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Glass packaging, how few sailed while others waded?

  • Why there is a slow growth in the glass packaging?
  • Why Vidrala and Shandong’s revenue increased?
  • How few firms raised their profitability, while some saw depleting margins?
  • Did global factors played a role?
  • Key initiatives undertaken for sustenance of profitability

Summary

In the packaging industry, the growth was the lowest for glass packaging segment (at 0.8%). This was highlighted in Televisory’s earlier blog (Asia the emerging saviour for glass packaging) on the subject. Thus, due to a slow growth in the industry, companies adopted a slew of measures such as cost reduction programs, product improvements, geographic diversification, product portfolio diversification, etc. A few firms managed to improve their overall profitability through these means while others failed. This blog analyses the key reasons for divergent profitability trends for companies in the glass packaging sector.

Marred by replacement of glass, companies diversified their product range

The packaging industry grew at a CAGR of 2% (2006-16), whereas the glass packaging grew at a CAGR of 0.8% in the same period. This low growth was mainly due to the substitution of glass by rigid and flexible plastics in soft drinks and home care product segments. These segments accounted for 18% and 2% of the total glass packaging demand, respectively. The liquid cartons replaced glass in the packaging of milk, juice, and other beverages. Therefore, flexible plastic packaging (e.g. stand up pouches) impacted the demand for glass in the home care product segment, primarily for the products like soaps, cleaners, etc.

Glass packaging lost the market share to rigid plastics and liquid cartons

(A unit here is defined as a bottle, container, pouch, tube or any small container vessel used for packaging)

This trend led to a change, in the end user industry mix for glass packaging products. Consequently, a reduction in demand from soft drinks packaging was picked up by the food and alcoholic drinks packaging (2006-15). This made companies to gradually change the type of products manufactured.

Moreover, firms such as Owens Illinois introduced and stepped up the production of black glass, while others like Gerresheimer diversified through a rise in production of better margin plastics and similar margin metal products in addition to certain cost reduction measures. Furthermore, most companies largely reduced the production of glass bottles for soft drink packaging.

Glass packaging companies faced a decline in revenues

Televisory examined 11 entities (which accounted for nearly 25% of the global market share) with distinct revenue, regional exposures and found that the glass packaging industry grew at a lower rate amid 2009-16. This was due to the replacement of glass containers by rigid plastics, liquid cartons and metal containers.

Additionally, most companies in the glass container segment witnessed a revenue decline (in USD terms) between 2009-16. While there were firms, which recorded a revenue CAGR in the range of 5-10%, this was in their local currencies. Notably, these local currencies depreciated by 20-80% during the same period.

Decline in the revenue of companies in the glass container industry

The above table shows that revenue for all the companies fell barring a meaningful increase from Vidrala and Shandong. However, this increase was supported by factors other than the demand growth:

Vidrala; acquired Encirc Limited (Revenue: USD 357 million) in 2015, this doubled the revenue of the company.

Shandong Pharma Glass; CNY appreciated over 2% vis-à-vis USD (2009-16). This drove the revenue, besides marginal growth in domestic demand from the pharma segment.

Reporting currency depreciation in relation to the USD

A divergent trend in profitability despite the similar global trends

A large number of big companies in this sector operate in several nations with exports panning globally. In addition, even the smaller companies in Televisory’s sample set were found to be exporting to other regions. Thus, except certain regional interplay, each company faced a similar global market condition. However, there were few firms which were able to increase their profitability, while margins of their counterparts depleted.

What profitable firms did?

In the past 5 to 6 years, certain global factors directly or indirectly impacted most companies. This included the credit crisis in Europe, political and subsequent economic instability in Russia and Ukraine and declining consumption of alcoholic beverages in Europe. Further, all the above were mostly related to Europe and the region was significant as it comprised ~40% of the global glass packaging product demand in 2010, this declined to ~35% in 2016.  

In the wake of these upheavals, the following key initiatives were undertaken by the companies for sustenance of profitability:

  1. Reduced exposure to European market

The demand for glass packaging witnessed a decline of 3.4% in eastern Europe and 5.6% in western Europe during 2006-16 as compared to an increase in demand from other regions. The decline from Europe was mainly attributable to the credit crisis, low income,  population and GDP growth; and changing consumption patterns. Hence, due to fall in demand, the companies faced decline in revenues and margins from the region. The below chart shows the margin of few companies from their European segments between 2009-16.

Hence, all the profitable companies diversified into emerging economies such as India and China; and other developed nations like the US and Canada. Likewise, Brazil and few African nations namely Nigeria, Uganda, Rwanda, etc.

Saint Gobain sold off a part  of their assets such as Saint Gobain Oberland, this was acquired by Verallia group.

Change in exposure patterns towards Europe

(N.A.: Not available, exposure level could not be ascertained)

  1. Product innovations and diversification into higher margin plastics and metals

A decline and stagnation in revenue compelled the companies to launch value added products to attract better yields. Following were the few major product portfolio related amendments which were undertaken:

  • Introduction of glass containers for high margin market segments (pharma and beauty)
  • Differentiating products based on the demand from geographies in which exposure was increased
  • Expanding into float glass segment
  • Increasing the product portfolio in high margin non-glass containers such as plastic

     

Product changes and introductions by few of the largest companies (2009-2016)

Diminishing difference in margins, plastics took over glass and metals increased

  1. Measures to reduce cost

In the wake of stagnant and declining top line, many firms focused on the cost reduction in order to maintain profitability. For instance, Owens-Illinois announced an ‘Asset Optimization Program’, wherein few high cost, lesser utility plants were shut. In 2010, the company announced the closure of facilities involving 26 furnaces which were mostly in Europe, this led to 3,250 job cuts. Thus, since then the firm has carefully reduced the assets and invested more in equipping factories for low-cost production. Similarly, Gerresheimer had pruned the capacity and made cost adjustments as early as 2009, which led to improvement in EBITDA margins.

Subsequently, companies resorted to mergers and acquisitions to expand and avail the benefits of economies of scale.

Future outlook for the glass packaging industry; capacity consolidation and diversification within the industry to increase

The growth for glass container companies is expected to improve from 0.8% CAGR (2006-2015) to 1.5-1.7% until 2020 if the following factors highlighted in Televisory’s earlier blog and mentioned below:

  • Demand rise from Asia, mostly led by alcohol segment
  • Urbanisation at a similar pace, implying sustained increase in demand from other segments
  • Demand recovery from Europe, led by growth in the region

 

However, this improved growth may remain in a subdued range as the substitution for glass packaging is catching up. Televisory expect the non-profitable companies to follow the model of profitable firms and limit the exposure towards glass packaging segment, introduce new products for cosmetics and pharma, and diversify to better margin segments like plastic and metal packaging. This was practised by few of the companies, which faced declining margins. For example, Saint-Gobain announced the sale of Verallia to Apollo Global Management LLC and Bpifrance. Verallia refers to the St. Gobain Oberland which manufactures glass containers.

Pending M&A deals

The recent measures and product changes

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