The label and package printing market can be characterized by significant challenges and strong opportunities that will impact both the short and long-term health of the industry. Economic and workforce challenges will remain present, but technology has advanced at a rapid pace to help mitigate a host of obstacles.

In stark contrast to recent years, the label and package printing industry saw negative growth in 2023. According to AWA Alexander Watson Associates, the global label market saw its growth rate decline by 1.4%. North America and Europe were particularly impacted, as North America saw -6.3% growth while Europe fell by 9.4%. In North America, pressure sensitive labels were significantly challenged, as the industry saw a 12.9% decline. 

However, the turnaround is already underway, notes AWA. In Q4 of 2023, North America saw nearly 1% growth – meaning much of the struggles occurred during the first three quarters of the year. AWA projects the North American label market to grow by 2.2% in 2024 – with similar projections until 2026 when the industry is expected to expand by 3.1%.

“The industry is positively improving,” states Corey Reardon, president and CEO, AWA. “The label and narrow web industry is dynamic, and it has proved over the past few years how truly resilient it is. The industry can be characterized by generally good growth characteristics across the board, with pockets of high growth in specific niches and value-added segments.

“After a turbulent period of Covid-19, supply chain disruptions, erratic supply and demand, overstocking, destocking, and economic uncertainties, the prospects looking forward are good,” adds Reardon. “Sustainability is the overriding trend and key driver of innovation, providing leverage for the sector as both a threat and opportunity.”

Suppliers are seeing the same turnaround. Paul Teachout, technical marketing and content specialist, Harper Corporation of America, cites the current market conditions as “promising.”

“There has been a stabilization of supply chain concerns, and destocking has also provided added value,” remarks Teachout. “The year-over-year growth rate of the label business from the first quarter of last year is 7.5%. That is great news as we head into the summer and fall seasons. Overall, we are trending toward a very optimistic future regardless of economic challenges.”

Both converters and suppliers alike have begun to destock inventories that were present during the pandemic, too. “This is a supply chain management decision to reduce the inventory to sales ratio,” says Teachout. “Implementing this process will also support improved inventory management efficiencies, as well as protect margins. In many cases, the carrying cost of these inventories can negatively influence storage, insurance, and obsolescence cost. The pandemic created a hoarding and inventory management trend that can now be reversed by destocking that will protect margins and free up much needed cash.”

Paul Teachout and the dedicated Harper team focus on label industry trends with their latest research and development initiatives.

Despite the previous challenges with pressure sensitive labeling, shrink sleeves saw an increase of 1.7% in North America in 2023, and those growth figures are expected to reach nearly 4% by 2026. Globally, beverages are the primary driver of labeling technologies, making up 43% of the end-use markets – which translates to strong opportunities in shrink, both now and in the future.

M&A will continue to be a focal point for both converters and suppliers. While the number of acquisitions is not quite as staggering as 2-3 years ago, this is still a space that bears watching. There are positives and negatives to this trend.

“Private equity has created a consolidation in the label sector of some of the most recognizable brands,” says Teachout. “Label printers will continue to be a prime target as we check off all the boxes, recurring revenue, brand loyalty, de minimis related benefits and asset continuity.  The most attractive converters will have shown good investment in their company, a millennial workforce, and a consistent growth rate. On average we have seen almost 40 acquisitions a year for the past decade, and at this rate we can go another 30 years before we run out of opportunities. This trend shows no sign of slowing anytime soon.”

“M&A has impacted the label landscape by driving consolidation across the value chain,” adds Reardon. “The industry has been consolidated through M&A on raw materials, coating and laminating, label printing and converting, and even on the machine/hardware and brand sides of the value chain. There is evidence that this consolidation has created a stronger, more professionally run industry with a high level of fiscal discipline, as well as capital investments in the industry to help drive efficiency, innovation, and profitability. 

