and mail and on-line ordering services for consumer goods. Label volumes are closely linked to the growth of supply chain management information systems implemented by businesses to drive down costs. This sector is estimated to account for roughly one half of all self-adhesive label usage in Europe.

Radio-frequency identification label and tag and ticketing systems are closely related. The logistical and anti-theft benefits of these microchip based 'smart labels' are now more widely understood by major retailers and much of industry.

There are also new types of roll-fed laminating and applicating machines. But while the cost of entry is easier, with new types of labels priced in pennies not pounds, label unit costs are still perceived to be too high which inhibits any meaningful usage.

In respect of alternative labelling methods, the traditional wet-glue approach is alive and kicking. However, unlike self-adhesive labelling, its application is severely restricted and is largely dependent upon trends in large-volume canning of food products and the labelling of bottled drinks.

Most market watchers agree that this sector's share has steadily declined to account for just one-third share of the total label market with near-static annual growth. In this largely offset-oriented world, quality differentials rely heavily on substrate quality.

"Printing and application speeds are increasing so it is critical that papers have outstanding performance properties to meet the higher demands," says Ahlstrom's marketing manager for one-side coated papers Anthony Lemonnier. "Label printers are also looking to reduce costs. One area is to reduce label weight."

Ahlstrom's 62gsm Chantelor-62 label paper for sheet or reel-fed printing is said to give a higher yield compared with conventional 70gsm papers and produce more labels/kilo without compromising performance.

The demand for vacuum metallised beer bottle labels has increased so Ahlstrom has introduced Gerstar-800, a glossier version of this grade with a base weight reduced to 65g/m2.

Both the self-adhesive and wet-glue sectors have lost some business to the non-adhesive technologies. In-mould labels (mainly for dairy and household products and motor oils), paper or film wraps for bottled products, and shrink sleeves. Their usage reflects an overall growth in the usage of plastics containers.

Environmental considerations have also encouraged the wide usage of thinner multiply PP and PE films with improved barrier characteristics.

Volumes of shrink film sleeves have increased dramatically in recent years, helped by the introduction of new types of thin-gauge multiply films.

A major advantage is that sleeves offer 360º coverage for point-of-sale impact and a choice of tamper-evident features. Their durability as a form of product decoration is aided by reverse-side printing which protects the printed images against scuffing.

The fact that many sleeves are flexo printed rather than gravure, highlights the improved quality of the process, as well as shifts towards smaller runs. Water-based flexo and UV-cured flexo are already the dominant processes for printing self-adhesive labels using narrow-web presses.

Combination presses are configured for flexible multi-process operation, with a choice of flexo, UV flexo, offset, screen process or hot foiling within a press line.

From this proven concept certain manufacturers have developed multi-product models, capable of printing and converting not only label laminates but also unsupported films for flexible packaging and/or 300gsm carton board for small folded cartons.

In it latest end-user study prepared for the international self adhesive trade association FINAT, AWA (Alexander Watson Associates) said increasing globalisation meant that the European label industry had to address several supply issues that are apparent to end-users and which may be a source of frustration to them.

For example, the European label converting base is fragmented which makes global sourcing supported by regional servicing more difficult. A generally destabilised market structure is compounded by an apparent lack of economies of scale. A recent market report from Pira International refers to Europe's labelling industry as "being in a state of flux".

Of course, some companies will always buck the trend and enjoy buoyant sales, especially those offering products that do not compete on price and volume sales at the lower end of an increasingly crowded marketplace.

One example is Sentega Labels (UK). "We concentrate on delivering solutions that address customers' specific business needs with labelling products that allow them to operate more efficiently and improve their information flow", says sales manager Derek Ord.

"This strategy has paid dividends and we are seeing excellent growth, particularly in vertical markets such as petro-chemical, medical, pharmaceutical and agriculture, where we can use our exclusive Xonad technology.

"Labelling companies that do not re-invent themselves or fail to identify where their products can successfully improve the way customers operate will continue to be driven down in an increasingly competitive, commodity-related channel that offers little scope for growth."

Other commentators also feel it is time that the label industry adopted new attitudes towards generating profitable business. Examples include incorporating business models based upon e-commerce as a means of adding value and improving profitability just like the materials suppliers have done.

This implies a move towards the 'partnership' model, involving dedicated suppliers working with customers towards mutual business aims rather than the short-termism of 'divide and rule'.

The other side of this coin relates to the adoption of production techniques that improve operating efficiencies. Already go-ahead label and packaging firms are investing in computer-to-plate techniques, digital origination and networked proofing systems.

Some have installed digital colour presses to form entirely new businesses specialising in small runs for test marketing and seasonal promotions.

Investment in narrow-web label presses appears to have reversed a decline. Mark Andy UK managing director Mike Richardson says his company has sold 22 Mark Andy and Comco presses since January 2002.

"We have around a 50% share of the UK market, with Nilpeter and Gallus/Arsoma following. Excluding the compact models, I estimate some 40-50 new full-size label presses have been installed so far this year."

With credit terms at their lowest for decades it is a good time to invest. It's to be hoped that the greater flexibility and efficiency of these new presses ultimately outweigh the downside of yet more extra capacity appearing in a highly competitive market.