LPC, Inc. is one of HP Indigo’s trusted research partners for the labels and packaging industry. Jennifer Dochstader, LPC Managing Director is a fountain of Industry knowledge and insights and I enjoy talking to Jennifer often about our industry. I am sharing parts of our recent discussion and hope you will find it interesting. –Eli Mahal.
Click on any of the questions to read Jennifer’s answer…
Jennifer: Over the past year, we have seen a significant slowdown in private equity groups looking to invest in our industry. Higher interest rates and reluctant lenders have made it more challenging for PE firms and we are expecting that to continue for the first half of 2023.
However, we are still seeing our industry’s largest strategic investors continue to acquire smaller label companies both in North America and in Europe, just at a slower pace than we were witnessing these larger converting houses make acquisitions in 2020 and 2021.
I predict that once interest rates start to decline again and the market becomes more hospitable to private equity acquisitions, we are going to see a sharp increase in activity and even more interest in printed packaging than we saw in 2020 and 2021. Our industry has proven itself. It’s an industry that is resilient through pandemics, continued global uncertainty and recessions. Private equity groups are constantly seeking safe harbor sectors and we will see activity return at an even higher level once the lending markets open up again.
Jennifer: On average, LPC, Inc. completes 5-6 due diligence projects every year for private equity groups and we have a saying that often holds true in our industry: “Private equity likes generalists, strategic investors like specialists.” Private equity groups often seek label converters who are what we would consider ‘generalists’. These companies serve more than four or five end-use verticals, they have good management teams in place, a strong balance sheet, a low churn rate and robust customer care culture, and have a history of being able to add value to the products and services they offer.
Whereas strategic investors often seek companies that can add something unique to their portfolio in some way. Maybe a company is really good at producing highest quality, multi-process labels in the wine and spirits sector and this is an area in which the strategic investor wants to build more muscle. Or perhaps a label converter specializes in multi-layer constructions like extended text, booklets or hinge labels and has a unique technology proposition that has created customer loyalty and bottom line growth.
Every private equity group and investment management firm that we have worked with over the course of the past half decade have sought acquisition targets that have at least one digital asset. These firms want to acquire companies that have a high level of digital-printing knowhow and a well thought out CAPEX plan outlining how they will continue to grow the digital side of their business.
Jennifer: In the last two quarters of 2020 and throughout 2021 we saw a high number of converters adding conventional/analog capacity. The pandemic created business surges in some key high-run segments in the food, beverage, household chemical and pharmaceutical industries. And in 2021, we witnessed surges from pent up demand in segments like consumer durables and industrial chemicals. These were years that delivered banner growth rates to many converters both in Europe and North America. Demand for flexo presses increased as converters had to bring in more capacity to meet the demands of their customers.
In the coming year, given the inflationary market that much of the world is currently experiencing and the looming threat of a recession on both sides of the Atlantic, we will see some of these segments stabilize and return to lower level pre-pandemic growth rates. Other segments may contract depending on the depth of a potential recession and how it impacts consumer behavior and the overall market for printed packaging.
Based on extensive research we have done that included surveying large numbers of converters in the U.S. and Europe over the past several months, we are forecasting that 2023 will be a much more challenging year for conventional/analog press technology and that converters will once again prioritize their digital growth strategies. We are predicting that the number of new digital presses sold will once again outpace the number of conventional/analog presses sold and we could see a precipitous drop in conventional/analog press installations in North America and Europe.
Jennifer: In many ways, our industry is still a regional one. In the surveys we send to brands and label buyers every year we ask about label vendor location and how important it is that a company’s label vendors are within a certain distance of where labels are being applied. In our most recent surveys, nearly half of the total respondent group indicated that they demand that their label vendors are within a 250 mile (400km) radius of where their labels are being applied to their products. Nearly 20% of respondents indicated that they demand that their label vendors are within 60 miles (100km) of where their sourced labels are applied. In our industry, proximity still matters for significant numbers of brands and label buyers. From a macro perspective, we predict that we will continue to see increased rates of near-shoring and on-shoring as companies shift their supply channels from Asia back to Europe and/or North America. The pandemic magnified how fragile the supply chain is when placed under extreme pressure and the largest brands are going to mitigate some of that risk by sourcing products from companies that are closer to home instead of countries like China. We are currently seeing this play out in North America as some industries have moved manufacturing from China to Mexico, particularly in the automotive, durables and apparel segments. As a result, this will create more opportunities for printed packaging converters in the U.S. and Mexico who serve these segments.
Jennifer: Historically, our industry has weathered global downturns and recessions extremely well. Economic downturns are usually far more punishing to the commercial print space than the printed packaging markets. The food and beverage industries alone make up around 60% of all labels consumed and while premium brands might struggle, consumers will redirect their preferences toward more economic choices as they become more cost aware. And of course, store brands and private labeled products do better in a recession due to consumers shifting purchasing behaviors away from name brands toward these less expensive options. The markets that are hit hardest in downturns are the larger ticket item segments such as consumer durables, electronics and automotive.
Something else that’s important to consider are the varying inventory levels of different products throughout the supply chain. Due to supply shortages in key labelstock categories, converters are reporting that they are inventorying more materials in their plants than ever before. Over the course of the past three years we have seen small to mid-sized converters quickly add warehousing space in any way they could – either adding on to their own plants or leasing additional warehouse space close by.
For the most part however, this scenario did not play out among the brands and label buyers themselves. Throughout 2022 LPC was surveying brands and asking about their finished-label inventory preferences and whether these companies were increasing higher amounts of printed labels due to the supply chain challenges we witnessed for materials. We surveyed more than 100 brands across end-use verticals and every one of these companies stressed that they still associated too much risk with inventorying higher levels of printed labels due to the constant inflow of changes coming from both the regulatory side, in addition to their own marketing departments, that result in necessary artwork changes and the need to keep printed label inventory as lean as possible in order to avoid the obsolescence of labels before they are even applied to a product. These companies will still be placing label orders and due to the events of the past few years, are relying more than ever on their label and printed packaging vendor partners to ensure that their requirements are met and that there will be no supply disruptions in this time of continued market uncertainty.
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