Market Focus

European Labeling

July 20, 2005

Some key socio-economic and political changes are reshaping a polarized European label market.

In some respects the Western European and North American label markets share several similarities. Both have roughly a 28 to 29 percent slice of the total global label market. Converters on both sides of the Atlantic divide basically use the same type of equipment and materials and find themselves coping with similar pressures on unit costs, rising raw material prices, increased energy costs and much else. There is also an understanding that innovation and flexibility are the keys to remaining competitive. But that is where the similarities end. As one would expect from such a diverse collection of around 40 countries, the various regional markets are influenced by differentiations in national character and economic growth patterns. Ultimately they must affect the consumption and usage of labels. There is also another often overlooked factor, and that is the effect of key economic and politically-inspired changes. They cannot be ignored, particularly by North American companies doing business in Europe.

Take the fall of the Berlin Wall, for example. It happened just over 15 years ago and unified western and eastern Germany. The social and commercial costs were huge and remain the main cause of Germany’s present under-performing economy and high unemployment. In the early 1990s the 15 former Soviet republics, with Russia as the largest, became independent countries, at least in name. The political and economical fallout remains a source of uncertainty, as shown in the crisis surrounding the Ukrainian election. Significantly, on 1 May 2004 the European Union went from 15 to 25 member states and increased its population by around 25 percent. However, GDP increased by less than 5 percent, because eight of the 10 countries were former satellites of the USSR. An enlarged EU now forms the world’s largest trading bloc with a population of 455 million people.

A dozen of these countries make up the single-currency eurozone (the UK and Denmark are notable exceptions). But a largely inflexible eurozone is considered by some to be an economic basket case: Gross domestic product grew by only 0.9 percent in 2002 and 0.6 percent in 2003. It is expected to have risen by 1.8 percent for 2004. By contrast, the UK’s GDP will have risen by 3.2 percent by the end of 2004, although pundits expect a ceiling of 2.5 percent in 2005. Uncertainty over oil prices is compounded by the strength of the euro and pound sterling against a weak US dollar, with its effects on exports. True to form, economists have begun to forecast gloomy times ahead for most European economies. Naturally, lower consumer and industrial demand will adversely hit the labeling and packaging industry.

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Label production
As for the structure of the European label industry, it splits roughly 39 percent for wet glue applied and 45.5 percent for pressure sensitive in most consumer applications. Film based shrink sleeves, wraparound labels and in-mold labels are growing fast in the developed markets — reflecting the enormous growth of plastics in packaging — but take only an 8 percent share of the total market. As for production methods, web fed printing of wet glue labels remains a small market, although new types of in-line finishing techniques are attracting more sheetfed litho printers. Narrow web technology has moved far from the historical dominance of semi and full rotary UV letterpress, especially in Germany, France and Switzerland. In the late 1980s letterpress accounted for 70 percent of European press sales, whereas in the United States flexo accounted for 80 to 90 percent of presses. Today, roughly 75 to 80 percent of new roll fed label presses in Europe have either conventional or UV cured flexo units. Flexo’s improved print quality and better color consistency is the clincher here, since European print buyers have always expected high quality as a non-negotiable right.

Around 10 percent of presses are combination models, either UV flexo or offset based, equipped with UV rotary screen and often hot or cold foil units. With respect to anilox rolls and platemaking, again these reflect an international approach. There is, however, a growing interest in computer-to-plate systems as part of digital prepress workflows. Substrate trends, including the use of film label stocks, follow roughly the same patterns as in North America. This reinforces the point made earlier about the ubiquity of equipment and materials in western label plants as supplied by a relatively few multinational manufacturers.

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Growth rates
Economically, several established western European converters still post higher-than-average returns, but most of the middle-band converters are being squeezed. Over-capacity and mature markets, compounded by sluggish economic performances in most countries, have therefore pegged self-adhesive growth in recent years. FINAT’s latest annual report says that in 2003 the total self-adhesive paper and film label stock market in Europe reached 4,530 million square meters (48,760 million square feet). This was an increase of 232 million square meters (2,497 million square feet) compared with 2002. Overall market growth, however, slipped to 5.4 percent compared with 6.9 percent in that year.

