Food Packaging Technologies Summit remarks

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Remarks for presentation given by Harris DeLoach, Sonoco Chairman and CEO, at the Food Packaging Technologies Summit in May 2012

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Food Packaging Technologies Summit remarks

  1. 1. Harris DeLoach Remarks Food Packaging Technologies Summit Chicago, Ill. May 8, 2012Clearly the packaging industry continues to be challenged to change.Those challenges are coming from many fronts. Regulatory changes are focused on improvingfood safety and security while retailers, led by Walmart, are demanding more sustainablepackaging, and consumer product companies are demanding innovation, speed to market andimproved shelf presence.Of course, consumers want all of the above. But most importantly they are looking for value.Some might look at these challenges and believe the packaging industry may be facing a crisis.I’m more optimistic. I believe these challenges actually provide our industry with opportunitiesunlike we’ve ever seen before.Before I get into a discussion about the trends I see in packaging technology, I do want to talk alittle bit about my favorite subject – Sonoco.If you’ve ever popped open a composite can of Pringles or grabbed a couple of Oreos from thatresealable package, washed your hair from an assortment of plastic bottles, or taken home anappliance or consumer electronics … then you know Sonoco.We were founded in Hartsville, S.C., 113 years ago. Today, we’re a $4.5 billion dollar globalpackaging company with approximately 20,000 employees working in nearly 350 operations in34 countries.I’ll tell you right up front – we’re a unique packaging company. This graphic shows our diversemix of businesses, including our complete line of consumer packaging, display and packagingsupply chain services, paper and industrial packaging, and finally, our newest growth business –protective packaging.For the past several years, we’ve diversified Sonoco’s business mix.Through acquisitions and new business development we’ve grown our consumer-focusedpackaging and services businesses to account for approximately 54 percent of the Company’ssales and 58 percent of operating profits. 1
  2. 2. We’ve pursued this strategy because our consumer businesses tend to be more recession resistantthan our industrial-related businesses.With the recent acquisition of Tegrant Holding Company, our new protective packaging segmentis expected to generate approximately $560 million in sales, which will represent about 11percent of our net sales in 2012.This new business is not only complementary to our existing consumer and industrial businesses,but provides strong growth prospects in both domestic and international markets.Our growing consumer-focused businesses are unique when compared to our packaging peers.We are focused on providing packaging and retail services options for our customers versus onlysupplying them with a single solution. Our businesses include:1. Rigid paper and closures – which accounts for about 40 percent of our consumer-related sales and where we are the global leader in composite cans;2. Rigid plastics – which is our fastest growing consumer packaging business;3. Flexible packaging – which accounts for 15 percent of consumer sales; and4. Global packaging services – where we provide “one-stop” retail merchandising solutions, including point-of-purchase displays, fulfillment and fee-based supply chain management.The cornerstone of our strategy has been to position ourselves as the industry’s only “totalsolutions” provider for consumer packaging.Our unique offering starts with innovative packaging designs selected from our complete line ofpaper, plastic and film based packaging products.Then, we are able to provide point-of-purchase displays, as well as supply chain services andretail fulfillment.And finally, we offer the industry’s most complete sustainability services.Developing “intimacy” with our customers by better understanding their needs is the only way wecan create relationships that ensure we can grow as our customers grow. 2
  3. 3. We have developed a “corporate customer” program, where we place “one face” of senioraccount leadership before our seven largest customers.We believe we can win more business by working in collaboration with these customers to growtheir brands.Since starting this “corporate customer” program in 2005, we have grown sales at a compoundrate of about 5 percent to nearly $1.1 billion or about 25 percent of the Company’s total sales.Consumer spending makes up about 70 percent of our GDP. The environment for consumerstaples has remained muted over the past year. Consumer consumption has grown about 1.4percent and is below year-ago levels. Since the first half of 2011, consumer spending has beendecelerating due to higher food and fuel costs.If you look at the retail data, consumer consumption has been soft, with volume down across thetop 25 consumable categories. From a cost perspective, the news is mixed.Recent data indicates that consumer packaged goods costs increased by 4.4 percent year-to-date,although year-over-year inflationary pressure is trending lower since peaking in the