INSEAD The Business School for the World* Metal Can and Container Industry in 2014 In the quarter century following the rise of William J. Avery to the top of Crown Cork & Seal in May 1989, the U.S. metal can and container industry was shaped and reshaped by changing demand conditions, regulations, entry and exits, mergers and acquisitions, technological shifts, and fluctuating input prices. In 2014, it was still a relatively sizable industry. In 2013, over 123 billion metal cans and containers were shipped. ' The same year, industry revenues topped $20 billion, with 370 firms operating 541 establishments throughout the U.S. and employing over 31,000 people. Analysts predicted that industry revenues would grow at an annualized rate of 1.1% in the next five years, to $21.5 billion in 2019. The Evolution of Industry Concentration and Demand The industry had witnessed substantial merger and acquisition activity over the years (Exhibit 1). The most significant acquisitions were Crown Cork & Seal's acquisition of Continental Can in 1990, and Ball Corporation's acquisition of the can-making division of Reynolds Metal, the fourth largest player in the industry, in 1998. Entry into the U.S. can-making market, both by new firms and the expansion of non-U.S. manufacturers, also re-shaped the industry structure. For example, the British company Rexam, the largest manufacturer of beverage cans in the world, acquired American National Can from the French conglomerate Pechiney in 2000. By 2013 the share of the top four firms in terms of revenue was 43.4%, comprising Ball Corporation with 22.4%, followed by Crown (7.3%), Silgan (7.1%), and Rexam (6.6%).* However, the discrepancy across segments in terms of revenue per unit masked the concentration in the beverage segment, which accounted for approximately three-quarters of units shipped but half of industry revenues. North America accounting for 35% of the global beverage can market, three companies -Ball, Crown, and Rexam- supplied over 60% of about 300 billion cans consumed globally in 2013." Manufacturing plants remained scattered throughout the country, with ten states accounting for 55% of the establishments (Exhibit 2). Imports and exports continued to constitute a small fraction of industry revenues and were concentrated in a few countries (Exhibit 3). Despite the changes on the supply side, demand in the three segments of the industry remained largely stable in the same period (Exhibit 4)." The beverage segment, which was two-thirds soft drinks and one-third beer, accounted for 74% of industry shipments. According to an independent study by Silgan Containers, 81% of consumers still preferred metal cans to plastic and glass 2013-14 Annual Report, Can Manufacturers Institute. June 2014 IBISWorld Industry Report 33243 SIC 3411 Metal Cans, Encyclopedia of American Industries (4th ed.), Vol. 1: Manufacturing Industries, 776- 779: Detroit: Gale: 201 1. June 2014 IBISWorld Industry Report 33243 Rexam Annual Report 2013 Can Manufacturers Institute annual reports, various years. Copyright @ INSEAD This document is authorized for educator review use only by Anh Pham, Other (University not listed) until May 2023. Copying or posting is an infringement of copyright. Permissions ghosp.harvard.edu or 617.783.7860INSEAD IN1573 The Business School for the World" POS Metal Can and Container Industry in 2014 Not Copy o 01/2015-6111 This case was written by Metin Sengul, Associate Professor at Boston College, USA, and Matthew Lee, Assistant Professor of Strategy at INSEAD. It is intended to be used as a basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. Additional material about INSEAD case studies (e.g., videos, spreadsheets, links) can be accessed at cases.insead.edu. Copyright @ 2015 INSEAD COPIES MAY NOT BE MADE WITHOUT PERMISSION. NO PART OF THIS PUBLICATION MAY BE COPIED, STORED, TRANSMITTED, REPRODUCED OR DISTRIBUTED IN ANY FORM OR MEDIUM WHATSOEVER WITHOUT THE PERMISSION OF THE COPYRIGHT OWNER. This document is authorized for educator review use only by Anh Pham, Other (University not listed) until May 2023. Copying or posting is an infringement of copyright. Permissions gthbsp.harvard.edu or 617.783.7860INSEAD The Business School for the World* containers. 