Contract Packaging: Essential Oil
Squeezed between high production costs and low retail sales, service providers seek financial balm in more-efficient production.
By John ConroyFrom basil to ylang ylang, essential oils are a beauty product staple for many manufacturers. Lately, however, contract service companies have had their attention diverted by developments surrounding another type of essential oil, as a staple of the global economy continues to fluctuate.
Continually changing oil prices have combined with flat retail sales to put service providers in an economic bind, says Doug Miller, production and operations manager, Beauty Avenues (Columbus, OH). The division of Limited Brands, which owns Victoria’s Secret and other beauty brands, contracts some of its packaging operations to outside manufacturers. “We’re seeing a period of soft sales, and at the same time we’re seeing costs increase significantly in many areas—corrugate, plastic, freight. Really pretty much across the board, costs are going up,” says Miller.
Boxed In
As a result, service packagers are financially boxed in, if you will. “We’re seeing what we refer to as a margin squeeze,” Miller says. “We can’t raise our prices because sales are soft, and yet our costs are going up.”
Pat Campbell, president of Coughlan Products (Wayne, NJ), says chemical costs have increased “incredibly.” Contract manufacturers working on custom formulations are aware that their clients have to predict the state of the market anywhere from 12 to 18 months into the future. Key raw materials prices that keep rising by 20 to 30%—and in one case by 40%—put packagers in a difficult position as products get closer and closer to release dates, Campbell says.
Specializing as it does in nonaqueous products, Coughlan has taken a hit this year across its product lines in terms of price increases, says Campbell. Even organic and natural products are affected. This is due primarily to the negative impact of energy costs on transportation and processing.
“It is a margin squeeze,” Campbell says. “We can’t pass all of the cost increases on to the customer. We have to take our share of the hit.”
Do companies, in effect, have to suck it up financially? “Not surprisingly, that’s the approach I’ve seen some companies take,” Miller replies, because clients insist they can’t accept rate increases. Obviously, says Miller, “that is a near-term or very short-term solution that isn’t sustainable.”
Facing soft markets, manufacturers are pressed to operate more effectively by reducing costs in areas such as packaging and transportation, Miller says. Beauty Avenues worked with one of its contract packagers to find ways of significantly reducing the number of internal corrugate pieces used to protect a gift set during shipment to stores. By redesigning the internal packaging, they were able to hold the overall packaging costs steady in the face of increasing corrugate costs.
John Del Mauro, CEO of contract packager Market Resource Packaging (Cranbury, NJ), says cost is only one of several factors customers take into consideration. “In everybody’s mind, cost is always at the forefront,” he says. He’s not convinced, however, that it’s the determining factor for Market Resource’s customers—a list that includes major companies such as Beauty Avenues, L’Oréal, and Revlon—when deciding to proceed with a project.
Corrugate prices go up every four months it seems, Del Mauro says. The price spikes put the onus on the contract packager to operate more efficiently in order to rein in costs. “We’re always looking at ways to automate,” he says, “but with a lot of set boxes, it’s difficult to automate certain things.”
Capacity Questions
Besides costs, plant capacity is one of the main concerns that Market Resource’s cosmetics clients have, Del Mauro says. That concern manifests itself particularly before the holiday season, when cosmetics manufacturers take in perhaps 80% of their annual revenues, the executive points out.
“No matter how well you prepare, in the course of things there are always snags,” Del Mauro says. Most of these snags involve getting one or more client-supplied components received on time, so “capacity is always a very big concern, at least for the [major] clients I deal with. They want to know about space, equipment, and [plant] availability.”
The question of capacity goes hand in hand with the other concern that several large accounts have mentioned, Del Mauro says. That’s speed to market. Market Resource’s 300,000-sq-ft facility has 362 packaging lines, thus offering clients tremendous capacity.
“Over the years, we have developed the experience and expertise to turn client orders around rapidly,” Del Mauro says. Diversified into numerous industries, Market Resource estimates that it assembles more than 12 million gift sets annually. Until recently, overseas suppliers were making those components for shipment to the United States, but Del Mauro says he’s seeing a trend toward local manufacturing.
Naturally Trendy
The growing popularity of natural and organic beauty and personal care products is another trend that is taking root, according to Campbell. Capitalizing on the trend, Coughlan is seeking to receive USDA organic certification, she says.
“More and more people are concerned about putting synthetic chemicals on their skin,” Campbell asserts. “What goes on your skin could go into your skin.” Coughlan expects to have the ability to offer clients USDA-certified organic products including skin balms, lip balms, body scrubs, and salt-based products with essential oils by no later than the fourth quarter of this year, she says.
Vanessa Johansson, cofounder of RainShadow Labs (St. Helens, OR), views the increased interests in natural products and local manufacturing as vindication of sorts. RainShadow Labs has been formulating natural moisturizers, lotions, shampoos, and other personal care products since 1983. “People really seem more interested in trying to source as locally as possible,” says Johansson, also the company’s president and chief custom designer. Calling it “definitely a new trend,” she says the attention to local sourcing goes all the way across the board from packaging to raw ingredients to manufacturing.
Johansson is also receiving more requests for sustainable packaging. “I don’t believe that need has been responded to,” she says. “There are some forward-thinking companies that have gotten clever with soap bars and that kind of thing.” Finding a packaging raw material that suits the shelf life of the typical beauty product is a problem, however. “You can’t have it decompose in three months, which is what a lot of corn-based alternatives will do,” she says. The typical personal care product has a shelf life of at least 2½ years, according to Johansson.
Green in More Ways than One
So, is it possible to have sustainable packaging for cosmetics? “That’s the never-ending question,” Johansson says. RainShadow uses recyclable and PCR material for its paper and packaging requirements and doesn’t charge a premium for their use, she says. “We’re definitely highly competitive price-wise in the market,” she says, adding that selling environmentally friendly contract services doesn’t have to hit customers in the wallet. “The truth is, it doesn’t cost us more to be 100% wind-powered than it does to be powered by nonrenewable energy.”
Given the general gnashing of teeth over oil prices and the economy, it makes sense that issues surrounding green manufacturing, recycling, and energy efficiency are on the business agendas of contract packagers. Jim Gabilanes, vice president of sales for Flexpaq (South Plainfield, NJ), says the industry has been conducting a lot of research and development. However, he notes, “there is not any one solution at this point.”
Some executives privately say that, other than Wal-Mart, there are not many beauty product retailers requesting green products. For contract packagers, one of the major hurdles is finding ways to bring down green packaging costs, Gabilanes says. Flexpaq, for example, would have to rethink its entire manufacturing process for the extruded and adhesive laminates used in making its monodose packages. “It’s a big nut to crack,” he says. Miller of Beauty Avenues adds that the industry still lacks a workable recycling infrastructure.
Still, the retail front offers encouraging signs. Miller says Limited Brands’ C.O. Bigelow personal care products store in Columbus, OH, recently ran a promotion encouraging customers to return their used containers. The idea “was just to get people in the store and get them interested in recycling and reducing package use.”
How’d it go? Says Miller: “It actually went very well.”