FPD: How has consolidation of the packaging industry and the need of food processors to adapt their products to consumer and regulatory demands affected the industry?
Bagchi: The consolidation in the packaging industry has enabled food processors to approach the packaging industry conglomerates as a 'one stop shop' for all their needs. Regulatory and consumer demands have made food processors experiment with a lot of things to better serve the customers. Some of the important trends would be a rise in aseptic packaging, the rising popularity of stand-up pouches and newer ways of processing food, like using water jets instead of using knives to cut food.
Due to aseptic packaging, machines made of stainless steel are becoming more popular as they can be washed down completely. The packaging machines have become costlier. Also packaging machinery manufacturers are trying to make the machine more modular so that each part can be removed and washed down if the need arises. This has increased the capital expenditure of the food processors as some machines have become costlier.
Food processors are trying to counter this by postponing buying decisions and trying to outsource packaging to contract packagers, either domestic or international. Although using water jets for cutting and processing food increases yield and compliance with statutory regulations, it is a highly cost intensive affair so many small food processors cannot afford them.
Many small food processors are falling by the wayside as they cannot afford to upgrade their processes and there is a trend of consolidation among the food processors too.
FPD: Is packaging becoming cheaper or more expensive for food processors?
Bagchi: Packaging is becoming more expensive for food processors although the cost of packaging machines and materials has gone down. This paradox is explained by the need for food processors to haveeye-catching packages to seduce the customers, which are costlier than traditional packaging media. With most sales being done by organised retailing, food processors need to have attractive packaging to catch theattention of the customer. In supermarkets, 'eye level' equals 'buy level'.
Most of the decisions to buy products by a customer in a supermarket are made in 40 seconds. Food processors have this crucial 40-second window to attract the customer to buy their package. So there are more attractivepackages, on which labels can be attractively printed. Shelf presence is driven by the marketers' need to outshine the competition, literally, in some cases.
It is the appeal to the customers' eyes, designed to attract attention with colour and emotional appeal. But the consumer is not consuming immediately, so the appeal is not to taste buds but to the consumers' visual sense of taste. In a category where productdifferentiation is slight but demand is high, packaging carries a larger burden of marketing. This is one reason why stand-up pouches (SUPs) have become popular both for human food and especially for pet food. Pet foodwas one of the most successful early uses of stand-up pouches to take advantage of the larger billboard.
With the introduction of preformed pouches from companies in China and Taiwan the cost of SUP packaging is supposed to go down in the coming five to six years.
FPD: Are food processors adapting by doing more of their own packaging in house?
Bagchi: On the contrary food processors are moving most of their packaging to contract packagers. The reason again is organised retailing. With retail sales of around $3523 billion in the US alone in 2004, the retail industry is a force to reckon with. The retailers want newer packages every fortnight to entice consumers to buy their products.
In this competitive world, staying ahead of the pack is an uphill task. This requires newer packaging and puts an enormous pressure on the supplier to come out with new packaging styles. Moreover, the emergence of the wholesale clubs like Sam's Club and Costco has led to the demand for different stock keeping units (SKUs).
Consumers demand SKUs from the standard six-pack to 48-pack sizes. This has put an enormous pressure on the packaging machine manufacturers to come out with machines, which can accommodate these SKUs from the two-pack to the 48-pack.
So instead of incurring a capital expenditure for new equipment, food processors hire a contract packager to test out the packaging first. Contract packaging revenues are expected to grow at a compound annualgrowth rate of 9.3 per cent, nearly twice that of packaging as a whole.