Into the Fire : Making Plastic Containers Is Not an Easy Path to Profits, Olson Finds After Shedding Egg Lines

When Olson Industries finished shedding its huge egg division last spring to concentrate on plastic containers, Chairman John W. Buffington said the egg business was simply too unpredictable.

The Sherman Oaks-based company was tired of having egg demand fouled up by consumers’ cholesterol fears or by government interference in the poultry industry. Then there was the influenza epidemic that killed millions of hens in 1984.

Who needed the aggravation? After all, Olson could count on its stable plastics operation, whose customers include no less than McDonald’s, which buys millions of Olson’s trays for its Big Macs and Quarter Pounders. Now that’s predictability.

But, as Olson has since learned, it’s not a sure-fire source of profit.

Profits Dwindling

One problem is that polystyrene, the main raw material used to make Olson’s plastic trays, has soared in price over the past year. Yet Olson hasn’t been able to pass all of the higher costs to its customers. The result: vanishing profit margins.

Then there is the matter of the ozone layer. An ingredient in the manufacture of Olson’s plastic trays is a gas containing chlorofluorocarbons (CFCs), which scientists now believe are helping erode the ozone shield that protects the Earth from the sun’s cancer-causing ultraviolet rays.

The discovery prompted McDonald’s to announce last August that, within 18 months, it would stop using containers made with CFCs. Although fast-food packaging represents only a fraction of all CFC use, the action still means that Olson’s plastics unit, Dolco Packaging, must come up with a new technique for making the containers--and incur another unneeded cost.

Nonetheless, Olson officials say the setbacks won’t last forever, and they remain convinced that the company made the right move in turning to plastics.

“This is a short-term situation in terms of our cost pressures,” Dolco President Larry E. Rembold said. “We are expecting to be modestly profitable in 1987, and certainly we are going to get relief in our raw material costs and return to more normal profitability.”

In the first half of 1987, Olson lost $3.74 million, including $3.6 million from divesting the egg business and a $140,000 loss from continuing operations. A year earlier, the company earned $2 million, or $2.86 a share. Six-month sales edged up to $30.8 million from $29.3 million. For all of 1986, when Olson still had some egg operations, it earned $4 million on sales of $100.5 million.

Bad Year for Egg Business

Rembold also noted that 1987 “is probably one of the worst years for the egg industry, and, if we’d stayed with it, we’d have had a double hit of bad news.”

But the news in plastics was bad enough for Olson investors. The company’s common stock, which reached a high of $37.50 a share in 1986, is about 60% lower this year, despite a bull market, and closed Friday at $14 a share in over-the-counter trading.

Yet Olson’s strategy gets a strong endorsement from at least one of its major stockholders, James Wilen, whose Wilen Management Corp. is a money-management firm in Lutherville, Md., that owns more than 10,000 of Olson’s 700,000 common shares outstanding.

The focus on plastics “was certainly the right move, long-term, for the company,” Wilen said. Olson’s containers “are much better for a lot of products than paper, and over time they will be expanding their product line,” despite competition from Mobil, W. R. Grace and their rivals, he said.

Plastic-Gas Mixture

Olson buys a plastic called polystyrene and then mixes it at high temperatures with a gas that contains the CFCs. The result is a soft, foam-like plastic that is then pressed to form the packages.

To accommodate McDonald’s, the gas will eventually include hydrofluorocarbons, which are considered ecologically safe, instead of the CFCs. That will cost extra, of course, but McDonald’s has indicated that it will help cover the added expense incurred by Olson and its other packaging suppliers.

“We anticipate there will be some costs on our side,” said Lana Ehrsam, a spokeswoman at McDonald’s Oak Brook, Ill., headquarters. She declined to elaborate.

Rembold acknowledged that the change is going to cost money, but said it “is not going to be significant to our bottom line.” And, although McDonald’s is the only Olson customer to request the change, Rembold said the company will no doubt change its entire process to eliminate the use of CFCs.

Price of Plastic

If only Olson could eliminate its major problem--the price of polystyrene. The plastic has nearly doubled in price, to about 53 cents a pound, from last fall because the price of its main component, benzene, tripled from October, 1986, to last June, Rembold said.

There has been a strong worldwide demand for benzene, a petroleum-based product, although benzene prices have declined somewhat since June and are now only about 10% higher than last October, Rembold said. But, so far, polystyrene prices have not come down at all.

Although Olson has raised its prices somewhat to cover its higher polystyrene costs, Rembold implied that the company is willing, for the moment, to accept lower profits in return for strong sales.

“One of our driving strategies has been to maintain market share,” he said. “We’ve been in part successful in raising prices, but not totally, in the interest of maintaining market share.”

So what does Olson do now? Until polystyrene prices start dropping, Olson’s profit margins likely will remain low. The company seems to have little choice but to keep cutting its other costs.

This year, for example, Olson pared its corporate work force from 60 people to 40. And, although there have been no layoffs at its five factories (including one in Pico Rivera), some job vacancies are not being filled, Rembold said.

Olson contends that the price of polystyrene will come down. “Everything has a cycle,” Rembold said.

Wilen agreed, saying that the recent decline in benzene prices portends a drop in polystyrene prices.

But, as Olson shareholders have learned, it can be dangerous to count your chickens before they hatch.

OLSON INDUSTRIES’ PROFITABILITY

Once one of the nation’s biggest egg distributors, Olson Industries began shedding its egg business in January 1986 to concentrate on its plastic-container division. The transition was completed in May 1987.

Fiscal year ends Dec. 31; In Thousands

Income (Loss) from Net Income Period Continuing Operations* (Loss) 1st Quarter ’86 $1,356 $1,746 2nd Quarter ’86 $131 $256 3rd Quarter ’86 $199 $400 4th Quarter ’86 $194 $1,566 1st Quarter ’87 $390 $(2,882) 2nd Quarter ’87 $(530) $(861)

* Excludes discontinued lines and extraordinary items.