Riding the Recession Rollercoaster

What goes up, must come down—so the saying goes. This could be used to describe the business climate during 2008 in any number of ways. For the label and packaging market, both the going up and the coming down have had significant negative effects.

Corey Reardon, president and CEO of AWA Alexander Watson Associates, McLean, Va., noted that the first half of last year was clearly identified with steadily increasing raw material prices, driven by unprecedented increases in oil and energy costs, with record high oil prices by mid-2008.

"During the second half of 2008, the reverse was true," he said. "Oil prices fell, and raw material prices stabilized and began to fall. Most significantly, during the second half of 2008, the impact of the economic crisis affected market growth dramatically. A softening and almost static third quarter was succeeded by rapid and unprecedented declines in market demand in the fourth quarter, and into 2009."

Frank Gerace, president and CEO of Sharonville, Ohio-based Multi-Color Corporation, had a similar observation. "Market conditions were stable through the third quarter of 2008; however, there was significant demand erosion during the fourth quarter as concern about the economic downturn led to customers ordering less to lower their inventories," he witnessed.

The label and packaging market has been described over the years as being recession-proof. This current recession is testing that theory.

James Hammer, president and CEO of Rochester, New York-based Hammer Packaging, said it clearly. "There is no industry that is recession-proof. Some are impacted less than others, but all industries suffer when reinvestment slows or stops altogether." While he believes the label market has remained relatively stable, "the competitive nature of the industry has become more intense than prior to the present economic situation," he noted.

Gross domestic product (GDP) is often used as a reference point for making predictions for the packaging market. Looking at recent GDP data would substantiate the potential negative impact on the label market. According to estimates from the U.S. Department of Commerce, GDP fell at an annualized rate of 6.1 percent during the first quarter of 2009.

With quarterly numbers such as this, it stands to reason the label market is being impacted to an extent. "Labels have not been immune from the worldwide recession, and packaging certainly isn't recession-proof," stated John Zarwan, an independent consultant for the printing and packaging industries. "While packaging and packag[e] printing hasn't been hit as hard as many other industries, there is no doubt that it has declined."

In response to the recession and high rates of unemployment, Zarwan said consumers have pulled back and changed buying habits. "These changes affect different label converters differently, depending on end use, product category, customers and type of label," he stated.

Gerace pointed to some of the changes in consumer buying habits that he has observed. "We have seen the most demand erosion in premium beverages and home improvement markets. However, virtually all the markets we support have had some contraction. The private label and lower tier products have definitely fared better," he noted.

Out in Time

Important questions on many people's minds are: What is in store? How long, how deep will this recession be and how will it impact the tag-and-label industry?

AWA recently released a report, "Labeling & Product Decoration Markets, Global Review 2009," in which it analyzed these markets. The study stated the world label market, although reflecting the severe downturn in the world markets, fared better than other business sectors. According to the report, overall growth for labeling worldwide was 2.1 percent in 2008. However, this was down from more than 5 percent in previous years.

For 2009, Reardon predicted a further downward shift for North American markets. "Demand is expected to be softer in 2009 with a decline in North America at minus 2 percent or more," he stated.

Although this year is shaping up to be difficult, there is hope that it will at least see the bottoming out of the severe economic downturn. "I think the economy will stabilize in the fourth quarter of this year and we will experience very low growth levels for the following two years," said Gerace. "The economic stimulus package will help to improve the economy in the short-term; however, I fear we will enter a period of 'stagflation' as a result of the inflationary impact of pumping trillions of dollars into the economy and the measures that will then have to be put in place to counter it."

Hammer also believes the economic stimulus will lead to much higher inflation in the future, with resulting higher interest rates hampering some percentage of the market from reinvesting. "This may be bad or good; only time will tell," he added. "One fact is for sure; there will be less packaging printers in the future due to this crisis."

Many industry analysts have predicted the tag-and-label industry would experience consolidation at all levels. The depth of this recession could make consolidation a more likely occurrence in the coming months.

"The recession is a 'deleveraging,' a D-process," remarked Zarwan. "In every industry, weaker hands will fold, for whatever reason. We have already seen this with the very large integrated packaging converters … The tag-and-label printing industry will be no different from other industries in this regard. Some companies will close, others will be sold to those looking to acquire good assets at a discount."

Opportunities to Pursue

For struggling companies to survive, or those looking to become even more competitive, there seem to be a number of areas that present growth opportunities. Gerace, for one, noted that pressure-sensitive applications will continue to be the area with the most opportunity for growth.

Hammer foresaw other opportunities stemming from new technologies. "Growth within the label market will come from new, innovative ways of product decoration," he predicted. "Present decoration methods will realize growth as the economy improves, but the real growth will come in new technology."

Reardon mentioned some market segments that are showing relative strength. "The two main areas least affected by the recession are anything related to consumer food packaging and healthcare fields," he noted. "Although labeling in the food and healthcare segments has seen some softening in demand, they are relatively stronger than other application areas and are stable (food) or showing demand growth (healthcare)."

Two other topics clearly are worthy of note—digital printing and sustainability. Multi-Color is one of a growing number of companies that digitally prints prime labels, mainly for customers requiring low order quantities, said Gerace.

"It's clear that digital print in packaging—and particularly of labels—is growing, and growing faster than the market overall (even discounting the recession)," commented Zarwan. "There is no reason to believe that it will displace one technology more than another. To the extent that flexography dominates packaging, it will be most affected, but it may also make it more difficult for offset to maintain share."

Surviving Tough Times

These are extraordinary economic times throughout the world. Very few industries will come through this unscathed. Hammer added the present economic crisis will impact the label market for years to come. "Consolidation and Chapter 7 filings will reshape our industry," he said. "Those who can adapt to change and have a strong balance sheet will survive. Those who can't, will not."

Even in the most difficult situations, opportunity knocks, and today, Zarwan saw a silver lining. "The current 'Great Recession,' while difficult, nevertheless offers an excellent opportunity to 
remake organizations, enhance productivity, and provide innovative solutions to customers," he continued.

(This article originally appeared in the June 2009 issue of packagePRINTING, a sister publication of Print Professional. For more information, visit www.packageprinting.com.)