Packaging companies serve as good economic indicators
Mike Meyers
Star Tribune
Published Oct 8 2001
Want to learn what's ahead for manufacturers? Ask a boxer.
The kind who works on cardboard, not on canvas.
Often boxmakers have proven as good, if not better, than
economic forecasters in predicting what's next for industrial
production.
But this year may be an exception.
Some in the carton trade boast of new customers and more
overtime to meet rising demand. Others talk of price cutting
and are struggling to replace factory customers who have gone
out of business.
For many box and package makers, the outlook rarely has been
so uncertain.
"Historically, we have been the barometer for what's to come
six months down the road," said Joe Gerou, general manager of
Golden Valley-based Liberty Carton Co., of his industry. "I've
been in the business for 35 years, and I've never seen it fail."
Until now.
"All bets are off," he said. "We don't know what lies ahead."
Gary Schiltz, general manager of the Willamette Industries
plant in Roseville, said the best he can say about the year so far
is that signs of a full-blown recession have yet to appear.
"Our business is fair," said Schiltz, whose clientele includes 3M,
Boise Cascade and Old Dutch Potato Chips. "It's not robust, but
it's not too bad."
But sales volume has come at the expense of profits. Box prices
have been "soft" in the face of supply outstripping demand, he
said.
The packaging industry traditionally has been a window on the
plans of manufacturers. When a manufacturer decides to turn
up production -- or ratchet down -- packaging companies are
among the first called. Almost every factory has the same thing
at the end of the production line: a box.
"Ninety-five percent of what a consumer touches comes in a
corrugated box at some point, from a coffee cup to a car," said
Tom Kell, president of Kell Container Corp. in Chippewa Falls,
Wis.
Kell Container expects the year's sales to be flat, at best, and
down 5 percent to 10 percent, at worst. "In the last six months,
we've seen a marked decline in the amount of overtime we've
worked," said Kell, whose company employs 200.
No layoffs are planned but Kell lately has been sending workers
home early on Fridays if they've completed custom-designed
boxes for customers, which include a broad spectrum of
companies ranging from breweries to auto-parts manufacturers
to shoemakers.
Nationwide, container board consumption is down and unsold
inventories are up this year compared to last, according to the
latest figures of the Fibre Box Association in Rolling Meadows,
Ill.
The trade group, which represents the makers of 90 percent of
the boxes sold in the United States, said consumption was down
6 percent and inventories up 7 percent in the first nine months
of the year -- before the Sept. 11 terrorist attacks reverberated
through the nation's economy.
Manufacturing output across the country has been falling for 14
months and in the last year employment in U.S. factories fell by
more than 1 million workers.
"Before the attacks, we expected a turnaround in
manufacturing output by the fourth quarter of this year," said
Dave Huether, chief economist of the National Association of
Manufacturers in Washington, D.C.
"Now, I'd say the best guess is that's postponed by a quarter,"
Huether said. "I think we'll probably see a turnaround possibly
in the first quarter of next year, around March."
'There is no next door'
If the packaging industry is any guide, the manufacturing
outlook varies widely by industry and geography.
Some boxmakers serving industries that prosper in hard times
or located in places with better-than-average economies, say
they still are working overtime and spending millions on new
equipment.
Others are hurting.
Rick Dobesh, chief financial officer of Des Moines-based
Packaging Distribution Services, falls into both camps at the
same time.
The company's main warehouse in Des Moines and a satellite
distribution center in Omaha both have seen some customers
vanish -- even as the firm's Eagan operations have flourished.
"In the last 12 months, we've seen more Chapter 7 and 11
bankruptcies than in the last five," Dobesh said.
Case in point: One customer, an Omaha maker of hydraulic
gear used in agriculture, bought boxes by the thousands last year
after expanding operations. This year, the business shut its
doors.
"You don't replace a customer with a 500,000-square-foot
warehouse by going to knock on the next door" in rural
Nebraska or Iowa, he said. "There is no next door."
But the bad news isn't universal. "Our business continues to
thrive in the Twin Cities," Dobesh said. "I see a lot more
economic slowdown in smaller metropolitan areas, especially
compared to the Twin Cities."
To be sure, some companies fail no matter where they're
located. Dobesh lost a customer earlier this year when a Twin
Cities roofing-shingle maker went broke after a costly
expansion last year. An increase in energy prices contributed to
the shingle maker's demise, Dobesh said.
Filling orders
Mike Sime, president of Minneapolis boxmaker Creative
Carton, finds his order backlog waning. Most of Sime's
competitors tell him their orders are flat to down as much as 20
percent. Creative Carton's business is off "in the single digits,"
he said.
Lately, Sime said he's seen hope of getting busier, but talk of
increased orders may be fanned by manufacturers' fall
shipments to retailers for Christmas. October represents the last
chance to fill holiday orders.
"If you don't have it manufactured and in boxes by then, you've
missed Christmas," he said.
Technology has helped some boxmakers to prosper, albeit at the
expense of competitors in some cases.
Marc Anderson, president of Medina-based boxmaker Walter
G. Anderson, Inc., has some of his more than 200 employees
working weekend shifts to keep up with demand, and plans to
spend $3 million to $4 million in new equipment to boost plant
productivity.
"If we need to have equipment for new business or to grow, we'll
go out and get it," Anderson said.
Two elements contribute to the company's bright prospects --
new kinds of packaging and the type of businesses that make up
its clientele.
A new kind of packaging called "microflute" paper allows
customers such as General Mills and Pillsbury to fill giant-sized
boxes with cereal, baked goods or other products and ship them
in bulk -- without cardboard cartons.
Instead, plastic wrap sheathes together the boxes destined for
the shelves of Sam's Club, Costco and other discounters.
Anderson also concentrates on foodmakers who sell products
destined for home kitchens -- an economical place for families
that are eating at home more as they rein in household budgets.
"I think that's part of why we're busy," Anderson said. "People
always have to eat."
Industries that are less prone to success during economic
downturns may have to wait longer to become busy.
At the manufacturer's association, Huether said factory
managers place their hopes on the recent burst in government
spending, lower interest rates and tax rebates filtering through
the economy in the months to come.
"The recovery, I think, will be fairly gradual," he said. "I don't
expect to see a sharp U-turn."
-- Mike Meyers is at meyers@startribune.com .
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