According to all accounts, from label converters, input suppliers, and brand owners, the Indian label industry is experiencing growth. However, it is fragmented, and rather than undergoing consolidation, it is gaining new entrants each month. This is partly because, in addition to the seven or eight recognized Indian label press manufacturers, each of whom manufactures two dozen machines annually, there are another dozen or so manufacturers who collectively produce 50 or 60 machines a year. In total, Indian label press manufacturers produce approximately 200 presses annually, and export 50 to 80 of these.
The entry cost to becoming a label converter is fairly low, with the least expensive 8-color press priced at something like Rs 65 lakhs (approximately Euro 60,000). This amount of capital is easy to borrow these days, and explains why new entrants are setting up shop each month. This tends to create an extremely competitive situation where newcomers have insignificant overheads and may not be as concerned about quality standards or compliance. Hypercompetition leads to many medium and larger converters feeling that consolidation is required. A leading material supplier recently told us that in most global markets, there are three or four label converters that dominate the regional market. This seems to protect both standards and margins.
From time to time, we hear that the consolidation of the Indian label converters is on the cards. This morning, we heard that there are three or four Indian packaging and label companies that are on the lookout for smaller companies that could be acquired to create larger entities. The rationale given to us is that consumer brands prefer to deal with larger companies, and that scale yields efficiencies, which can protect margins and absorb the costs associated with quality, innovation, research, development, and compliance.
However, the experience of the label acquisitions that have happened thus far in the country has not been unblemished. Some of the acquisitions have been disappointing and have not led to long-term growth. Those who point this out accept that there are several challenges or growing pains, especially if one wants to build innovative and futuristic companies that can add value to the packaging of consumer products. They suggest that the solutions or growth path, although painful, are not likely to be as simple as consolidation.
Another trend that we have discussed with several converters in the past week indicates that increasingly, label converters are undergoing backward integration by setting up their own label stock production units. While some have entrusted these to associate companies, several are doing it on their premises and produce labelstocks that are approved by leading brand owners. As label stock production grows both by dedicated suppliers and by label converters, exports are also likely to grow. Simultaneously, one hears of the possibility of more global players manufacturing in India rather than merely bringing in jumbo rolls for slitting, rewinding, and sales into the local market.
Overall, there is a jostling for growth among the established middle-level label converters. While some are investing in technology for flexible packaging, others are attempting to differentiate their offerings with extremely high-level digital printing and futuristic capabilities. The thinking of these companies seems to be that long-term value creation and operational efficiencies are more important considerations than initial capital costs.
This group of new generation label converters is acutely aware of the skills shortage and the need to attract and retain better talent in their attempts to become structured organizations. They are compelled to see significant investments in human resources as a virtuous spiral – that technological investment and domain know-how can only be leveraged by more investment and qualitatively better resources. Although traditionally risk-averse, they see this as the best path to unlock the implicit value created over generations.
