Is the Metal Containers Industry Attractive?

Is the metal containers industry attractive?

In general, firms in the industrial materials sector produce commodity products with very little pricing power, and margins are slim. Firms in this industry are usually vulnerable to economic cyclicality. Capital requirements are large and lead to high fixed costs associated with manufacturing equipment. During strong demand cycles, capacity can be utilized to produce large volumes. Given the high operating leverage of most firms in the sector, incremental production beyond a break-even point comes with a high margin. However, during a weak demand cycle fixed costs become a burden that severely impairs profitability. In this industry, operational efficiency and customer service are the keys to success.

In 1989, the metal containers industry was a very robust industry, representing 61% of all packaged products in the United States. However, many factors are emerging that are beginning to contribute to an unattractive business environment. Margins are beginning to compress due to excess capacity and rising raw material/labor costs. Key buyers in the industry are beginning to vertically integrate downward, manufacturing their own cans in “captive” plants. In addition, key suppliers are beginning to integrate upward as aluminum firms produce metal containers. The introduction and growth of glass and plastic as substitute products is becoming a real threat to the metal containers industry. Glass bottles are becoming a real source of competition with the brewery end-user, outperforming metal cans on customer preference. Plastics possess the highest growth potential, especially among soft-drink bottlers. However, their potential is currently limited due to the material’s inability to hold carbonation for a long period of time and possible environmental concerns. Producers of metal containers are beginning to recognize these trends and take action. Firms are beginning to consolidate and diversify, some into alternative packaging materials such as glass and plastic, and others into unrelated businesses such as financial services.

Bright spots in the industry include serving the soft-drink segment with aluminum cans as well as expansion into underdeveloped overseas markets. The soft-drink industry has emerged as the largest end-user of packaging, with aluminum as the material of choice. Moreover, in-house production of packaging by end-users (vertical integration trend) is not as prevalent in the soft-drink industry. Overseas markets hold untapped potential. Developing nations have very few established firms, governmental incentives, and have considerable growth potential in metal packaging.

Given the inherent unfavorable business conditions present in the industry (low margins, high fixed costs, demand cyclicality) coupled with the increasingly difficult conditions outlined above, we feel that the industry is quite unattractive. In an already low margin industry, firms are feeling price and cost pressure caused by the factors described above, further impairing profitability. In addition, substitute products are gaining momentum, threatening to effect demand and growth potential.

How has Crown Cork & Seal positioned itself to deal with key industry forces?

Up to 1989, the firm had positioned itself and adapted quite well to the forces present in the industry. However, conditions are becoming increasingly difficult and the future will pose significant challenges. The following section will focus on the firm’s position with regard to key functional areas.

Product Choices: Currently, Crown’s focus is on aluminum cans manufactured by the two-piece method. The firm accurately recognized the potential in the soft-drink industry and intern shifted focus from steel to aluminum as well as improved customer service and increased flexibility. The firm has also uniquely positioned itself to control transportation and shipping costs, a major cost component in the industry, through strategic plant placement. However, current industry trends will test the firm’s ability to effectively position its products. Metal packaging growth rates are stabilizing, which may necessitate a change in product choice.

Customer Service: It appears that the firm has positioned itself quite well with respect to customer service level and flexibility. The cornerstones of Crown’s marketing and customer service model are their ability to provide high quality products, tailored to the specific needs of customers, with the ability to react quickly to changing customer needs. Because they produce a commodity product, they have correctly identified the need to differentiate based on customer service. Individual customer attention is also key to