“On the flip side, as small to medium size, family-owned companies reduce in number, the character and personal relationships synonymous with the label and narrow web industry is reduced,” he continues.

FLAG president JC McKay concurs with Reardon’s sentiment, as the early returns have come in for some acquisitions that have taken place over the last 3-5 years. “Mergers and acquisitions always seem to follow the same pattern: they start with promises that nothing will change, but over time, everything does,” says McKay. “We’ve seen countless acquisition examples play out the same way. Initial stability is soon followed by significant shifts, often leaving the tenured employees who helped build the business unhappy or worse, jobless, to satisfy the bottom line.”

Upcoming challenges

While the industry has stabilized, there are still several causes for concern in the immediate and long-term future. According to AWA’s Reardon, inflation, social unrest, imported equipment and pricing are all potential obstacles.

“Inflation is a challenge as it relates to material costs,” says Reardon. “The label industry has relatively high material cost inputs, which is challenging in a material cost inflationary environment. Getting price increases through needs to be done in a timely fashion, taking into account sensitivities and challenges other value chain partners and customers may have, increasing the importance of a customer-centric and collaborative approach.”

“The post covid-19 response by the Federal Reserve has led to an inflationary period like we have never seen,” adds Harper’s Teachout. This has affected our markets across all verticals. Disinflation will help in consumer spending, but this just means prices are not rising as fast. As the economy continues to recover, we can expect inflation to be a concern through 2026. The opportunity that we have is to continue to increase our operational efficiencies to protect our margins, providing exceptional value and a competitive advantage to our customers. Consumers are still confident that they get what they pay for, so give them the best experience possible to maintain brand loyalty.”

According to FLAG’s McKay, there is a bright light for dealing with smaller converters during this inflationary period. “Inflation is a significant threat with rising costs and no clear end in sight,” he says. “However, independent label converters have the advantage of being able to adjust and respond more quickly to customer needs due to less red tape. Even if their pricing is a bit higher, the responsive, personalized service they offer is something that many companies are willing to pay for and seek out when finding new suppliers.”

Additionally, social economic political instability is another key challenge, with conflicts continuing in Eastern Europe and the Western Mediterranean, including the Middle East, notes Reardon.

“This will continue to be a challenge for the Euro zone economy and beyond. There is also the challenge of low cost materials and equipment being imported from the Asia Pacific region, with evidence that label materials are imported into Europe and North American below local production costs.”

Potential opportunities

Despite numerous challenges lying ahead, there are opportunities for converters and suppliers to grow their businesses. The main way: sustainability.

AWA’s Corey Reardon studies the latest data impacting the market.

“While often challenges can be leveraged into opportunities, other areas of opportunity in the label space include developments in more sustainable materials and recycling programs, including consumer sentiment leaning into more sustainability and recycling, or circularity in packaging,” explains AWA’s Reardon. “Other opportunities include the innovations around RFID and smart and intelligent labeling solutions, and an increase in collaboration across the value chain.”

Sustainability is just one area that will see continued expansion. Technology, specifically with automation, will make strong inroads in the future. “On the positive side, many label converters are expanding their capabilities into other markets, like flexible packaging, which provides new opportunities for growth,” says FLAG’s McKay. “We are also seeing more innovation in our space to combat some of the challenges our industry is facing like enhancing production efficiency with automation.”

McKay has observed several trends that will be pivotal for suppliers and converters alike. “Sustainability is a major focus, with a strong push toward more sustainable materials and processes,” he notes. “Converters continue to make investments in digital technologies offering versatility to their businesses. Additionally, there’s a growing emphasis on automation and efficiency to improve production and reduce costs. Also, cash flow continues to tighten, so proactive communication between suppliers and converters is crucial. It’s no secret that open communication typically helps more than surprises, but the day-to-day often distracts from those important conversations.”

Harper’s Teachout projects a strong close to 2024 as the industry prepares for the future.

