Crown Is Well-Positioned to Benefit From Long-Term Aluminum Can Demand 

Equity Analyst

Spencer Liberman

Crown Holdings is the world's second-largest producer of aluminum beverage cans. Used primarily for carbonated soft drinks and beer, aluminum cans are historically a low-growth industry but one with favorable competitive dynamics for incumbents. Crown operates 200 manufacturing plants across 40 countries and continues to evaluate new markets for its products. In recent years, Crown has divested from specific industries (such as its European food and aerosol businesses) as it increases its focus on producing aluminum cans in markets where it can earn strong economic profits.

Crown’s three core segments manufacture beverage and food containers, with aluminum beverage cans accounting for the vast majority of sales – Americas beverage (40% of revenue), European beverage (16%), and Asia Pacific (13%). The firm has significant market share in the regions it operates, accounting for 22%, 18%, and 50% of total aggregate beverage container shipments in North America, Europe, and Southeast Asia, respectively. Developed-market demand for aluminum cans has grown in recent years and has even outpaced supply in some end markets. A global shift toward eco-friendly packaging has provided a strong tailwind for aluminum cans. Over the long term, we expect developed-market demand to normalize as aluminum can market share gains moderate. Future growth will most likely come from faster-growing emerging-market economies.

In 2018, Crown made a somewhat surprising decision with the purchase of Signode Industrial Group Holdings, now the transit packaging segment. Signode is a producer of a wide variety of packaging systems, tools, and components as well as the consumable products. While this does not fit Crown’s core beverage and food packaging business, Signode provides Crown with additional international exposure and reduces its exposure to beverage and food packaging. Together, its nonreportable operations and transit packaging business make up approximately 32% of revenue.

Business Strategy & Outlook

We think Crown Holdings benefits from durable competitive advantages that should support economic profits for at least the next 10 years. We assign Crown a narrow moat rating based on efficient scale and intangible assets. The majority of Crown’s business (64% of 2022 revenue) involves producing aluminum beverage cans. The aluminum beverage can industry is highly concentrated as most regions are typically serviced by a few large competitors that maintain long-standing relationships and strong contracts with beverage companies. The firm also operates a transit packaging division (20% of sales) that produces a wide variety of packaging systems, tools, and components as well as the consumable products.

The aluminum beverage market is served by only a few large competitors due to the high capital costs required to efficiently produce aluminum cans. Crown has significant market share in most regions it operates, supporting our efficient scale moat. The firm accounts for 22%, 18%, and 50% of total aggregate beverage container shipments in North America, Europe, and Southeast Asia, respectively. These markets are currently served by four or five competitors with almost no entry or exit in recent years. It is highly unlikely that an incumbent firm will exit, further preventing would-be entrants from attempting to join the market. Beverage can manufacturers must produce a large number of cans and run plants at high capacity to remain profitable. The low-value nature of aluminum cans paired with high costs of operating manufacturing plants produces a strong barrier for new entrants. Aluminum cans are also a commoditized product with little room for differentiation. Innovation in the segment is easily replicable by competitors as it is usually a change in the size or shape of the can. Because of this, potential entrants would need to resort to price competition to grab market share, which is not a viable alternative.

Can producers typically target a capacity utilization rate between 92% and 95% in their plants. Running the plants at lower than the target rate would directly affect margins as high operating costs would decrease profits. That said, Crown does not want to run its plants near 100% as it’s important to maintain some excess capacity to meet small increases in demand without having to make significant capital investments for a new production line or plant. Creating a new line at a plant can cost in excess of $70 million. It’s also beneficial to operate with some excess capacity in case of an issue at the plant. If a line at the plant goes down or inventory is damaged, Crown will not have excess capacity to produce more cans. The firm would have to transport cans from plants further away and incur extra costs. Due to the high costs associated with producing aluminum cans, competitors in the segment are encouraged to act rationally and have over the years. There is almost no incentive to undercut prices or add additional capacity in the hope of taking business from a competitor. Most can manufactures operate under long-term contracts that make poaching very difficult. New entrants would most likely be immediately unprofitable upon entering a market as the capital costs of starting and operating a plant are high and finding customers who are not currently serviced would be difficult. 

