Once thought of as a sleeping giant, the folding carton industry appears to have awakened-and members of the Paperboard Packaging Council (PPC) have been busy this past year rousing it from its slumber. This was evident at the PPC's Spring meeting, which a record 115 people attended in Atlanta, Georgia, from March 21-23.

A number of industry trends and issues attracted the record crowd, such as: new, more accurate industry statistics that indicate growth in the folding carton business; consolidation, both within the industry and among its customers; and a new, highly successful marketing campaign that the PPC launched in 1998. Folding carton converters are facing many new challenges as they enter the 21st century, such as increasing strategic sourcing, decreasing profit margins and a drastically changing marketplace-all of which will require changes in their business structures and philosophies. PPC members discussed these market challenges, as well as possible ways to address them.

In a report that it released last year, Bankers Trust Securities Corp., Institutional Equities Research Group, described the folding carton sector of the packaging industry as "Steady Eddie" for its consistent market performance and mature growth rate. BT Securities publishes research on a number of integrated folding carton manufacturers for institutional investors. Mark Wilde, managing director and senior paper/forest products analyst at BT Securities spoke at the PPC meeting. He said the folding carton industry is attractive to investors because of its relatively steady demand in a non-cyclical market and its consistent pricing structure, due largely to its higher value-added content.

At the same time, however, "pricing pressures have increased over the last two years," Wilde said, "particularly in the higher-volume end of the business. Big consumer products firms have been using an increasing amount of their purchasing leverage to really squeeze pricing in some segments of the business," and this trend will continue with increased customer consolidation. Wilde said those converters willing to invest in capital to upgrade their products and to serve national and multinational accounts will be the most successful.

While PPC members generally agreed with Wilde's assessment of the carton market, the council disagreed with the "mature growth" label applied to the industry. This finding is based on new data on the market, said Steve Dunning, chairman of the PPC's industry information committee.

"The report implied that the industry is lagging its markets and losing share to other packaging forms and materials," said Dunning, who is manager of corporate planning at Smurfit-Stone Container Corp. He said the overall conclusion of the "Steady Eddie" report is "the industry's performance isn't bad, but it's clearly not home run territory. In nature's scheme of things, the folding carton industry was characterized as a tortoise."

But what if the numbers were better? "What if the industry were in fact larger, growing faster and tracking its markets?" Dunning suggested. The results of a new study conducted by Copeland Economics Group (CEG) suggest those conditions aren't merely the product of wishful thinking.

Dunning explained that the goal of the CEG study was to reconcile an approximately two-million-ton difference in reports between the PPC and the American Forest and Paper Association (AF&PA). Looking at 1997 data, CEG was able to narrow the tonnage gap, using the AF&PA and the U.S. Department of Commerce's Census of Manufactures as benchmarks. CEG concluded that the carton industry has been growing at about 2.2% per year, nearly double the rate of growth that the PPC had previously reported.

Another important conclusion of the CEG report is that the folding carton industry is strongly tracking-not lagging-its markets. The folding carton industry's biggest end-use markets are foods and non-durable consumer products, which have been growing at a rate of about 1.9% a year. According to the CEG's findings, U.S. folding carton producers have paralleled-even outpaced-that growth.

"What this says, in effect, is that, rather than losing share to other materials, we've actually been gaining share relative to the customers that we supply, or our products have been going into new and different markets," Dunning said.

Despite the more positive numbers in the CEG report, one PPC member and guest speaker presented a more sobering account from the paper and forest products perspective. Ed Woods, president and CEO of Gulf States Paper Corp., Tuscaloosa, Alabama, described the industry as high in volatility, low in profitability and vulnerable to customer consolidation.

According to Woods' figures, the paper and forest products sector ranked last in a comparison of 12 major manufacturing industries' return on investment. In other words, "the industry's return on its investments is less than the cost of capital in a very capital-intensive business," he said, because the paper industry has done a very poor job of managing capital spending and expansion.

"The spend-it-if-you-have-it investment behavior often results in capacity expansions coming on the heels of strong prices, (which) perpetuates chronic overcapacity in the industry and results in a falling utilization rate," Woods said. "This cyclical over-expansion in an industry that is relatively stable with small annual growth rates causes significant fluctuation in short-term demand, takes prices on a wild ride and dramatically effects profitability." Add to that mix increased customer consolidation, strategic sourcing and price squeezing, and the paperboard converting industry is in for some problems.

Woods said too many manufacturers still follow a product-centered business design. "They presume their customers are the same. They produce the same set of products. They still try to differentiate themselves with the same quality and price messages, and they still rely on the sale of their products as the only value-capture mechanism," he said. With that approach, "the market share gain will see profits decrease even as revenues increase."

