US flex packaging majors losing market share
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PCI Wood Mackenzie’s recently published study on the North American flexible packaging market estimates sales in the United States, Canada and Mexico at US$23.5 billion in 2016, growing by 4.5% in value terms during the year. However, some of the largest players, including Bemis and Coveris, did not share in the benefit, reporting static or even declining flexible packaging sales in 2016. Much of this has been ascribed to flat consumer demand in some end-use categories and lower raw material input costs, which were passed through in lower prices to customers.
We believe that these disappointing financial results from some of the leading players have led some commentators to suggest that flexible packaging sales in North America grew by only around 3% during the year. This view fails to fully appreciate the speed at which flexible packaging is replacing rigid formats in many applications or the impact that trends in consumer spending patterns are having on major brands and their converter suppliers — predominantly the largest converters.
There is a view that the big brand owners are losing out to new specialty food brands because they are spending too much on supporting and extending their existing high-volume brands, and not enough on innovation and the introduction of truly new products. At the expense of slow-moving legacy brands, consumers have begun searching for innovative, locally sourced, health-focused brands that feature natural ingredients displayed in transparent packaging (often utilising the stand-up pouch format).
Many of these new products come from food startups that are growing much faster than their large established competitors and often source their flexible packaging from small and mid-sized regional suppliers. Market fragmentation and the proliferation of new niche food brands also play to the strengths of small and mid-sized converters, many of which are more adept than large converters at quickly — and more profitably — turning around relatively small orders.
Private label, although much less important than in Europe, is also now growing rapidly in the US, not only at the giant retailers such as Wal-Mart but also at smaller regional chains. As a result, minimum order sizes are getting even smaller, and small to mid-size converters are growing their business. This is resulting in the increased adoption of flexible packaging formats for retailer-label products, such as cereals, but is not necessarily benefiting the major converters. Some major converters have begun bottom-slicing their customer base by cutting smaller, less profitable accounts.
Contract manufacturers and packers are picking up profitable business in growing markets, especially those utilising stand-up pouches, at the expense of some of the large converters. Of growing importance are imports, especially from Asia, of stand-up pouches and pouch laminate. Industry sources indicate that stand-up pouches sourced from Asia and especially South Korea are up to 20% cheaper than pouches produced in the US.
In the face of these competitive headwinds, major converters that rely too heavily on supplying the major brand owners will need to equip themselves to better and more profitably address the needs of the proliferating numbers of increasingly successful small and mid-sized speciality food companies that will continue to take a growing share of US grocery spending in the years ahead.