Business advisor Ernst & Young has completed the most comprehensive study in recent years of the global packaging market, which lends further credence to the growing number of advisors that are heralding the industry as a safe bet for investors.
The study, entitled The Global Packaging Market - The Top 100 Players, reveals that despite investors' historical reluctance to enter the sector due to low single digit growth prospects, high levels of debt and the perception of low profitability, the world's largest packaging companies are beginning to appreciate in value as investor re-evaluate 'old economy' stocks, which are less cyclical in nature.
At the top 100 companies (those companies with sales over £277 million), management strategies aimed at debt restructuring and improvement of working capital have lead to improved cash flow multiples. Many of the top players are currently heavily reliant on the food and beverage industry for their annual turnovers. They include names such as Alcan and International Paper, which are leading the trend, followed by Rexam and Alcoa. Among the top ten companies, Rexam's share price has doubled over the last 12 to 18 months. In the US, Graphic Packaging, Silgan, BWAY and Applied Extrusion Technologies also doubled and the overall packaging index rose by 30 per cent.
The more dynamic companies in the sector are clearly viewing the future with optimism. Such companies are not only looking inwards at their own cost bases and product innovation, but are recognising the need to embrace global consolidation. In the past five years, a surge in merger and acquisition activity has occurred, with well over 2,000 deals completed, which has led to higher sales growth at the top 100 players. This consolidation has seen the increased participation of venture capital and private equity houses, as investors recognise the potential return that the leading companies are likely to deliver. Management teams at the leading companies are also engaged in share buy-back programs that enhance shareholder value through the restructuring of the capital base. Most major global players have adopted a share buy-back programme in the past three years.
Control of capacity has also become a more important strategic option. This has been particularly notable in North America where companies like Smurfit-Stone, Georgia-Pacific and Weyerhaeuser have either cut or mothballed uneconomic capacity. Streamlining the cost base remains a major imperative for many sectors of the industry, and companies as diverse as Nampak, BSN Glasspak, Alcoa and Amcor each embarking on rationalisation exercises. De-merger and management buy-out activity has also accelerated as the leading companies refocus on core markets.
Embracing innovation in both processes and products has also led to increased margins and opportunities within the top 100 global packaging companies. Facilities management/outsourcing involving the extension of packaging companies' role to that of supplying extra added value services including supply of all the required packaging components, assembling these and even packaging part or whole of the product and arranging delivery is becoming more commonplace in many segments of the market. The top players continue to embrace the benefits of e-commerce, maximizing supply chain efficiencies, and this trend is clearly set to accelerate.
Ernst & Young's report also reveals that the top 10 players in the industry (those companies with sales of €3.9 billion or more), are also engaged in analysis of manufacturing value chains resulting in prioritisation of product and manufacturing objectives. Ernst & Young believes that this is the best practice approach to enhancing value and performance.
Innovation has offered a road to higher profitability to the industry. Coupled with niche marketing, innovation has steered profit trends higher for many smaller companies as well. Since 1996, average profit margins across the whole industry (for the top 100 companies) have varied between 7 to 10 per cent, with smaller companies posting the highest overall margins in both 1998 and 2000 (8 per cent and 9.5 per cent respectively). While Ernst & Young estimates that the global packaging industry has grown by an average rate of 3.9 per cent per annum between 1993-2000, against 3.8 per cent for world GDP growth, the leading companies have growth rates nearing 10 per cent.
Ernst & Young has determined that the size of the industry reached £289 billion in 2001 (£89.4 billion in Europe; £80.4 billion in North America; and £42.3 billion in Japan). The industry is one of the world's largest and most diverse manufacturing sectors employing more than 5 million people in around 100,000 companies worldwide, and spans a wide range of activities from raw material production and conversion to product packing and recycling.