Sonoco Products (NYSE: SON) makes packaging - the cardboard and plastic, often painted with a company's branding, that encases a toy or other consumer item. Sonoco operates in two broad end-use markets: consumer and industrial, which each represent about half of the company's sales respectively. Demand for the company’s product is mostly driven by consumer use of non-durable goods, things that don’t last a long time or need to be replenished on a regular basis, such as food or pharmaceuticals. A third of the company's sales come from outside the US. The company earned $3.6 billion in revenue and $151 million in net income in 2009.
A sluggish U.S. economy has had negative impacts on Sonoco's bottom line. When spending on goods that use Sonoco's packaging goes down, Sonoco's revenues suffer. In 2009, the company's net sales fell by 13% due to lower sales volume.
Sonoco also faces risks from increasing energy and commodities prices are hiking up the cost of obtaining raw materials - such as plastic, which is made from oil. Sonoco is dependent on several materials such as recovered paper, paperboard, steel, aluminum and plastic resins, to make its products. The rising costs of these commodities are forcing Sonoco into a difficult choice - raise prices on its products and risk losing customers, or cut its operating margins and earn less profit.
Sonoco divides its sales into four different product segments:
The Consumer Packing business makes the packaging for a variety of consumer goods, whether it be the cartons for juice, boxes for frozen pizza, or plastic containers for medicine. This segment’s operations control 63 plants worldwide. The products and services in this segment are:
This segment operates in 122 plants on five continents. Sonoco’s fiber-based packaging uses raw material that is provided by the company’s own paper operations; 65% of the paper the company manufactures is used in packaging, while the rest is sold to third parties.The products and services in this segment are:
The products and services for this segment are:
The products for this segment are:
Sonoco is dependent on the average consumer buying typical goods and a slowing economy spells trouble for Sonoco. As consumers cut back on spending, it leads to a decrease in the demand of goods. Sonoco is dependent on a high demand of durable goods (goods that are replenished or replaced often) to make money. As the demand for these goods drops, so do Sonoco’s net sales as there are few and fewer items that need packaging. For example, American consumers are spending less money and are less willing to get car repairs due to the slumping economy. Fewer repairs means fewer automotive parts needed and leads to a decrease in demand for Sonoco's packaging. In 2009, net sales fell 12.7$% due to lower demand.
Rising cost of raw materials and commodities has forced the company to implement several price increases on its products. The ability to obtain raw materials, which include metals such as steel and aluminum and other commodities such as recovered paper, paperboard, and plastic resins, at favorable prices is an essential part of the company’s success. Higher commodities prices translate into high production costs for the company, which forces the company to either raise the prices of its products by placing the burden on the consumer or to take the burden itself by absorbing the higher costs and decreasing profit margins. Steel is an essential commodity for Sonoco as it is used in several of the company’s packaging products, especially in the construction and appliances market. Most importantly though, the company faces higher recovered paper and paperboard costs; most of the company's packaging products are paper based.
Higher energy costs have already forced the company to implement energy surcharges to its customers on its North American tubes and core shipments as well as its recycled paperboard products. Higher energy costs also forced the company to shut down one of its smaller specialty machines as according to the company, “energy and other costs… made it impossible to profitably operate the unit”. The problem with the increasing price of energy is that it adds to production costs. Production plants and its machines are powered by oil and natural gas, both of which are seeing record prices. Higher energy costs translates into higher production costs and once again the company is forced to either pass the burden to consumers by raising prices or take the burden itself and suffer decreasing profit margins.
Sonoco is forced to adhere to many federal, state, provincial, foreign, and local environmental regulations. To make sure that these regulations aren’t violated, the company must implement policies and invest in more efficient technology to ensure they are emitting below pollution emission standards; this process can be very costly to the company. In addition, if the company fails to meet all environmental regulations, they face hefty fines. As the world becomes increasingly eager to fight global warming, more and stricter environmental regulations will be placed on the company. The costs of adhering to new regulations and fines of breaking regulations can substantially decrease the company’s operating results.
The company however has taken precaution to any future environmental liabilities. Every year the company reserves $60 million environmental liabilities. The company has also taken initiative to decrease environmental pollution on their own. The Sonoco Sustainability Solutions (S3) is a service that has aims to identify ways to reduce waste materials going into land fills and to turn waste into revenue by finding alternative uses for them.
Because Sonoco makes hundreds of different packaging products using different kinds of materials, the company faces competition from both big companies with a diversified line of products and smaller narrowly-focused companies.
The company’s paper-based packaging competitors are:
Bemis Company (BMS) - This consumer packaging company focuses on the prodcution of flexible packaging prodcuts which are primarly sold to companies in the food industry. This puts the company in close compitition with Sonoco as many of Sonoco's rigid and flexible packaging prodcuts are for the food industry. Bemis also has a small portion of its business focused on the production of pressure sensitive materials.
Caraustar Industries (CSAR) - Caraustar makes paperboard products, including tubes and cores. The tubes and core segment is the company's largest segment. The tubes and core/paper business is Sonoco's largest segment.
Smurfit-Stone Container (SSCC) - Smurfit-Stone makes paper based packaging prodcuts with a focus on containerboard and corrugated containers. Although this company doesn't have a tubes and core segment, many of the company's items can be used in the packaging for various other items such as food, which is in direct compitition with Sonoco's consumer packaging segment.