“In the short term, I think the stabilization of the supply chain and inflation rates will provide a strong close to the year,” he says. “In the long term, continue to invest in operational efficiencies to maintain margins. Empower your workforce with the latest innovations in digitalized production methods. This will ultimately build your brand identity within the label community. The future will then be yours to dictate.”

In addition to new technologies that drive efficiency, companies are investing in leadership and the growth of their workforce. This can be done with many different approaches, too. “The most interesting thing to me is the advancement of AI powered systems and machine learning,” comments Teachout. “These innovations are rapidly becoming the next big thing in increasing operational efficiencies and driving down operational costs.

Investments in generative AI, robotics, and machine learning are now something that every converter is looking at. AI powered systems, coupled with intelligent machines, will create an environment of performing tasks autonomously. A process trained on huge amounts of manufacturing data can perform predictive modeling to streamline your entire workflow.”

More ‘new normals’

As the world adjusted to a new normal coming out of the pandemic, there are still lessons to be learned. The future is rife with risk and opportunity, which will benefit flexible and adaptable companies.

“In the short to medium term, the label and narrow web industry is still adjusting to ‘new normals’ and letting the dust settle from everything that has happened the last few years,” states AWA’s Reardon. “Since 2019, in fact, some companies are ahead of the curve while others are behind the curve on this. This will be followed by an increase in M&A activity going into 2025 and beyond, and companies across the value chain getting stronger.

FLAG’s JC McKay addresses the industry. (Photo credit: Sareigh Hatcher)

Investment in capacity will be needed as markets continue to expand, and growth will be driven in areas related to sustainability, recycling, circularity, smart and intelligent labeling, RFID, and other technologies. Emerging technologies like linerless, direct print to container, and alternative ways consumers see and purchase products will change the way we do business and the types of products needed to succeed.”

“In the short term, I think we’ll see continued uncertainty around business growth and economic stability, especially with inflation and ongoing M&A activity,” says FLAG’s McKay. “It’s also an election year, which always brings additional instability in the market. Long term, I think sustainability and automation will continue to be a growing focus. The industry will consolidate further, but independent converters in the market that can stay agile, think forward, and find leverage for their businesses will help them remain strong.”

The workforce challenge has also emerged as another new normal. Regardless of what industry you are in, the workforce challenge has had an impact on most businesses. “The manufacturing sector has been especially hit hard as the younger generation has a negative image of manufacturing,” explains Harper’s Teachout. “This has created an atmosphere of wage compression, rising prices, and lower margins. Current unemployment rates are at 3.9%, and we know that full employment is 4.1%. Private sector employment is at a record high. So, everyone who wants to work is; we simply have more jobs than we do people to fill them. As the silver tsunami recedes from its impact, we are left with a staggering employment situation that will continue to get worse. Over 2.7 million workers will retire in the next decade while new job growth will be 700,000.”

Teachout adds there is no silver bullet for this situation. “Frankly, our birth rate has declined, and we cannot keep up with human resources or the economic growth in manufacturing. Manufacturers must develop strategies within their specific organizations to overcome this challenge by implementing new technologies and equipment that provide higher levels of efficiency. We must change our negative image of manufacturing and show that we are now a sophisticated process of technical innovation and processes. We must continue to invest in the education of our workforce and create a culture within our organizations of opportunity and flexibility. Continuing engagement in education is a requirement, internal training, and development at every level, engage at local schools and colleges to develop the next generation of label manufacturers.”

TLMI’s LLT event addressed topics such as workforce development.

Associations have played a big role in tackling the workforce. For example, TLMI hosted its popular Label Leaders of Tomorrow (LLT) Excursion in Chicago, IL, USA, on July 9-10, 2024. TLMI has emphasized community, insight, and advocacy in its operations. Those principles guide education and content creation for members, with the goal of addressing the latest industry trends. From sustainability and digital printing to workforce development, TLMI has focused on content that will shape the future of its members. Workforce development, which has been a key factor in the launch of LLT, has long been a core focus of TLMI. The association awards over $30,000 in scholarships annually, and the member employee scholarship is still open. This allows member employees to pursue higher education and advance their technical and/or leadership skills.