Paper label stock rolls grew by 4.2 percent, slightly down from 5.7 percent for the previous year. Surprisingly, the previous strong growth for rolls of film and synthetic papers was only 8.1 percent compared with 14.6 percent in 2002. By contrast, sales of non-paper rolls to Eastern European converters reached around 20 percent growth, but in a far smaller market. Taking 1997 as the base year, FINAT’s figures show non-paper rolls achieving a year-on-year relative growth of 85 percent, while the total growth for paper rolls was “only” 39 percent. The paper sheet segment increased significantly in 2003: 11.6 percent compared with 4 percent in 2002, possibly due to increases in display and signage applications. Non-paper sheets grew by 6.9 percent to reverse an earlier decline.

The Eastern European self-adhesive label market grows by about 17-20 percent annually. To place this into context, only 21 percent of the region’s labels are self-adhesive; wet glue applied takes a 68 percent share. The UK and Ireland had the next best growth rate of 4.6 percent, followed by Southern Europe (France, Spain, Portugal, Italy, Greece, Turkey) which showed a 3.6 percent growth. Volumes in Central Europe (Germany, Austria, Switzerland and the Benelux countries) rose by only 3.4 percent. Volume growth remains near static at 2.9 percent for Scandinavia, although per capita consumption is the highest in the world. In terms of the total global label market, Western Europe currently has a 28 percent share while it is 8 percent for the Eastern European countries and all to play for.

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Eastern expectations
Although hyped to Klondike-like proportions, the markets in Eastern Europe are growing relatively strongly, especially for the new EU members who expect to benefit from open borders and cheaper labor costs. However, not all of the goodies will come at once. Some label plants already work to high levels of technical competence, but they still face a difficult transition period lasting several years. They must abide by stricter rules governing health and safety, technical regulations, wage rates and environmental issues. Invariably, this means absorbing increased production costs through more efficient usage of plant and equipment. This could diminish any competitive advantages they may have had over western neighbors. There is also an underlying political instability in the region that cannot be ignored. Many of these issues were discussed at a recent Eastern European “label summit” held last year in Prague by Tarsus (See page 46). Delegates heard that some work was already being lost to even lower-cost printers in Serbia and Ukraine.

Nevertheless, this region has attracted huge investments by companies like Nestlé, Unilever, Kraft, Colgate-Palmolive and Coca-Cola, as well as some large cross-border retailers. Poland, Hungary and the Czech Republic have particularly benefited, with extra manufacturing capacity coming from German and Austrian engineering businesses. For label converters, the ground rules are the same: They must be fast to respond to the multinationals’ demands, which invariably means attracting the necessary investment funds. (The profile of the Finnish-owned Hungarian label printer, M-Real Petöfi Label, in L&NW’s November/December issue, gives an example of one who has.)

For companies like Avery Dennison, Gallus, Nilpeter, Mark Andy and many others, eastern Europe must seem like the days of opening up western America. All of them have set up extensive sales, service and distribution centers in the region. Raflatac’s new distribution terminal and sales office in Hungary, for example, is located between Budapest and Vienna to serve customers in central and eastern Europe. “The terminal answers the changes taking place in the European marketplace. Raflatac has anticipated the opportunities brought by change and provided for the needs of an entire region experiencing rapid economic growth,” said Thomas Rohweder, senior vice president for Raflatac Europe.