Crown operates over 50 beverage facilities in various countries and regions around the world. Aluminum beverage containers have a low value/volume ratio so shipping empty cans beyond 200-300 miles is unprofitable. In order to win and service contracts, Crown must operate plants near customers to maintain profitability. This market dynamic discourages new entrants from joining the market as they would need to open multiple manufacturing facilities because it’s unprofitable to ship cans over long distances. Recently, demand for aluminum cans has outpaced supply in North America and forced Crown to import cans from other regions to meet demand. While this has historically been unprofitable, Crown has been able to pass through most of the transportation costs to customers. That said, we expect Crown to reduce the number of cans they import into North America over the next few years as additional capacity comes online and demand for cans normalizes. 

Crown and its competitors typically sell aluminum beverage containers under staggered long-term contracts that provide Crown and its few competitors with a strong competitive advantage. The long-term nature of these contracts creates predicable demand, enabling Crown to prepare its production schedules for years ahead. This allows the plants to operate in a manner that maximizes capacity and efficiency. Since the contracts are also staggered, beverage producers do not have many choices when contracts are up for renewal as it's unlikely any other can producer will have enough excess capacity to fulfil their orders. This is especially prevalent with larger customers that need a significant number of cans and cannot afford any delays. 

Crown’s contracts also contain cost-recovery provisions that limit its exposure to aluminum prices with price contingencies. This contract feature has been especially important in recent years as aluminum prices have increased considerably. While Crown has been able to pass through most increases, there is a lag as most contracts are on an annual basis. Historically, this lag was not an issue but recent increases in aluminum prices have outpaced Crown’s ability to recover price through these contract provisions. As a result, Crown has been negotiating stronger provisions in new contracts and updating provisions in current contracts that would remove the lag and allow the firm to recover costs quicker. 

Crown’s transit packaging division, which accounts for 22% of revenue, was established through the acquisition of Signode Industrial Holdings Group in 2018. The segment produces a wide variety of packaging systems, tools, and components as well as consumable products. Signode owns hundreds of brands within the packaging industry to offer customers a full suite of products and services for packing products and protecting those products in transit. While Signode produces protective packaging, it also manufactures the tools and equipment used to apply its packaging materials. Signode’s equipment is critical for its customers as manufacturers need end-of-line packaging for their products. Signode’s equipment and products are embedded within the manufacturers production process, which makes switching providers difficult as it would require the integration of new equipment within the production process and additional training for employees. This is likely to lead to substantial downtime, something Signode’s customers seek to avoid. There is also a risk that the new packaging system does not perform properly, which can lead to product damage during transportation. This leads to some stickiness from Signode’s customers who rely on the firm to ensure the safety of their products during transportation. 

Unlike Crown’s core beverage business, transit packaging is highly diversified. It produces a variety of products, none of which account for over 15% of revenue, while selling to a substantial number of customers across many countries. Its largest customer accounts for less than 2% of revenue, which reduces the company’s reliance on the concentrated customer base within its beverage business. While we see some competitive advantages around Signode’s imbedded equipment and materials within manufacturing plants, we do not think the business benefits from an economic moat. That said, the transit packaging division is not large enough to have a material impact on our opinion of Crown.

Narrow

Economic Moat

Crown Hlds

Crown Holdings, Inc. engages in the design, manufacture, and sale of packaging products and equipment for consumer goods. The firm offers aerosol cans, beverage, promotional, and transit packaging, closures and capping, and food cans. It operates through the following segments: Americas, Europe, Asia Pacific, and Transit Packaging. The Americas segment manufactures beverage, food and aerosol cans and ends, glass bottles, specialty packaging, metal vacuum closures, steel crowns, and aluminum caps. The Europe segment operates in Europe, Middle East, and North Africa. The Asia Pacific segment includes beverage and non-beverage can operations. The Transit Packaging segment provides industrial and protective solutions and equipment and tools businesses. The company was founded by William Painter in 1892 and is headquartered in Philadelphia, PA.

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