third quarterof last year.I personally believe that the pressure of inflation is subsiding and consumer spending mayactually grow in the second half of the year. Clearly, that would be a positive to consumerproducts and packaging companies.Longer term, it’s my opinion that there are three hard realities impacting economic growth in theU.S. – (1) the depressed housing market, (2) excessive government borrowing and (3) lingeringhigh unemployment.Housing starts are about 60 percent below their 2005 peak. While there are some indications ofrecovery, most economists are forecasting painfully slow growth over the next several years.Federal deficits as a percent of GDP are at the highest levels since World War II.And, as we all know, unemployment is not rebounding as strongly when compared with the pastseveral recessions.As a result, consumers’ spending habits are changing as they look for value in every purchasethey make. 3
  4. 4. Our customers are reacting to this change by driving for innovative, less-expensive packagingformats.Retailers also are attacking shrinking consumer spending by rolling out more private-labelofferings and other retail-ready solutions.In the face of this economic backdrop, we believe there are several market trends that will drivepackaging technology innovations.These include:1) Packaging format changes – By this I mean that consumers’ desire for new packaging is driving material substitution.2) Product safety and security - Much of this emphasis is being driven by new science, supply chain problems and, in some cases – by emotions.3) Sustainability - Depending upon your point of view this is either one of the most important or least important trends in packaging today.4) The clear bifurcation that is occurring in consumer spending due to economic pressures.5) Continued desire for consumer convenience and, directly linked to that, is the impact our aging population has on packaging.6) Continued desire for improved packaging shelf presence.7) The Internet changing consumer buying habits. No longer does the consumer have the patience to go to a retail location and comparison shop. They can do that online. However, this trend is changing requirements for both primary and secondary packaging as products are shipped directly to the consumer.8) Finally, all of these changes are driving more packaging customization and the way products are merchandised.Let’s take some time to explore each of these trends. 4
  5. 5. Changing a packaging format is not really new. It’s why Dustin Hoffman was given advice as“The Graduate” to look into “plastics.”That said, packaging formats continue to change. I like to use our experience with powderedinfant formula (PIF) as a case study.For decades, PIF was exclusively “canned” in metal cans. However, tinplate prices tend tofluctuate and infant formula producers began looking at converting to paper-based compositecans.About five years ago, the majority of producers converted from metal to composites in NorthAmerica and parts of Europe.But consumers started looking for new designs and shapes and plastic containers were introduced.Next, as material science improved, flexible packaging began to move into the market.Today, Sonoco is producing PIF containers using composite cans, plastic containers and flexiblepackaging. Metal containers continue to have shelf presence, particularly in emerging markets.But like North America, those consumers will also want new packaging formats and we expect tobe producing similar containers around the world.Our experience with powdered infant formula has provided us with experience regarding issuesof product safety and security.We could debate for hours whether Bisphenol A, or BPA, poses a health hazard in certain plasticand metal containers. The FDA recently said no. But the State of Connecticut says yes. Who’sright?You know it really doesn’t matter. We believe that BPA will likely be phased-out of all foodpackaging through time. Today, our customers are asking for BPA-free packaging and we’remeeting those needs.One thing is clear, regulatory scrutiny over food safety is increasing. The most recent caseinvolving lean finely textured beef and boneless beef trimmings is a case in point.This product was given the unfortunate name of “pink slime” and that effectively killed theproduct and a business without any scientific research or fact. 5
  6. 6. That is why the work of the global food safety initiative is so important. This business-driveninitiative to improve food safety management systems throughout the supply chain is the onlydefense against future “pink slime” episodes.As for Sonoco, we’re focused on new packaging technologies that promote freshness andextended shelf life.For example, we are developing clear plastic packaging that minimizes light-induced oxidationand oxidation inhibitors incorporated in flexible film and rigid plastic containers.In addition to eating “safe” food, consumers are trying to improve their eating habits. Accordingto a recent survey, 87 percent of consumers are trying to eat healthier.This is spurring products and packaging innovations to meet consumer trends. Portion-controlfood packaging, including dosing for multi-serve products or dosing