For generations, the contract packaging industry was essentially dead, says Stan Zelesnik, executive director of the Contract Packaging Association (CPA), Naperville, Ill. “It was flat, uninspired, and companies found it difficult to make a profit.” But something changed over the past couple of years, and the industry finds itself on the verge of some of the most significant growth it’s experienced in decades. “The contract packaging industry is beginning a new lifecycle,” confirms Zelesnik, citing a recent CPA report that pegs annual growth expected at 15 to 18 percent for at least the next five years.

What’s driving those increases?

“The need for speed to market,” Zelesnik says, noting that brands that hit the shelves first often become category leaders. In fact, he continues, companies have been known to go to market with a new product in whatever container is readily available rather than delay its introduction until the right one can be developed.

But it’s not just about being first. Product lifecycles are shorter today than ever, Zelesnik explains, and so is the amount of time the window of opportunity remains open. Brand owners have to strike while the iron is hot, and contract packagers that are already tooled to do the job are often in a better position to do just that.

Another key driver behind the growth of contract packaging is demand by increasingly large, powerful retailers for custom packaging designed to help differentiate their offerings — even on the branded side — from their competitors’ selections. So, while Costco Wholesale might offer Kraft Macaroni and Cheese in a 15-count multi-pack, Sam’s Club wants it in a 12-count configuration. And while Kroger is content to offer Little Debbie Swiss Cake Rolls in a standard six-count package, Dollar Tree needs them in a less expensive five-count box. But that’s only part of the story. Retailers also are increasing calls for short-lived promotional sizes.

“Current research suggests that in-store promotions are a more effective use of media spend than trade dollars/discounting,” explains James Grissom, vice president of sales and business development for West Chester, Ohio-based Crescent Park. As a result, he continues, companies are putting more of their dollars in-store — where 70 percent of purchase decisions are made. Much of those monies are funneled into retailer-specific promotional sizes — particularly money-saving bonus packs — that create much sought-after “shelf impact.”

Customization Leads to Outsourcing

“The number of sizes and configurations continues to grow,” Grissom says. “But for a CPG company, promotional sizes require a very different process vs. producing open stock,” especially on the food side of the business where plants tend to operate at maximum efficiency.

“Once [the product] comes off the line,” explains Ron Pontolilo, vice president of sales at Jacobson Packaging and Manufacturing, Des Moines, Iowa, “they can’t do specials or multi-packs.” A lot of times, they don’t have the space. More importantly, however, it’s just not cost-effective to invest in equipment that can only be used to package a fraction of the plant’s total output. The same argument applies to new SKUs that may or may not stand the test of time.

“[Brand owners] don’t know whether a new item will be successful; most new products aren’t,” says Brian Young, sales and marketing director for Advanced Packaging and Distribution Specialists (APDS), Manteca, Calif. So instead of making changes to their in-house packaging operation, they’ll outsource the job to a contract packager that already has the right equipment. Then, if the product sells, they can bring the packaging component back inside at a later date — or not. It all depends on their corporate philosophy.

“Many of our customers want to focus their resources on product development and marketing,” reports Marty Sennett, vice president of sales and marketing at New Paltz, N.Y.-based Ultra Seal Corp. Even if they do their own manufacturing, handing off the packaging function to a “specialist” represents one less piece they have to spend time worrying about.

“We take on the overhead and innovation burdens so they can focus on the components of their business that they’re best at,” explains John Yamasaki, president of NAFM Labeling, Lake Forest, Calif. “Especially in tougher economic times,” he adds, “companies tend to revert to their core competencies while everything else is contracted out… So, although consumers may be buying less at retail, more companies than ever are looking to gain efficiencies by using [contract packaging] companies like ours.”

This trend makes the industry’s prospects for 2009 very bright, indeed — despite the lackluster economy.

It’s the Economy, Stupid!

“A lot of investment money has dried up, so companies aren’t putting money into new [packaging] equipment or machinery,” Yamasaki adds. This makes contract packaging not just an option but, in many cases, a necessity. However, only contract packagers that have positioned themselves to operate within a new industry paradigm will be able to take advantage of the current economic crisis.

“It’s my belief that you can’t grow in this industry today without being a one-stop shop,” explains Pontolilo, noting that Packaging and Manufacturing is only one of five Jacobson companies (the other four include transportation, warehousing, logistics and staffing). Due to the high cost of freight (a.k.a. “the diesel factor”), he continues, “Clients don’t want to move product around any more than they have to. If they can warehouse it, pull it down, repackage it, relabel it, etc. all in one place, they’re going to save money on fuel.”

But fluctuating fuel costs aren’t the only factor driving demand for one-stop shopping. Shorter lead times also are becoming increasingly important.

“Companies are looking for ways to take out those transportation legs for service as well as cost reasons,” confirms Grissom. “Retailers have shortened their lead times for promotions so they can lower their inventories,” giving contract packagers a much smaller window in which to ship. As a result, “Many customers are looking for companies that offer both contract packaging and logistics. If you can link those services together across the supply chain, you’ll attract a lot more business.”

