Owens-Illinois (OI), which specializes in glass packaging for the food and beverage industries, tallied over seven billion dollars in sales in 2009, while supplying bottles and containers to prominent consumer brands such as Budweiser, Heineken, and Heinz. Despite being an industry leader, the company faces stiff competition from Crown Holdings (CCK), Ball Corporation (BLL), and Silgan Holdings (SLGN). However, O-I has a competitive advantage over the others since it is the only company that produces glass bottles. Indeed, consumers overwhelmingly prefer glass receptacles to aluminum or plastic containers for wine, spirits, and beer. Brewers and distillers are some of Owens-Illinois’ largest clients.
Not only is glass the favored choice by consumers, but the glass production process is also “greener” than the manufacture of aluminum or plastic alternatives. Although uncertainty exists regarding future policy on climate change, it seems probable that pressure to reduce carbon emissions will intensify in the coming years. As a result, Owens-Illinois is spearheading initiatives to reduce its carbon footprint.
Currently, the company’s bottles and jars consist of 36% recycled glass or cullet. Owens-Illinois plans to increase cullet use in production to 60% by 2017. Using recycled glass in production versus plastic or aluminum, results in reduced carbon emissions and lower raw materials costs. Furthermore, glass is 100% recyclable, whereas plastics tend to be “downcycled”, which means the plastic waste materials are recast into inferior goods in an effort to conserve material. For example, plastic bottles may be “downcycled” into plastic patio furniture. Aluminum beverage containers are also 100% recyclable. However, consumer preference for glass containers, particularly for wine, spirits, and beer, gives Owens-Illinois a competitive edge over aluminum beverage container manufacturers operating in this niche market.
Reduced expenses that are likely to result from increased cullet usage ought to eventually widen margins and bolster profits. On the contrary, the costs associated with producing petroleum-based plastics will probably rise in the future, reflecting the increasing difficulty in extracting crude, as most of the low-hanging fruit is gone. Moreover, aluminum extraction and processing is energy intensive and relatively expensive compared to transporting and processing cullet.
While glass has numerous advantages over plastic and aluminum, its delicateness remains its major shortcoming. Littering exacerbates the fragility of glass. Since broken glass is so undesirable, plastic and aluminum containers have been winning market share for years in the beverage industry. However, health concerns regarding BPA, a component in several types of plastic bottles, has encouraged a public pushback against plastic bottles, which may lead to future opportunities for glassmakers.
Even though producing glass containers provides a distinct advantage, operating results have been mixed lately. On one hand, Owens-Illinois has experienced feeble demand in Europe and North America. Conversely, the company’s Asian and South American operations are expanding at a healthy clip. For the most part, the lackluster volume in the developed world stems from high unemployment and heavy debt burdens, particularly among young adults, which hurts alcoholic beverage consumption.
In response to struggling markets in the United States and on The Continent, Owens-Illinois has shifted its focus to emerging markets. Earlier this year, O-I entered a joint venture with Thailand’s Berli Jucker Public Company Limited to purchase Malaya Glass, increasing its presence in China and Southeast Asia. Also, the company purchased Brazilian glassmaker Companhia Industrial de Vidros, further extending its reach into the lucrative markets of South America.
Expanding operations in emerging markets might prove to be rewarding, but without a resurgence in developed economies Owens-Illinois will probably struggle to exceed its record earnings per share set in 2008. That said, in the event of a stronger-than-anticipated recovery in North America and Europe, Owens-Illinois will likely report sizable gains in both sales and earnings.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.