Crown Cork And Seal
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...
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