'The food segment accounted for 23%, with vegetable and vegetable juices, pet food and soup as the leading categories. The general packaging line segment, supplying aerosols and other non-foods, was a distant third at 3%. Cans and Containers C The 12oz. beverage can was the industry's single most important product. By the turn of the century, aluminium had completely replaced steel in beverage cans. Technological advancements allowed for the use of lighter aluminium in manufacturing, which was hair-thin in the middle of the can but still structurally stable. 12oz. cans were the standard, accounting for over 95% of all beverage cans. In contrast to the beverage segment, the food segment still relied mainly (about 75-80%) on steel. The general line segment also used almost exclusively steel." The purchase of raw materials, along with the purchase of organic coatings, lining compounds and inks accounted for 62.9% of industry revenues Wages were the second largest cost component at 9.2%. Marketing expenses were noticeably low at 0.1%. Rent and utilities were 2.4%, depreciation 1.7%, and all other cost items, including logistics, communications, legal and accounting expenses, accounted for the remaining 17.7%. Overall industry profitability, measured as EBIT, was 6.0% as of 2013. Can-making firms continued to invest in targeted opportunities to improve both value to consumers and costs. Crown Holdings, one of the most innovative firms in the industry, for example, operated two research facilities, one in Illinois and another in England, and spent $30- 40 million (about 0.4-0.5% of sales revenues) on developing new products or designing significant improvements to existing products or processes. " Recent industry innovations included value-added shaped cans (e.g., Heineken's keg can), improved beverage cans that required less metal in production (e.g., Ball's spin-flow necking process), improved tamper resistance, end designs that allow improved pourability, drinkability and ease-of-opening (e.g., flexible lids), and the development of techniques for embossing and printing high-definition graphics. 12 13 Current Industry Trends Total industry demand had remained fairly constant, but can-making firms paid close attention to consumer trends further down the value chain. In 2013, soft drink consumption contracted 3% on SIC 3411 Metal Cans, Encyclopedia of American Industries (4th ed.), Vol. 1: Manufacturing Industries, 776- 779: Detroit, Gale. 201 1. Can Manufacturers Institute annual reports, various years. June 2014 IBISWorld Industry Report 33243 10 Ibid. 11 2013 Annual Report, Crown Holdings Inc. 12 June 2014 IBISWorld Industry Report 33243 13 SIC 3411 Metal Cans, Encyclopedia of American Industries (4th ed.), Vol. 1: Manufacturing Industries, 776- 779: Detroit: Gale: 201 1. Copyright @ INSEAD 2 This document is authorized for educator review use only by Anh Pham, Other (University not listed) until May 2023. Copying or posting is an infringement of copyright. Permissions ghbsp.harvard.edu or 617.783.7860INSEAD The Business School for the World* an annual basis, corresponding to the ninth straight yearly contraction and to more than double the 1.2% decline in 2012. "In contrast with earlier years, 2013 also marked a sharp drop in low- calorie carbonated drinks. Beer consumption, on the other hand, was largely stable. Alcohol use varied significantly by race, gender, and age (Exhibit 5). In a Gallup survey, 55%% of male drinkers said that they most often drank beer, followed by liquor (2i?) and wine (20%). The majority of female drinkers instead favoured wine (52%), with just over 20% most often choosing liquor or beer, respectively. According to the same survey, alcohol consumption was highest in the 35-54 age group, followed by the 18-34 group. Despite stable overall demand for beer, some recent trends in beer consumption were noteworthy. Micro-brewing had become an important new segment, composed of over 3,000 microbreweries. Differences in the manufacturing and distribution processes of these microbreweries compared to the major brewers made them less likely to use cans. For instance, many sold to customers who showed up at the brewery to buy beer in