‘Substitution risk’ could threaten Ball’s economic moat, analyst

By Ben Bouckley

- Last updated on GMT

Related tags: Beverage cans, Alcoholic beverage, Beer, Drink

‘Substitution risk’ could threaten Ball’s economic moat, analyst
Despite strong performance over the first three quarters of 2011, any future move towards alternative packaging could dent Ball Packaging’s can hegemony in developed markets.

That’s according to Thomas Mullarkey, an analyst at Morning Star, who discussed the firm’s long-term strategy to expand its global beverage can business in a note this morning.

Mullarkey noted that Ball was the world’s largest producer of beverage cans, and produced 43bn cans in 2010 for sale in US, Brazilian, Canadian markets, 15bn for Europe and 4.5bn for China.

“Producing this many cans permits Ball’s beverage cans to achieve high levels of efficiency,”​ Mullarkey said.

He added: “The plants typically run 24 hours a day and are close to large-scale bottlers and brewers, which minimises transportation costs. For example, Ball’s Milwaukee beverage can plant is just a hop, skip and jump from Miller’s brewery.”

A similar setup also allowed Ball to sell much of the output from its Golden plant in Colorado to the local Coors brewery, the analyst noted.

‘Rational oligopoly’

But Mullarkey noted that the global beverage can market was currently a “rational oligopoly”​ dominated by Ball, Rexam and Crown Holdings, “which tend to lock their customers into multi-year contracts with cost pass-through provisions”.

Ball was able to “fortify its economic moat”​ within developed markets such as the US and Europe, the analyst said, given its established manufacturing base and long-term consumers contracts that meant high switching costs.

“Longer term, however, the company could be subjected to substitution risk as glass or plastic bottles may become more prevalent choices for beverage packaging,”​ Mullarkey added.

But despite competition for metal beverage cans in developed markets, emerging countries were ripe for an expansion across the entire packed goods industry over the medium-term, he said.

“As consumers earn more money…the demand for all forms of beverage packaging in countries like China and Brazil should have many years of growth ahead. Demand for beer, soda and non-carbonated packaged drinks is highly correlated with per capita GDP,”​ Mullarkey said.

Higher Asian investment

Higher GDPs and growing demand across Asia and Latin America would drive demand for beer, soda and non-carbonated drinks packaging from Ball, via contracts with brewers and bottlers, said Morning Star.

Mullarkey cited Ball’s estimates that can beverage can demand would grow 4 per cent annually, from 280m cans a year now to 400m cans in 2020, with the bulk of increased demand coming from Asia.

He added that Morning Star expected Ball to invest heavily in China in coming years – if the canned beer market doubled to 10 per cent by 2020, Mullarkey said Ball would have to add 30 new can lines – with the company potentially shifting under-utilised manufacturing assets from the US to abroad.

Since around 75 per cent of turnover was driven by can sales, Mullarkey also discussed Ball’s innovations to drive higher marketplace margins.

Ball’s aluminium beverage bottle had seen “robust growth”​, he said, while colour-changing inks that morph with temperature and tactile printing were two other innovations.

“Finally, Ball has recently created sophisticated printing technology that allows for much greater resolution on a can…to provide a better canvas for marketers to promote their beverages,”​ he added.

Related topics: Processing & Packaging

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