Much has happened since Label & Narrow Web last brought its readers a comprehensive overview of the European labeling scene in January 2005. Politically the continent has moved slightly to the centre right. The popular press has welcomed newcomer Nicolas Sarkozy in France and Silvio Berlusconi (back again) in Italy, both colorful figures. Colorful is not an accusation often made of Chancellor Angela Merkel in Germany, still less of Gordon Brown in the UK, both solid, middle-of-the-road leaders. In Poland, the eclipse of the Kaczynski twins has brought the country back from a political scene that was getting perhaps a little too colorful. Of Mr. Putin, ex-president and continuing strongman of Russia, it can be said that at least businessmen know where they stand with him, even if it is not always where they would want to be.
Since 2005 the European Union (EU) has expanded to 27 member countries with the addition of Bulgaria and Romania, and the euro zone has also expanded slightly (welcome, Slovenia!). Britain is still of course outside the euro zone and likely to remain so (along with Norway, Denmark and Switzerland), but most of the Central and Eastern European EU members are lining up to adopt the euro, and their currencies are already pegged to it. It is significant that when your correspondent visited a medium-sized town in Poland recently, the taxi driver at the airport not only accepted payment in euros but even gave change in euros. This trend, along with the almost total freedom of movement of goods, capital and labor within the EU, is the one significant political fact for any company, US or foreign, when doing business in any part of Europe.
Despite all its woes, the Old Continent's label sector has fared better than North America's over the past three years, according to statistics published by the label association FINAT. Pan-European growth rates for pressure sensitive labelstock were up by 6 percent for paper based materials in 2006, while synthetic labelstock rose by 13 percent. The corresponding figures for 2007 will not be published until the FINAT congress in June, but the consensus is that growth rates will be down by one or two percentage points. There are no reliable statistics for market development by value, but industry insiders reckon that total value of pressure sensitive labels in Europe was static in 2006 and will have risen in 2007, but partly due to raw material price increases in the latter part of the year.
These trends for Europe as a whole conceal wide differences between countries and regions. In very broad terms we can divide Europe into four parts:
- Britain and Scandinavia: these countries have high per capita consumption of PS labels, in excess of 15 square meters per head per year, low growth of PS label markets, and generally low margins for label converters.
- Other countries of Western Europe (principally Germany, France, Ireland, Benelux, Italy and Spain): In this region the per capita consumption is in the range of 10-13 square meters per year; the larger converters' profit margins are generally satisfactory and overall market growth in 2007 was around the European average of 7-8 percent (by volume).
- The former Communist Bloc countries (except Russia and Belarus): These countries are characterized by a very low per capita consumption, of the order of 3 square meters on average, but with double-digit growth of PS label markets. Increasing competition between local label converters is forcing down margins, which are nonetheless still adequate. Conditions vary widely, from Poland and the Czech Republic with near-Western European economies at the top end, to Bulgaria, Romania and the strife-torn regions of ex-Yugoslavia at the opposite extreme.
- Russia and Belarus: These two are in a category of their own as countries unlikely ever to join the European Union. They are democracies only in the eyes of their rulers. Nonetheless, for those in the label business they are significant markets, rapidly expanding, and with underdeveloped potential.
The United Kingdom is reported as having 300 pressure sensitive label converters, a surprisingly low figure which probably excludes a number of small converters. Several recent studies have thrown up widely divergent figures for the total market size, but the figure of £500 million per year (US$1 billion) calculated by the British Print Industries Federation seems plausible. A study carried out by the Plimsoll Institute reckons that over the past 10 years label converters have seen their sales go down by 3 to 4 percent, with small companies suffering more than market leaders. Average gross margins for UK label converters, according to the same study, are 34 percent, but over one third of all companies covered by the study had made a net loss in at least one of the last 10 years.
Several medium-sized UK label converters have gone out of business over the past few years (including one who seems to go in and out of business regularly) and merger and acquisition activity has been rife up until the last quarter of 2007, when it slowed in the wake of the sub-prime crisis. Unlike continental European countries, the British acquisition scene has been dominated by private equity groups, which have brought managers and particularly finance managers into the label business from outside.
In terms of associations, Britain was for years the only major country in Western Europe without a label association. The recently formed BPIF Labels, which operates under the umbrella of the British Print Industry Federation (www.bpif.org.uk), has just 44 members.
Benelux (Belgium, Netherlands and Luxemburg)
With a population of only 26 million, the Benelux countries are home to some of Europe's leading label converters, including Drukkerij Verstraete, Reynders, Kolibri and Eshuis, all with more than $60 million in annual sales. This region also houses one of Europe's major forces in labels, Bopack, with plants in Germany, Netherlands, and France (where Bopack is market leader) as well as in its native Belgium. It is significant that all these label firms are family owned, and mostly run by the second or third generation. There is no homegrown label association in Benelux, but the international label federation FINAT has its offices in the Dutch city of The Hague, and the federation's current president, Jan-Frederik Vink, is also CEO of Kolibri Labels.