glass jugs (known as "growlers") and to nearby taverns that bought kegs. Those that shipped their beer used bottles that were simple to seal and did not require costly specialized canning equipment. However, cans allowed brewers to save money on shipping: a case of cans weighed about a third less than a case of bottles, and about 2,000 cases of cans fit into a shipping container compared with 1,350 cases of bottles. According to Anchor, a San Francisco Brewery, it cost roughly $2 a case to ship cans of beer by truck to the East Coast, compared with about $3 for bottles. A very recent development serving low-volume brewers was the emergence of mobile beer-canning companies, which installed a canning system in a trailer and drove to breweries that demanded their service". The market price of the industry's primary raw material, aluminium, was historically quite volatile (Exhibit 6). Industry analysts expected the price of aluminium to increase moderately in 2014. "A standard industry practice was to include a levy clause that linked can prices to the spot market price of aluminium, thus enabling operators to pass some of the risk of changing input costs downstream. Some analysts speculated that the strong recovery of the U.S. dollar after the 2008 financial crisis might have affected cross-border trade, encouraging imports and discouraging exports. Manufacturers also were monitoring a number of non-market trends. The Can Manufacturers Institute, the trade association of the industry, was concerned about the call from consumer groups for more detailed labelling requirements concerning potential health risks with food ingredients as, it argued, unwarranted labels on food packaging could disrupt the manufacture of metal cans. " The institute also lobbied in favour of handling chemical regulation on the federal level, rather than by states as the latter would create a patchwork of contradictory laws, thus increasing the costs of compliance. This was in response in particular to the emergence of "green chemistry" initiatives which called product designs and processes that reduced or eliminated the 14 Esterl, Mike. "The Diet Soda Business Is in Freefall." Wall Street Journal, 31 March 2014. 15 Saad, Lydia. "Majority in U.S. Drink Alcohol, Averaging Four Drinks a Week." Gallup, Accessed: August 24, 2014. http:/www.gallup.com/poll/156770/majority-drink-alcohol-averaging-four-drinks-weck.aspx 16 Hagerty, James R. "Hot New Job: Migrant Beer-Canning Experts." Wall Street Journal, 20 August 2014. 17 June 2014 IBISWorld Industry Report 33243 18 2013-14 Annual Report, Can Manufacturers Institute. Copyright @ INSEAD 3 This document is authorized for educator review use only by Anh Pham, Other (University not listed) until May 2023. Copying or posting is an infringement of copyright. Permissions gohosp.harvard.edu or 617.783.7860INSEAD The Business School for the World* use or generation of hazardous substances. The institute was working with the Environmental Protection Agency on the next round of federal air pollution control standards for the surface coating of metal can operations. The Clean Air Act standards applied to can manufacturing facilities and other major industry sources of hazardous air pollutants. Linder the Act, the Agency was required to review emissions for eight years. Do Not Copy or F Copyright @ INSEAD This document is authorized for educator review use only by Anh Pham, Other (University not listed) until May 2023. Copying or posting is an infringement of copyright. Permissionsighbsp.harvard.edu or 617.783.7860INSEAD The Business School for the World* Exhibit 1 Notable Acquisitions in the U.S. Metal Can and Container Industry, 1989-2014 Year Acquirer Target (assets acquired) Transaction value (millions of USD) 1990 Crown Continental Can 336 1993 Crown Van Dorn 177 1993 Silgan Del Monte (container manufacturing operations) 73 1994 U.S. Can Steeltin Can and two affiliated companies, 20 Eastern Container and Eastern Metal Decorating 1995 Silgan American National Can (food metal and specialty 336 division) 1996 BWAY Davies Can 42 1996 BWAY Ball (metal aerosol can business) 42 1996 Silgan Finger Lakes Packaging 30 1998 Ball Reynolds Metals (can-making business) 746 1998 BWAY