To avoid that scenario, the industry must move toward a customer-centered design, Woods said. "We must start viewing the product as one part of a strategic business system" and work harder to cut cost out of that system.

With those kinds of market conditions in place, perhaps a good advertising and marketing campaign will help the paperboard packaging industry. Larry Howard, chairman of the PPC marketing committee and vice president of sales for the Fort James Packaging Business, reported positive feedback from an extensive magazine advertising campaign that the PPC launched in July 1998. An outside advertising company, Stern Agency, was hired to develop the campaign.

To date, six full-page, full-color ads have appeared in five customer-oriented magazines, including Packaging Digest, Packaging World, Brand Packaging, ID and Supermarket Business. The ads each feature a familiar folding carton package, such as a Crayola(R) crayon box; a box of General Mills' Wheaties(R) cereal; and a Dunkin' Donuts(R) carton. Using catchy text, the ads describe the benefits and values of paperboard packaging.

"Cops protect themselves with Kevlar. They protect their breakfast with paperboard," reads the Dunkin' Donuts ad. The fine print then reads: "You have the right to bold graphics. You have the right to crisp type. Anything you say can and will be read clearly. Want to handcuff the competition? Use paperboard packaging."

Howard said the ads have been well-received. A message impact study conducted by Packaging Digest, which ran the Crayola ad, showed that 68% of those surveyed remembered the ad, compared to a 46% response rate to other ads in the same issue of the magazine. Readers responded that the ad is "reminding companies to use paperboard packaging because it is so adaptable and affordable," and that the PPC is "an organized group of manufacturers that promote the use of paperboard packaging. Crayola has been successfully using it for many years and so should you."

The PPC plans to continue the ad campaign in 1999. It also plans to create ads for the drug and pharmaceuticals end-use markets.

In another new marketing effort, the PPC unveiled at the meeting a brochure for members to give to their customers or to use in sales presentations. The white and gold brochures bear the title: "The Things You Can Do With Paperboard Packaging" and feature on the cover examples of a hologram, fluorescent inks, embossing, hot foil stamping and UV coatings. The brochure contains information about paperboard packaging, outlining: the development of a package from concept to design; the wide range of structural and decorative materials available; and its versatility and affordability as a marketing tool for the products that it contains. The PPC plans to send the brochures to consumer product companies through a direct-mail campaign.

*The PPC contest winners, which were announced at the Spring meeting, are listed in Association News on page 17.

At its Spring meeting, the PPC presented its annual Roundtable Safety Essay awards-one for sustained excellence in safety and one for the most improved safety performance.

The awards are based on statistical performance as well as on an essay describing each plant's safety program. The programs are judged upon their demonstration of managerial commitment, defined policy and goals, training, management and hourly cooperation, auditing and incentives.

This year's award for overall excellence went to Gulf States Paper Corp. in Maplesville, Alabama. Gulf State's facility in Conover, North Carolina, was named as a runner-up in that category.

The award for the most dramatic improvement in safety performance went to Union Camp Corp.'s plant in Moonachie, New Jersey. Within the past five years, the plant has attained OSHA STAR certification and has brought its total recordable incident rate down from eight to zero.

When Jefferson-Smurfit Corp. and Stone Container Corp. merged, the new Smurfit-Stone Container Corp. made some tough decisions, PPC chairman Scott Macfarlane said in his speech to commence the council's Spring meeting.

"The merger has tightened the containerboard market. The combined capacities of Smurfit and Stone at the time of the merger was 5 million tons of linerboard and 1.9 million tons of medium," said Macfarlane, vice president and general manager of the folding carton and boxboard mill division at Smurfit-Stone Container Corp. in St. Louis, Missouri. "Restructuring reduced the combined containerboard capacity by more than 1.1 million tons, or 16% of the company's capacity." He said that percentage equals about 3% of total U.S. linerboard and medium capacity. Quoting a report issued in January by Resource Information Systems Inc. (RISI), Macfarlane said, "Smurfit-Stone's decision is unprecedented for this industry, since the only drops in capacity during the last 30 years were seven-tenths of a percent in 1977 and six-tenths of a decline in 1993.

"Our decision to take significant containerboard capacity out of our system sends a clear message to the industry that discipline, consolidation and rationalization of capacity are necessary for the collective long-term viability of this business," said Macfarlane.

In an exclusive interview with BCI, Macfarlane shared some of his thoughts on the folding carton side of the packaging industry. He said a big issue facing the industry is the fact that "the consumer drives us towards convenience. So we have to design for our customers, but we also have to design for our customer's customer." In addition, more consolidation-especially among the big-ticket customers-is likely to occur. To meet their needs, more technology investments will be required, while the cost of technology continues to escalate. It will be harder and harder to make a profit in the future, Macfarlane said.

"To improve our margins, we will have to be creative and add value as well as take cost out of the system," he said.