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Production issues
Meanwhile, there is a growing realization that label converting really should be seen as an industrialized process centered on reducing job changeover times and minimizing start-up waste. Methods and processes must be seen to reduce costs, raise efficiency levels and help maintain service levels. This is essential now that buyers order smaller quantities to keep inventories to a minimum and avoid obsolete label stocks. Standardized global brands may have similar styles of labels and packs, but regionalized marketing demands different size packs and multilingual labels. Gallus says that at least 70 percent of all first order jobs placed with European label printers represent 80,000 labels or fewer. In a five-year European strategic forecast of labels and packaging by Pira International in the UK, 90 percent of respondents said short runs represented a “very” or “fairly important” issue. (A corresponding 73 percent also expected that digital color printing would handle increasing volumes of on-demand, short run printing with a variable data component.) Materials and unproductive setup time make up almost 90 percent of the cost of first-order labels. This also helps explain why more press manufacturers are pushing full or hybrid servo drive systems. They argue that digitizing print production and press control data facilitates faster setups, gives more accurate control over web tensions, and permits full data storage for repeat jobs.

Buyers expect high quality standards as a matter of course and demand that suppliers comply with quality control accreditation schemes. On-press video web inspection — and at the slitting/rewinding stage — is used widely with varying levels of sophistication. However, the biggest changes are in prepress, where more companies are processing data files within digitized workflows using PDFs. Shorter lead times and pressures on margins means getting things correct from the start, despite the well meaning efforts of most creative types. Remote and localized digital proofing to complement computer-to-plate imaging is therefore a hot subject, as is an appreciation of color measurement techniques, combined with press fingerprinting. Internet interfaces for customers’ job tracking and progress reports, supported by management information packages, have also begun to take hold.

It is the larger European converters, and some large trade repro houses, who are adopting such techniques. They also figure strongly in some recent consolidations and mergers to become major suppliers to the international conglomerates. Examples (some with US connections) include CCL-Pachem, Chesapeake, Clondalkin, Pago, Skanem and the Steinbeis Group. Each has production sites in different countries to serve multinational customers who trade extensively across borders, or have international retail chains. Of course, smaller printers supplying local buyers within their own borders will continue, particularly those developing niche products.

As mentioned at the Prague summit, packaging buyers for global brands will look for a greater standardization of processes, inks and substrates, ideally with harmonized cross-border pricing, as well as increased security applications. This reflects the pressures on buyers to control brand images, perhaps by developing local and global partnerships with suppliers.

In summing up the European label scene, it is appropriate that a major label buyer should reiterate a familiar message: “The sourcing of certain goods and some packaging in emerging markets has already begun, especially for commodity labels for distribution which can usually be sourced anywhere. They help companies with local stockholding strategies to reduce risk”, says Mark Hill, operations manager for Label Link, an outsourcing department of Asda Stores UK (owned by Wal-Mart). “Local printers must take the threat seriously. That means reducing costs and driving service and quality levels up. There will be casualties.”

In the meantime, another threat is seen, this time from China, India and other fast-expanding Asian centers as western firms relocate some of the manufacturing plants. As the Chinese themselves might agree, we certainly live in interesting times.

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Vychodevropska konference pro etiketovaci prumysl
(Central European conference for the label industry)

By John Penhallow

The roofs and spires of Old Prague were bathed in the gentle sunshine of an Indian summer, but the 120 delegates of the Label Summit (12-13 October 2004) were more concerned with business than with the modern and medieval glories of the Czech capital.

To mark the accession, earlier in 2004, of eight new member-states into the European Union, Tarsus group, organizer of Labelexpo, produced a conference with an Eastern European flavor.

Starting from zero after the fall of Communism 15 years ago, the label sector — and in particular the pressure sensitive part of it — has expanded at a phenomenal rate throughout Central and Eastern Europe. Label demand was boosted by the arrival in Central Europe of major FMCG manufacturers like Procter & Gamble, Unilever and Nestlé. More recently they have been joined by nearly all the world’s leading retail groups (with the exception, for the moment, of Wal-Mart).

Originally met by imports from the West, label and packaging requirements in Central Europe are today largely supplied by local printer/converters. Today, there are in the eight new European Union member states alone more than 100 roll label converters. Some are mom-and-pop businesses using second-hand equipment, but others are equipped with rows of the latest combination narrow web presses, and are capable of matching the quality of all but a few Western competitors — and at a much lower price.