U.S. Can (metal services operations) 28 1998 Silgan Campbell Soup (can manufacturing assets) 123 2000 Rexam American National Can 990 2003 Ball Metal Packaging International 28 2009 Ball Anheuser-Busch InBev (three beverage can and 575 one beverage can end manufacturing plants) 2009 BWAY Central Can 68 2011 Silgan Nestle Purina PetCare (metal container self- 25 manufacturing assets) Selected acquisitions in the U.S., directly or through affiliates. Company fully acquired unless otherwise noted. The list excludes all container industry acquisitions that were outside the metal can and container business (in particular, glass and plastic packaging), outside the U.S., less than $20 million in total (nominal) transaction value, vertical in nature (such as aluminium manufacturing), acquisitions of minority stakes from partners, private equity deals (i.c., the acquisition of BWAY's parent company in 2010 and 2012), and/or took place after the first quarter of 2014. Source: Bloomberg and Mergent Online. DON Copyright @ INSEAD 5 This document is authorized for educator review use only by Anh Pham, Other (University not listed) until May 2023. Copying or posting is an infringement of copyright. Permissions ghosp.harvard.edu or 617.783.7860INSEAD The Business School for the World* Exhibit 2 ost Top Ten States with the Most Metal Can and Container Manufacturing Establishments, 2013 State Percentage of U.S. Population establishments rank California 10.5 #1 Illinois 9.1 #5 Ohio 8.5 #7 Texas 6.4 #2 Pennsylvania 5.5 #5 Wisconsin 4.0 #20 Florida 3.8 #4 Indiana 3.5 #16 New York 3.3 #3 North Carolina 3.1 #10 Source: Establishment numbers from June 2014 IBISWorld Industry Report 33243; Population rank based on C.S. Census data. Exhibit 3 Destination of Metal Can and Container Industry Imports and Exports, 2013 Imports from Canada Mexico China Germany Other $897.7m Exports to Canada Mexico Other $876.9m Do 100 200 30D 400 500 600 700 800 006 1000 Source: June 2014 IBISWorld Industry Report 33243. Copyright @ INSEAD 6 This document is authorized for educator review use only by Anh Pham, Other (University not listed) until May 2023. Copying or posting is an infringement of copyright. Permissions @hosp.harvard.edu or 617.783.7860INSEAD The Business School for the World* Exhibit 4 ost Annual Metal Can Shipments, 1970-2013 (billions of cans) 140 TOTAL LOO Beverage C Food General packaging Empty cans and can ends produced and shipped from U.S. and U.S. controlled territories. Source: Can Manufacturers Institute. Exhibit 5 U.S. Population Dynamics and Alcohol Consumption by Race Race Percentage of Percentage Median Alcohol population, growth, 2000- age, 2012 consumers (). 2012 2010 2007 Asian 5.3 46 35 38.0 Black 13.2 15 32 43.8 Hispanic 17.1 43 27 46.3 Native American 1.2 27 29 47.8 White 62.6 42 59.8 "White" corresponds to non-Hispanic whites alone and "Native American" to American Indians and Alaska Natives; population percentages do not add up to 100 as the table excludes remaining races, such as Native Hawaiian or other Pacific Islanders; Alcohol consumers corresponds to past-30-day estimates of any alcohol consumption in adults. Source. Population demographics from 2012 U.S. Census Bureau estimates; Alcohol consumption figures from the 2007 National Survey of Drug Use and Health as reported in Chartier, Karen & Cactano, Raul. "Ethnicity and Health Disparities in Alcohol F Research." National Institute for Alcohol Abuse and Alcoholism, hip//pubs.niaaa.nih.gov/publications/arh40/152-160.htm Accessed: August 24, 2014. Copyright @ INSEAD This document is authorized for educator review use only by Anh Pham, Other (University not listed) until May 2023. Copying or posting is an infringement of copyright. Penissionsighbsp.harvard.edu or 617.783.7860INSEAD The Business School for the World* Exhibit 6 Aluminium Prices, 1989-2014 Post 1.6 14- Aluminum Price (USDAb) 12- 0.8. 04 0.2- 0+ Jan 2 Jan 1 Jan 1 Jan 1 Jan 2 1969 +684 2004 2009 2014 Source: InvestMine.com. Do Not Co Copyright @ INSEAD 8 This document is authorized for educator review use only by Anh Pham, Other (University not listed) until May 2023. Copying or posting is an infringement of copyright. Permissions @hosp.harvard.edu or 617.783.7860