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Need of innovation in North American PET market

LAS VEGAS (Feb. 22, 4:30 p.m. ET) -- The North American PET market might need to change the way it thinks about itself as it moves into the second decade of the 21st century.

Some of the old rules — which provided solid growth for more than 30 years — no longer apply. And the new rules are creating new opportunities, according to industry pros who spoke at the Packaging Conference, held Feb. 8-10 in Las Vegas.

"The PET industry has shifted from large multi-national companies to private investors," said John Maddox, president of the SBA-CCI Inc. consulting firm in Jacksonville, Fla. "But the idea of industry consolidation taking place as margins decline hasn’t happened. And we can’t seem to take out enough — we’re still adding capacity through debottlenecking or new plants."

Many market watchers believe there’s too much PET capacity in North America. Wellman Inc. and Invista closed three North American PET plants in late 2008, eliminating almost 1.5 billion pounds of annual capacity, and Eastman Chemical Co. temporarily idled a major PET site in Columbia, S.C., in late 2009 -- it has since reopened.

But at the same time, Indorama Polymers Public Co. Ltd. is in the process of opening a billion-pound-per-year capacity plant in Decatur, Ala., and Selenis Canada — a new market entry — will offer 330 million pounds of capacity from a plant in the Montreal area by the end of 2010,

Industry veteran David Beckmann also was blunt in his assessment. "If we don’t get innovation to excite the customer, growth rates aren’t going to improve significantly for quite a while," said Beckmann, who had almost 40 years of experience with packaging firms Owens-Illinois and Rexam Plastic Packaging. “We need to work more closely with brand owners.”

"Packaging is no longer seen as waste or product transportation. It’s a valuable resource for recycling and activating the final consumer product itself," said Beckmann, who is now senior operating executive of the David C. Beckmann Associates consulting firm in Toledo, Ohio.

Part of the challenge facing the PET field is that the beverage market — which still represents the industry’s backbone — has undergone some unexpected changes.

"There’s been an across-the-board slowdown in beverage purchases," said Gary Hemphill managing director and chief operating officer, of the Beverage Marketing Corp. consulting firm in New York. "Liquid refrigerated beverage volume was down in both 2008 and 2009."

"Consumers have less discretionary income, and packaging companies are facing higher prices and costs. There’s been more decline in carbonated soft drinks and the first beer market decline in decades. Bottled water also has had a rough couple of years, whereas before it had been a growth engine."

According to BMC research, U.S. alcohol sales were down 1.7 percent in 2009, with sales of non-alcoholic beverages down 1.9 percent. Carbonated soft drink sales were off 3 percent for the year — "Consumers are reaching for healthier alternatives," according to Hemphill — with bottled water down 3.5 percent and sports drinks sales tumbling 6.8 percent.

In spite of this bleak recent performance, bottled water has a five-year growth average of almost 10 percent, while sports drinks have five-year average growth of more than 4 percent.

"The beverage category still is outperforming other categories, and will be among the first to show improvement as the economy improves," Hemphill said. "I think we’ll see continued size and format changes and more functional and interactive packaging. Future moves are going to be more toward niche brands. The market isn’t going to favor big brands."

Lightweighting also remains a hot-button topic with less and less PET being used per bottle, as packagers seek to trim their resin costs.

"Lightweighting is going well beyond CSD and water," said Maddox. "It’s into enhanced waters and similar products. Lightweighting can kill a quality brand image. These [lighter] bottles get crushed on their side, their necks are bent. They can’t handle the distribution system.

"Then retailers have to pull damaged products off their shelves. I don’t think that’s captured in the total cost. That can damage the name and the image that the industry’s worked so hard for."

Beckmann pointed out that some recent PET closure designs use 33-44 percent less resin than previous models, while Hemphill added that consumer objection to lightweighting "is not significant."

"[Lightweighting is] not going the other way," he said.

Although lightweighting has been a front-and-center concern for the PET industry, Maddox said that product pricing should not be overlooked.

"Price points are killing consumer demand," he said. "Everybody wants to blame lightweighting, and I’d support that too, but price points have played a role."

Maddox cited national carbonated soft drink brands selling for as high as $1.79 per two-liter bottle, while private-label retail brands can sell for as low as 78 cents. "Price points will drive sales," he added. "We’re killing the goose that laid the golden eggs."

Resin plant operating rates that are only in the high 70s or low 80s also represent a challenge.

"These [plants] aren’t designed to throttle back and run at these rates," Maddox said. "Price direction is inconsistent with utilization."

In spite of these hurdles, Maddox said he believes North American PET demand will average 3.5 percent annual growth over the next 3-5 years, with conversion opportunities, and water and CSD returning to positive growth rates.

But he didn’t let PET market players completely off the hook.

"I’ve shown these numbers to statisticians," he said. "And they say ‘Who’s running this industry?’ "