to deliver product freshness,is a trend we are seeing in our thermoforming, rigid plastics and flexibles businesses.This slide shows a few examples of packaged foods marketed for health and wellness in severalof our packaging formats.In just a few years, sustainability has evolved from being a “bolt on” trend for responsiblecompanies to being integrated into everything we do at Sonoco.To improve the sustainability of our packaging, we introduced a computerized design model thattakes interconnected design variables to improve functionality and reduce cost while minimizingenvironmental impact. We call this system – design for the environment.We view a sustainable package as having these key advantages over existing or other packaging,including:1) Source reduction;2) Using more sustainable materials;3) Utilizing production processes that use less energy, water or raw materials and finally;4) We believe that any sustainable package must be verified through either a life-cycle analysis or third-party certification.Let me show you some new packaging that fits these criteria.Here are two products that were launched within the past several months that have less material. 6
  7. 7. Utilizing finite element analysis, we were able to redesign Wishbone’s salad dressing bottle andeliminate resin weight by 20 percent. This met Unilever’s goal of obtaining a higher performancecontainer with less material.Likewise, Kraft’s Planters Peanuts was looking for a more sustainable package to align with itsbusiness strategies.Utilizing our design for the environment program, our design and material specialists created alight-weight, high-gloss plastic option that weighed 84 percent less than the original glasscontainer.This reduction in packaging material led to a 25 percent reduction in the number of trucksrequired to transport the product to market – thus providing savings in material use and intransportation costs.We continue to look at renewable feedstocks for plastic containers. It’s our opinion thatrenewable materials should come from non-food sources, such as agricultural wastes.In addition, for recyclability, we believe that alternative resins should act the same as fossil-fuelbased plastics so not to contaminate the recycling stream. A prime example is Coca Cola’s plantbottle.And finally, for compostable solutions, degradable bio-based plastics or repulpable all-recycledcontent paper-based cans also offer good solutions.Sonoco is one of only a few packaging companies in North America that has a fully integratedbusiness focused on recycling paper, plastic, metal and glass packaging.In addition to providing recovered paper for our uncoated recycled paperboard mills, we havesuccessfully grown collections to nearly 2 million tons annually in North America. Much of thisrecent growth has come from expanding our residential material recovery facilities (MRFs) in theSoutheast.Late last year we developed new MRFs in Charleston, S.C. and in Onslow County in easternNorth Carolina. We also completed an acquisition of an existing MRF in Greenville, S.C.Overall, we now serve all major metropolitan areas in North and South Carolina and over 150municipalities throughout the Southeast. 7
  8. 8. Our efforts in sustainability continue to be recognized. I’m proud to say that we were listed forthe third year in a row to the Dow Jones Sustainability World Index. We received the highestranking of any global packaging company and were honored with a gold class ranking bySustainability Asset Management, which assesses the nearly 2,500 companies participating in theindex ranking.On the heels of that recognition, Sonoco was ranked as the top packaging company inNewsweek’s 2011 Green Rankings.And, I’m pleased to announce that we were selected last week as South Carolina’s mostsustainable company by Southeastern Corporate Sustainability rankings; and were recognized asthe top packaging company in Corporate Responsibility Magazine’s “100 Best CorporateCitizens” for 2012.We don’t go out of our way to receive these external recognitions. However, they confirm thatour actions and performance are at the highest level with our peers and with the best companies inthe world.With median household incomes declining, there is a clear bifurcation occurring in consumerspending.Citigroup has developed an “hourglass” index which charts 25 high-end, name-brand productsand private-label products for discount merchandisers.This hourglass index has shown sales growth of 57 percent since the end of 2009. This meansthat high-end brands and private-label products are performing well.It’s estimated that private-label unit sales in the United States have grown to approximately 22percent of all products sold at retail, which represents about 19 percent of all retail sales.However, I’ll remind you that this is only half the percent of private label product sales inEurope.Sonoco generated approximately $165 million in private-label packaging sales in 2011,representing about 10 percent of our North American consumer packaging revenues.This chart shows where we are producing private-label packaging. Composite cans are our largestcontributor with sales reaching approximately $100 million or 15 percent of our North Americancan sales. 8