Not surprisingly, adds Zelesnik, many companies are positioning themselves to do just that. “Much of the growth in the contract packaging industry today is backing up from those in the business of moving the product.” So, companies that used to specialize primarily in transportation and logistics are expanding into contract packaging as well. At the same time, many outfits also are looking to increase their national footprint by moving into new regions. The goal is to not only do everything related to contract packaging in a single location but in a single location close to where the product will eventually be sold. And it’s not only about saving money and time.

“There’s also the question of sustainability,” Young says, citing “green” initiatives at many leading retailers, including the grand-daddy of them all: Wal-Mart Stores. “Customers want to know how far their products have traveled and how much fuel it takes to move them,” he explains, adding that companies closer to home clearly have an edge.

Although some companies have skirted the issue of proximity by offering “embedded” contract packaging services within the customer’s own distribution center (“an increasingly popular choice,” according to Grissom), much of the rest of the industry is looking to expand both breadth and depth through consolidation.

“The pace of acquisitions is picking up,” reports Dan Brousseau, vice president of sales at The Visual Pak Cos., Waukegan, Ill. “Even though it’s growing, the industry has lost many regional contract packaging companies that presented a limited selection of services.”

Probably the biggest acquisition to date was Jacobson’s 2006 merger of Atlanta-based Wilpak, Zelesnik says. “But there are a lot more in the works. Demand for turnkey is growing across the board. So the mergers and acquisitions have only just begun.”

The evidence is in the heavy interest the industry is receiving from the investment-banking community, which typically identifies opportunities for growth long before the rest of us recognize them. At last count, adds Zelesnik, the CPA was working with no less than 24 different investors seeking information on the industry.

An Industry Snapshot

According to the CPA’s 2008 State of the Industry Report, there are currently between 1,200 and 1,500 contract packagers operating in the United States, with a combined market value of between $12 billion and $16 billion. Of those, Zelesnik estimates that approximately 30 percent also offer contract manufacturing, while another 30 percent are involved in warehousing, distribution and logistics as well as contract packaging.

Contract packagers can be divided into roughly three categories, none of which is mutually exclusive: Primary packagers put a product into a primary package, secondary packagers put primary packages together into a finished unit (a shrink-wrapped multi-pack, a multi-product kit, a trial-size banded to a full-size, etc.), and display packagers create retail displays by putting primary packages into a tray, display-ready shipper or some other sort of display vehicle.

But according to Zelesnik, some of the most significant growth is occurring in the secondary packaging arena where demand for kitting and assembly is through the roof. “Kitting and assembly is currently the biggest segment of the contract packaging industry,” he reports. “It’s repetitive, time-consuming and difficult to do with automated equipment,” making it a popular candidate for outsourcing. In the name of one-stop shopping, “Everyone’s doing it — even contract packagers that wouldn’t normally offer such a service,” says Zelesnik.

That’s because most contract packagers specialize in product categories rather than packaging categories, says Pontolilo, explaining the need for companies to offer a broad array of packaging options. He adds, “A lot of us do the same things but for different industries,” mostly because it would be too cumbersome to meet the disparate requirements of the different agencies and entities that regulate each individual industry.

In fact, notes Vicky Wilson, sales and marketing manager at Gibson City, Ill.-based Toll Packaging Group, those ever-changing requirements may have created a bit of reluctance among some contract packagers to enter certain higher-risk segments where specialty handling is needed .

Food, Personal Care Lead the Way

Which industries make the most use of contract packaging? According to a 2005 report published by CM&P sister publication Packaging Strategies, in terms of sheer volume, the food industry is probably the biggest user of contract packaging. But only about 35 percent of food industry respondents to its survey reported using contract packagers in ‘04, putting it near the bottom of the list (at 22.2 percent, manufacturers of paper, soft goods and other non-durables were the lightest users of contract packaging).

On a percentage basis, however, the biggest users of contract packaging were makers of personal care, followed by manufacturers of pharmaceuticals and medical devices, beverages and chemicals/cleaning products.

“Health and beauty and food have always been product areas where we’ve found [the best] opportunities for contract packaging,” confirms Thomas Bacon, president of Aaron Thomas Co. (ATCO), Garden Grove, Calif. Why? “Because they typically involve many new products and product lines that aren’t yet proven, and their manufacturers often choose not to invest in capital equipment until sales justify it.” In fact, he adds, “The life cycles of some of these products are so short that the investment is never justified,” which bodes well for the future of the contract packaging industry.

Even better is the news that manufacturers in almost every industry surveyed reported they were likely to increase their use of contract packaging in the coming year, suggesting that the percentage of brand owners utilizing the services of a contract packager is actually much higher today than five years ago.

Yes, concludes Pontolilo, “There are still some holdouts who think a contract packager can’t do the job as well as they could. But those days are behind us. This industry has come a long way in the past decade or so. We can really be a valuable partner to our clients.”