What label presses for Central Europe?
Some 20 speakers gave presentations at the Prague Label Summit. Some of these were of high quality; others less so. In the first category was Bernhard Grob of Edale, the UK label press manufacturer. Grob rejected the widely-held view that Central and Eastern Europe are bound to follow the same development stages as in the West.

Grob pointed out that narrow web flexo printing in the Eastern half of the European continent arrived before wide web applications, which are still little known in these countries. This has enabled Czech, Hungarian, and Polish label converters in particular to fill the void by branching out easily and profitably into flexible packaging and folding boxes. Grob went on to remind his listeners that label end-users in Central Europe are a ready market for high value-added labels. Local label converters are already able to supply advanced security label solutions, and will over the next few years be supplying more complex label formulations like booklets, RFID tags and “peel and read” labels.

Another quality speaker, but coming from a converter background, was David Harrison, sales director of Skanem, which claims to be Europe’s biggest supplier of self-adhesive labels. He expressed the view that, in order to survive, label converters anywhere in tomorrow’s world must be either very big or very small. The big ones will expand internationally and enjoy economies of scale, while the very small will continue to provide fast, personalized service to regular customers in their neighborhood or town. The medium-sized label converters, thinks Harrison, will in the course of time be taken over or squeezed out.

No label conference worth the name is complete without a speaker from Avery Dennison, and to fill this slot, the Label Summit was able to produce not one but two senior managers in the form of international marketing manager João Adao, and Angelo di Pietri, Fasson brand manager for South and East Europe. These speakers pointed to the low consumption of pressure sensitive labels in Eastern Europe — only 1.2 square meters (around 10 square feet) per head per year, less than one-tenth of the corresponding figure for label consumption in USA. Avery concludes that there is still plenty of room for further expansion of label consumption, and if growth in markets like Poland has slowed, “fringe” countries like Romania are experiencing annual market growth of over 40 percent.

A heavyweight label buyer
It was regrettable that the line-up of speakers at the Label Summit included only one label end user. But this one pulled no punches. Mark Hill buys labels and packaging for the UK’s Asda/Wal-Mart, one of the country’s biggest retailers. With 50 percent of its products sold under its own label, Asda/Wal-Mart is a heavyweight among label end users. Hill clearly favors what might be called the Ghengis Khan approach to supplier relations. His company now buys from only 20 label converters worldwide, as against 80 a decade ago. The other 60, explained Hill, were unable or unwilling to “get real” and meet Asda/Wal-Mart’s demands on price, delivery and quality. Label converters are generally too comfortable, too reactive, he opined, and need to be picked up and shaken regularly if they are to remain in the game.

Digital debate
On the second day of the conference a panel of experts discussed the complex question of digital label printing. The advantages (no prepress, instant start-up, short runs and high quality) were compared and contrasted with the drawbacks (low speeds, high-priced consumables…).

Christian Menegon of HP Indigo stressed the way in which digital label printing can “make the impossible possible” for short runs, and can guarantee that a strictly identical label can be run off in any country of the world. For Ken Daming of Mark Andy, the real future for digital label printing lies not with the all-digital press but with the digital print unit installed on a conventional machine. Both speakers, while defending their different views, agreed that equipment prices and consumable costs will fall over the next few years, while at the same time operating speeds will increase — HP Indigo, says Menegon, plans to double the speed of its digital presses within the next three years.

A view from the summit
The conference was opened and concluded by that venerable guru of the label world, Mike Fairley. From the height of his 45 years experience of the business, he predicted continued high growth for roll label markets in Central and Eastern Europe, averaging 17 to 20 percent per year (compared with current growth of 5 percent in Western Europe, and rather less than that in North America)

The Prague Label Summit attracted fewer delegates than the similar event organized recently by Tarsus in Mexico City. This was mainly due to a poor turnout by label converters from outside the Czech Republic.