  9. 9. One of our biggest success stories has been the conversion of several private-label coffee brands,including Kroger, Mother Parkers, Reily Foods, Melitta USA and Pan American. Overall, weincreased coffee can unit volume by 35 percent in 2011.The U.S. population continues to grow, age and diversify. No household type can be neatlydescribed anymore.For instance, the standard married-with-children segment now accounts for only 22 percent ofhouseholds.By 2015, baby boomers are forecast to own 60 percent of the nation’s wealth and account for 40percent of spending.With mature shoppers dominating retail spending, successful marketers cannot overlookdeveloping packaging features that attract and retain these important consumers.That is why we are working on age-friendly packaging that has easy-open and reclose systems.For instance, our precision die-cutting technology, which provides an easy open and reclosefeature for Nabisco cookies, has been successfully integrated into a cream cheese product inMexico.We also have expanded use of this technology into confectionery products.Traditionally, foil has been used as the barrier lidding to allow each piece of gum to be dispensedby pushing the gum through the foil wall. Our solution has been to replace the foil with precisiondie-cut plastic film which resulted in material cost savings and a 7 percent reduction in the weightof the blister pack’s lidding.We’re also testing this technology for a second generation steamer vent for microwavable frozenfoods.As you are all aware, there is a never-ending need to develop packaging differentiation and shelfimpact due to increased competition for retail space.In addition to new packaging innovations, we are spending more efforts researching shopperinteraction to better understand consumer preferences.Because of our “total solutions” approach, we are able to improve shelf presence from severaldirections. For example, in our flexible packaging business we have a global graphic design andmanagement capability along with flexographic plate and gravure engraving. 9
  10. 10. As a result, we’re able to quickly test new visual and material solutions for our customers. Forinstance, we were able to develop a metallic ink technology which uses a single layer of goldpigment to give Jelly Belly brand candy packaging a smooth, mirror-like appearance.Through our packaging services business we are also able to develop point-of-purchase displaysand then provide fulfillment of shelf-ready packaging to reduce operating costs.Consumers are no longer loyal to a limited few retailers and are shopping different stores andchannels.Recent estimates of U.S. retail spending found that online purchases grew to about $40 billionlast quarter, which was up 13 percent year over year.This growth is presenting a need for different supply-chain friendly packaging solutions as moreproducts are shipped through e-retailers.As a leader in protective packaging, we are able to provide not only primary packaging, but alsosecondary packaging to preserve products, particularly those requiring temperature-assurance.Our ThermoSafe cold chain solutions business is able to develop custom-engineered packaging tosafely transport medicines, vaccines, as well as food.Our Greenbox thermal management system provides the pharmaceutical industry with a reusableand recyclable temperature-controlled closed-loop distribution system.As an example, Greenbox worked with Bristol-Myers Squibb to develop a cold chain logisticssystem within its operations. The packaging (shown on the right) can be reused up to 20 times,significantly reducing packaging costs.Increased customization to meet the needs of diverse consumers is also driving companies tobecome more flexible.Lego is a prime example of a customer that we work with that is developing solutions for adiverse global customer.Shown here on the left is what we call “pickers” who work in our service centers in Strykow,Poland. 10
  11. 11. This employee is putting together components that were custom-ordered by a young consumerover the Internet.In addition, we recently put together a “total solution” for Lego for the launch of its new “Hero”toy line.Our flexible packaging team designed and produced the colorful flexible stand-up pouches yousee on the right. Then our fulfillment services team, operating for Lego in Monterrey, Mexicoand Poland, packaged this new product for distribution in North America and Europe.Let me conclude with some final thoughts.I believe that consumers in emerging markets will likely be the key to driving even more changesin packaging innovation in the next five to 10 years.As the food supply chain becomes increasingly global, there will be a much stronger requirementfor improved quality, security and safety of packaging.The days of food being sold loose by street vendors is quickly evolving into packaged processedfood. In addition, cold chain improvements in these markets will also simulate the demand forchilled and frozen foods.All these trends provide challenges and opportunities for consumer packaging companies.Opportunities that we believe will drive our growth in the future. 11

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