Skyrocketing packaging costs are forcing brand marketers to be as creative as they can in controlling expenses. With consumer price increases hard to achieve in the current marketplace, the difference may be carved out of marketing budgets.
"The environment right now is that we can't pass on costs to the consumer," said Stuart Greenblatt, a spokesman for Keebler Co., Elmhurst, Ill. Other savings must be found to compensate.
"Pulp is going up. Corrugated is going up. But we have not yet been able to pass those costs along," agreed Thomas Shufelt, director of marketing for the consumer products division at Georgia-Pacific Corp., Atlanta.
"When packaging costs go up, you will not be able to discount as deeply," added Lutz Issleib, chairman and president of Pabst Brewing Co., Milwaukee.
The reason for the increases is that virtually all raw material prices have jumped dramatically since January: Resins are up an average of 40% to 50%, pulp has nearly doubled and can stock has risen 8% for tinplate and 25% to 30% for aluminum. Corrugated has had two or three increases of 8% to 10% each.
This makes raw material suppliers happy because they're finally making some profit after several years of flat or declining prices. But it is providing a fresh challenge for brand marketers and packaging converters.
"We have gotten notices from the glass manufacturers, from the corrugated folks, the paper folks. They are all going up," said Issleib. "This hasn't hit yet as far as in the cost of cans, but they are
building us up for it."
"Everyone has come in with a letter [announcing a price increase]," said Patrick Sylvester, director of IGA Brands for IGA Inc., Chicago, which sources an extensive range of store-brand products for member retailers.
"There's definite price pressure," said a purchasing manager at another major food company.
The steep rise in raw material prices has also forced packaging converters to scramble to preserve profitability. A host of price increases, averaging 10%, was announced in August and September, affecting a wide range of packaging materials including film and paper bags, stretch wrap, deli containers and foam trays. While reassuring customers of adequate availability, many converters are limiting order sizes.
The result is increased lead times and shortages. "It's a challenge to get what we need when we need it," reported Karen Oberg, director of logistics at Blue Diamond Growers.
No one expected prices to increase so much so fast. Observers said a variety of factors have converged: After seven level or declining years, raw material prices hit bottom and are rebounding. This is coupled with increased demand due to the end of the recession and an improving global economy.
Reduced domestic supplies are driven in part by a growing market in developing areas such as Eastern Europe, South America and Asia. With the U.S. dollar low against other major currencies, other countries find U.S. raw materials a good buy. As a result, exports are up substantially.
The U.S. housing industry, driven by the cleanup after Hurricane Andrew and the low mortgage rates of a year ago, has absorbed large quantities of forest products. There has also been some run up of inventories by both converters and packagers. Indeed, converter inventories of plastic resin, which averaged 15 days at the beginning of the year, have doubled to 30 days or more, according to a source at Phillip Townsend Associates, Houston, publisher of Plastic Market Monthly.
Finally, process improvements that had helped keep costs down in recent years have largely been completed, said converters.
Miriam Schneider, industry specialist for the paper and forest product industry at Chemical Bank, New York, has tracked the startling rebound in packaging materials prices since January of this year. While the packaging business is regarded as "cyclical," she said, few in the industry were prepared for price hikes of this magnitude.
"When will packaged goods manufacturers feel the pinch? That will depend on what kinds of contracts they have with their packaging suppliers," she said, adding that announced price increases by packaging materials suppliers might take months to have an effect, and competitive pressures might blunt the effect on prices to the consumer, with margins suffering as a consequence.
"This is not showing up at the consumer level," added Irwin Kellner, economist at Chemical Bank, who noted that consumers have been and will likely continue to be unwilling to accept price increases. "The mission before consumer packaged goods companies is to either avoid paying these higher costs or find other ways to reduce costs."
Blue Diamond is coping by carefully organizing production schedules and issuing purchase orders for full annual requirements to be delivered in predetermined quantities on preset dates. "This lets suppliers forecast raw material needs," she explained.
IGA's Sylvester finds the best defense to be judicious budgeting plus negotiating with vendors for the best possible price.
Basically, it comes down to being "very cost-conscious and smart in our buying," concluded Keebler's Greenblatt.