A deep dive into M&A: Anatomy of a pricing freefall

By Sandy Hubbard

How confident would you be in setting an asking price to sell your business? How confident would you be in defending that price? You see, confidence is vital. Confidence is a psychological guard against doing something stupid. Let me explain.

When the seller does not have confidence in the asking price, it can set up what I call “freefall,” where the price and terms cascade downward during negotiations – and even impair closing. As a seller, this is not the position you want to be in.

Let me start by saying I’m not a CPA, tax expert, or attorney. I’m not a broker or M&A advisor. I’m a business advisor and marketing strategist with experience helping companies position themselves in the buy-sell process. I help companies build, improve, grow, and substantiate their asking price.

That being said, this is not advice, just my observations. That’s my disclaimer. Now, let’s get rolling with a story about a crisis in confidence that cost the seller millions. My colleagues and I were service producers on the buy side, helping a buyer find a tuck-in in a specific geographical area.

We had a few sellers in mind, plus one intriguing entity that was not officially on the market yet but interested in a conversation with our client. This seller had a soft idea of what they thought they could command for the business based on a recent valuation and input from their broker.

As providers on the buy side, we felt the asking price was slightly above market – but fair.

In doing the math, the buyer thought the target, if acquired, would avoid the expense and drama that sometimes goes with integration. It was a savings they could add to their offer to meet the seller’s number. There might be other savings, the buyer thought. When buyers start justifying the asking price, they already envision themselves as the new owner.

We were excited that the match was a good one. Here’s where it gets interesting. During the conversations between the buyer and seller, the outside world was heating up. The local market and the business climate were beginning to constrict:

1. Interest rates were due to increase.
2. There were signs of inflation.
3. Commercial lenders were tightening their requirements for borrowers.
4. Suppliers were shortening their grace period for payments.
5. Consumer confidence was faltering.
6. The big corporations in the local area were laying off workers.

Although the business climate was straining, the seller’s niche was solid, and his customer base was stable and diversified. Our research on the target was very favorable.

Truth be known, the seller could have gotten an even higher asking price. And, he could have negotiated terms. The buyer was prepared to do so. Unknowingly, the seller had the power. Instead, the opposite happened. The seller freaked out.

During due diligence, our client did what most buyers do. The primary contact goes silent while their representatives and attorneys conduct the process. This is typical, especially for regulated transactions where there are strict procedures and communication methods to follow.

The seller, though, interpreted this part of the process as a negative sign. He got nervous about the follow-up questions during due diligence. He got defensive about inconsistencies in his financials (not unusual). He got flustered by the stream of paperwork. He was upset that the buy-side valuation was much lower than his asking price.

He did not realize the buyer was still prepared to move forward. The nail in the coffin was the seller’s broker. The broker urged the seller to drop his price so the deal could be consummated quickly “before the bottom dropped out of the market.” Who knows, but maybe the broker was desperate for any commission – even a lower one – versus none at all.

Yes, asking prices were dropping for some types of businesses in the area, and more buyers were kicking tires instead of closing deals. That’s the challenge with a constricting market.

The seller’s nervousness was understandable. His perception was that the process was stalled. However, none of it was true!

In fact, the buyer was motivated and invested in the process. The due diligence process was being conducted at a reasonable rate. The buyer’s team was satisfied with its findings. The end of the story worked out great for the buyer – less so for the seller.

The seller dropped his price “to sweeten the deal.” He wanted to accelerate closing and get ahead of market conditions. I won’t tell you how fast the closing occurred, but it was the fastest one I’ve ever seen.

The buyer was happy. Instant equity. The seller and his broker were relieved. The deal went through. My colleagues and I shook our heads in disbelief.