In Germany as elsewhere in Europe there is a strong trend towards concentration (both Rako and Schreiner have grown largely by acquisition). As a result, the number of enterprises in the sector is shrinking. Official statistics show the number of companies in the category "converters of paper and film" which includes both label and packaging companies) fell from 860 in 1995 to 750 in 2006 and is continuing to fall; German label companies complain of falling prices and margins, but nonetheless their total sales rose by 4 percent in 2006 and their order books at the start of 2008 were for the most part well stocked, partly however due to German label converters' success in diversifying into flexible packaging, smart ticketing and other high value-added sectors. RFID technology, which many German label converters embraced enthusiastically a few years ago, has developed more slowly than expected and is today mainly limited to transport logistics and the so-called "closed loop" applications.
Central and Eastern Europe
Despite high rates of GDP growth (see chart at right), this region was rather unkindly referred to recently by a leading light of European labels as "a group of countries with a great future behind them." It is certainly true that growth rates for label production in almost all Eastern European countries have fallen from the giddy heights of the late 1990s and early 2000s. However, they are still in double figures, which is more than in any of the countries of the Western world. Per capita PS label usage rates even in the most industrialized countries like the Czech Republic and Poland are less than half those of Britain, so there is still plenty of room for expansion.
The Polish label market is a case in point, where the evolution has been rather different from what was expected after the collapse of communism 19 years ago. In the early '90s the conventional wisdom was saying either that German capital would acquire most of Polish (and Czech, and Hungarian�) industry, and/or that low cost imports from these central European states would drive Western competitors out of business. As far as the label sector is concerned, neither of these prophecies has come true. Western companies have been slow to invest in Central Europe: Apart from two small producers in Hungary and Slovenia, there is still no labelstock production between Berlin and Vladivostok.
A major development here, however, is the decision of UPM Raflatac to invest €90 million in a greenfield plant to manufacture self-adhesive labelstock in Poland. This plant will come on stream by mid-2008, and underlines the importance of the Polish label market for the whole central Europe region. So far other world leaders in labelstock manufacture have not made any similar investment decision, but both Italy's Ritrama and Loparex (Finland) recently chose Poland to site new slitting and distribution centers.
Further east, in Russia, the situation is less favorable for Western investors as the smiling Russian bear begins to look more like Little Red Riding Hood's grandma. The country is getting richer fast as oil and gas prices rise, but industrial production in sectors like food, cosmetics and pharmaceuticals is not keeping pace as Russians turn to imports for their consumption and French Riviera property for their investments. Locally owned label converters in Russia are believed to be doing very nicely, thank you, but few Westerners have taken the plunge. At least one major label press manufacturer is known to have scaled back its marketing in Russia as a result of disappointing sales.
Narrow web machinery has long been an area in which European manufacturers excelled. Denmark's Nilpeter also manufactures in North America (Nilpeter acquired Rotopress, based in Ohio, in 2001), but the others cover US and Canadian sales from Europe – and they are not happy. Rising raw materials costs combined with a rocketing euro/dollar exchange rate have had a serious impact on their US sales.
Conversely, US based press manufacturers well established in Europe, like Mark Andy, are enjoying a boom. So far, the threat of cheap press imports into Europe from the Far East has not materialized, although manufacturers like Iwasaki, Labelmen and Orthotec continue to do good business. Some well known names among European press makers are rumored to be outsourcing the less sophisticated components of their presses to Chinese and Indian subcontractors, but they are understandably tight-lipped about admitting it.
Press technologies – the rise of digital
Narrow web flexography became the dominant technology in Europe in the 1990s and in market share terms has stabilized. Three important trends have characterized the past three years in Europe: One is the "return" of narrow web offset (which never really went away), vectored by manufacturers like Nilpeter, Gallus, Codimag and GIDUE; the second is an increase in screen printing (especially for wine and pharmaceutical labels) propelled by Stork, SMAG and others, and the third and most important is the very rapid growth of digital label printing, thanks mainly to market leader HP Indigo.
How are European converters facing up to globalization?
The short answer for over 90 percent of Europe's narrow web converters is – not at all. A very high proportion of Europe's label plants are still small family run businesses serving customers within a 50-mile radius. A decade ago, some leading roll label converters set about building a worldwide network of plants to be able to handle demand from global customers like Nestlé, P&G and other giant producers of fast moving consumer goods. In Europe, Skanem has gone some distance down this road, with plants in the UK, Germany, Russia and Thailand as well as on its home ground in Scandinavia. Others, even Europe's biggest narrow web converters, have been slow to follow; groups like Rako and Schreiner (Germany) or Autajon and JPL in France have expanded mainly within known markets, and rarely outside Europe.
The greening of Europe
Last but by no means least among the changes that are happening in Europe is the continuing rise of environmental movements. Particularly in Britain and Germany, these popular movements, aided and abetted by the press, have often had the packaging and labeling industries in their sights. Outcries at "overpackaging" have made many retail manufacturers rethink their whole packaging strategy. European Directives on recycling, and on packaging and label manufacturers' responsibilities, have often been opposed by fierce lobbying, but the writing is on the wall.
For pressure sensitive label converters, ecological disposal of their waste is now a cost item which they must all figure into their prices. More significant is the question whether liner is "packaging" or not in the context of European law. It looks as if the argument is moving against Europe's label converters, who may find themselves required to recover used liner from their customers and then to invent some not too crippling way of recycling it.