Box Makers Fighting for Livelihoods
Thinking outside the box isn’t easy when you make corrugated cartons for a living. But Southern California’s myriad box makers are finding it necessary to survive in a commodity industry.
While much of the economy continues to boom, U.S. box shipments are projected to grow a miserly 1% this year, reflecting America’s spending spree on imported goods packed in foreign-made containers. Add a hefty hike in raw material prices this year, a glut of domestic box makers, razor-thin profit margins and competition from rival packaging such as plastic and it’s easy to see why it’s tough to make a buck on those ubiquitous brown cartons.
In response, some local box makers are gobbling up competitors or following their customers offshore. Others are carving out more lucrative niches to become less dependent on the commodity side of the business.
“Anybody can make a brown box,” says Michael Feterik, owner of Industry-based Orange County Container, whose company has branched out into movie displays and other specialty products. “We had to learn to differentiate ourselves.”
Corrugated boxes, named for the wavy inner fluting that gives the smooth panels their strength, aren’t exactly a sexy product. But thanks to its large manufacturing base and proximity to the state’s agricultural regions, the Southland is a box-making hotbed, with an estimated 85 to 100 facilities operated by more than 70 companies duking it out for market share.
The largest players are so-called integrated companies that control every step of their container-making operations from the forest to the finished carton. Big national firms including Federal Way, Wash.-based Weyerhaeuser Co. and Chicago-based Smurfit-Stone Container Corp. have set up facilities here to manufacture the corrugated sheets to supply their own local box-making operations as well as those of independent companies. Nationwide, fewer than 20 integrated firms account for more than 75% of U.S. corrugated box shipments, according to the Illinois-based Fibre Box Assn.
The rest of the domestic market is divvied up between nearly 1,000 independent corrugators and “sheet plants” that purchase corrugated panels and turn them into boxes. Most of these small players specialize in short runs and quick turnaround rather than the huge volume-based accounts sought by the integrated companies.
“We do stuff the big guys wouldn’t touch,” said Lewis Eagle, president of Empire Container Corp., a Carson-based corrugator and box maker. “That’s why we’re in business.”
But it’s getting tougher.
A 35-year veteran of the container industry, Eagle said his sales have hovered between $10 million and $15 million for the last several years. He pointed to the erosion of Southern California’s manufacturing base as the primary reason.
To be sure, the L.A. region remains the nation’s manufacturing capital, employing more than 1 million workers who crank out products from apparel to telescopes.
But the landscape has shifted with the rise of the service sector, high tech and globalization. Many heavy users of corrugated boxes, such as furniture and electronics manufacturers, have moved operations offshore.
“If Sony is making TVs in Mexico, they’re going to buy their containers from suppliers there,” said industry analyst Peter Ruschmeier of Donaldson Lufkin & Jenrette. “The trade deficit has had an impact.”
In addition to sluggish revenue growth, independents such as Eagle are being pressured on the cost side. The prices he’s paying for smooth “linerboard” and wavy “medium,” the heavy brown paper used to make corrugated sheets, have climbed nearly 30% in the last year and a half.
That has been good news for the large integrated firms whose paper-making profits have rebounded after overcapacity caused prices to slump. But it has cut into the profitability of many independents reluctant to pass the full increase along to customers in a hotly competitive market.
“Customers talk about quality and service, but everything comes down to price,” said Lloyd Kennedy, director of sales and new-business development at Industry-based Fibre Containers Co.
With raw materials representing about 65% of the cost of his boxes, Eagle keeps a tight rein on his other costs. Much of his box-making equipment is decades old, including a lovingly maintained, 1956-vintage contraption that can print, cut, fold and glue up to 10,000 boxes an hour. The mechanical heart of his small corrugating line, which “flutes” the medium and then sandwiches it between two sheets of smooth linerboard, dates from the 1920s.
“A lot of companies like to brag how new their equipment is,” said Eagle, over the roar of the shop floor. “Me, I like to brag how old mine is.”
Equipment suppliers say Eagle isn’t the only box maker watching his pennies in a slow-growing industry. Brea equipment dealer David Ray says his business is off about 50% from last year.
“You’ve really got to justify spending $1 million on a new machine these days,” Ray said. “That [represents] an awful lot of boxes.”
Which is why Feterik of Orange County Container has aggressively sought new opportunities.
Founded in 1981, OCC has grown steadily from a four-employee concern to an international operation with 1,100 employees and $100 million in 1999 sales.
Convinced that growth was the only way to survive in an industry with single-digit profit margins, Feterik purchased competitors in Anaheim and San Diego, joining the trend toward industry consolidation.
When some of his manufacturing customers began moving to Mexico in the mid-1980s to take advantage of cheaper labor, Feterik elected to follow them. Today, the company boasts sheet plants in Mexicali and Tijuana, as well as a corrugating facility in Tijuana in partnership with another U.S. firm.
Although those operations continue to grow along with the burgeoning maquiladora market, not all of OCC’s forays south of the border have been successful. The company shuttered a facility in Sonora after projected business never materialized.
“There is a big learning curve,” Feterik said. “It takes more time and money than you think.”
The company began another strategic shift five years ago by moving into specialty displays, particularly for the entertainment industry. It makes life-sized cardboard cutouts of Michael Jordan and other sports stars for a trading card company. But the company’s real niche is creating movie displays set up in theater lobbies to promote the latest releases.
Most are free-standing replicas of movie posters, reproduced on sturdy corrugated board. But OCC has also produced more elaborate displays. A three-dimensional plastic city for the movie “Godzilla” featured flashing lights, sound effects and water rigged up to create a miniature thunderstorm. The 1998 film was a stinker, but Feterik said his company’s creation was a real hit.
“There were more people in the lobby looking at that display than in the theater,” he said with a chuckle.
However, the contribution to OCC’s bottom line is no laughing matter. This year, nearly 30% of the company’s projected $120 million in revenue and more than half the company’s profit is expected to come from specialty displays.
Industry analysts say it could take a lot more consolidation to boost margins in the brown-box side of the business. Others say the rise of e-commerce and Internet exchanges could help small players remain viable. In the meantime, no one appears to be getting rich making a product that nearly every company needs.
“As long as people need boxes this industry will continue making them,” said Kennedy of Fibre Containers. “But when you look at the returns delivered for the capital invested . . . it’s not a pretty sight.”