The seller had capitulated on price without a word from our client. Maybe there were tax issues or family health problems we weren’t aware of. Perhaps something was going on behind the scenes to drive the seller to drop his price drastically. I don’t know that side of it. I do know our client was prepared to pay millions more.

You’re probably thinking, “Big deal. It’s just one sale between one panic-stricken seller and one savvy buyer.”

True. However, even one sale has a ripple effect that can spread, influencing future deals. You see, that sale goes into the pool of comparables. The public details of the transaction are added to data used for valuations. The grapevine of sellers and buyers spreads the information to others who base their decisions on recent sales.

When an otherwise strong seller closes for a price below market, it sends a message that prices are tumbling.

During the Great Recession of 2008, I personally knew sellers who were the top performers in their niches – and who jettisoned their businesses in a panic. Maybe they were over-leveraged elsewhere and just needed to cash out. Maybe they wanted to be the first to sell before the market was flooded. Business brokers and used equipment dealers were caught up in the mayhem, telling owners to sell now or forever lose your chance.

While post-2008 was an example of pricing freefall at the extreme, I’d hate to see it happen today.There’s no reason for it. We are far from the same situation we faced in 2008.

Despite inflation, investors are interested in betting on our sector. Strategic buyers still want to grow through acquisition. Competitors with good chemistry still want to merge and gain efficiencies of scale. Family members still want to build the business for another generation.

I see no reason for panic or loss of confidence. What should the confident seller do?

1. Start with a professional valuation from someone who is familiar with our sector. Get the proper advice in setting your asking price so you can support and defend it.
2. Invest in strategic advice and professional marketing so you can powerfully build and position the business before going into the sale.
3. Choose a trustworthy, confidential matchmaker with the right kinds of connections who can discreetly help you get a feel for the types of buyers out there who might be a good fit.

Pricing concessions, if any, should be handled with the guidance and input of an experienced advisor. Proper preparation and knowledge make all the difference in the moments when a seller is losing their nerve.

Confidence in pricing starts with preparation. It takes the mindset that can carry you through all stages of introductions, negotiations, due diligence, and closing. Controlling your mindset will help you sweep those extra millions of dollars on the table into your own hat, not that of the buyer.

Finally, don’t be afraid to find out what your business is worth. I regularly talk to owners who would prefer to dream about some fantasy number rather than order a current valuation and possibly be disappointed. Whatever number or range of values the valuation returns, you will have to work on the business before putting it on the market.

Don’t let yourself get sucked into a pricing freefall when it’s not necessary. Confidence comes with open eyes and a steady heart.

 

How to avoid leaving money on the table in a sale

By Sandy Hubbard

If you, as the seller, secretly believe your business isn’t worth your asking price, it will be next to impossible to make it to the finish line, both psychologically and emotionally. Your asking price starts with reliable and qualified information.

Order a business valuation from a qualified provider. Have your confidential advisor or marketing consultant help you interpret the findings. Use the findings to craft a road map to make your business worthy of your asking price.

Being able to defend your asking price means collecting robust data across your business. You’ll want to gather data over time showing where you’ve improved. The goal is to fix issues that buyers notice and care about.

Make sure your financials are orderly, correct, and up to date. Address any inconsistencies by correcting them or documenting in writing why they exist.

Build your sales program so revenue numbers are predictable. Try to level out sales so buyers won’t worry about ebbs and flow. Document and improve customer retention. Address and solve inefficiencies in your operation.

Maintain your equipment and facility so you are proud to give a plant tour. Improve internal leadership and the quality of your workforce so a buyer will value your people. Create an organization that can attract talented employees. Become the kind of company where everyone wants to work.

When you can solidly defend your valuation with the kind of facts and improvements that buyers care about, you can stand behind your asking price. Knowledge and preparation help you withstand the temptation of making unnecessary concessions or mistakes that leave money on the table when selling your business.