On May 2, 2023, approximately 120 commercial leaders and financial sponsors in the packaging sector gathered at The Future of Packaging conference in Chicago, Illinois to discuss key opportunities for value creation in the packaging industry. The role of an integrated approach to value creation and innovation across supply chain stakeholders was a defining theme explored throughout the conference’s keynote, endnote, and panels. Here are 10 key takeaways:

  1. Packaging markets are adjusting to a post-pandemic reset: Many packaging markets experienced outsized growth during the pandemic as material shortages and at home consumption supported demand across a variety of packaging types from corrugate boxes for e-commerce to tamper-evident solutions in food & beverage products, with many converters having their best period ever from mid-2020 through the first half of 2022. Life on the “Other Side” of the pandemic is proving a challenge​ for converters as supply chains normalize creating excess capacity across substrates and the combination of stimulus removal and higher interest rates put pressure on consumer spending.

  1. Converters are taking action to address an emerging “new normal”: Converters are responding to post-pandemic conditions by assessing opportunities for portfolio and capacity rationalization to address shorter term price pressure given downward volume demand pressures across substrates since 3Q 2022. The other important focus is innovation across the value chain from material science to substrates to digital printing to drive added value for brand owners and ‘e-tailers’. This dynamic approach positions converters to address the longer-term industry evolution towards sustainable and light-weighting solutions.

  1. E-commerce parcel volume growth is down, but far from out: Despite a 2% decline in 2022, U.S. parcel volumes are still significantly above where a continuation of the 2016-19 growth rate would have been (~21B annual parcels today vs. ~18B based on pre-pandemic trend) signaling the long-term criticality of e-commerce for brand owners and retailers. While automation remains in the early stages, with just 10% of fulfillment fully automated, the pandemic served as an accelerant for investment which projects to benefit the industry faster throughput, reduced waste, lower labor needs, and improved safety standards. Fulfillment centers have an opportunity to automate hundreds of millions of manual human touchpoints to allow human operators to focus on higher value activities while reducing pressure from labor shortages.

  1. Improving the consumer unboxing experience is providing exciting opportunities for packaging innovation: The unboxing experience is critical for brand owners to both elevate consumer engagement and avoid costly product returns, which can reach up to 60% in some categories. As ecommerce continues to take share from traditional retail, brand owners are responding, with over 85% indicating that they have made changes to packaging (tamper-evident features, automation designed packaging, etc.) for products sold online. Fulfillment centers, equipment providers and converters are responding with more integrated approaches to create differentiated consumer-brand engagement.

  1. Specialty materials extend well beyond sustainability: Brand owners are taking a dynamic view on the role of specialty materials to support their packaging objectives. Historically specialty materials were most associated with sustainability, but increasingly they are being used to enable a range of other attributes from performance to durability with ~50% of brand owners making a change to their packaging materials over the past two years. Stakeholders across the value chain are responding with an increasingly solutions-based approach tailored to the application (vs. a product-based or chemistry-led approach) with higher collaboration creating more value and enabling more rapid problem solving.

  1. The market is placing a premium on specialty material capabilities: The market is rewarding specialty materials companies backed by evidence-based metrics with forward trading multiples of 10.3x (EV / EBITDA) vs. 8.7x for the broader packaging market. Similarly, both private and public specialty material transactions are earning 1.5 turns greater than the overall packaging space (11.5x vs. 10.0x). In addition to providing recession resiliency consistent with the overall packaging space, specialty material companies earn their premium through higher levels of technical differentiation, which can drive customer stickiness, and more quickly address material substitution trends in a rapidly evolving packaging marketplace.

  1. The pandemic and sustainability have disrupted the supply chain in many ways: Brand owners took different approaches to address COVID-19 and associated supply chain challenges with nearly an even split increasing and decreasing their supplier bases. Consistent across both approaches has been the trend towards near shoring / domestic geographic diversity and sustainability. Brands are prioritizing a resilient supply chain with suppliers located in different regions to ensure supply continuity and improve lead times as well as continuing to make headway on their long-term sustainability objectives even if short-term supply constraints remain. It is ok for brand owners to miss near-term sustainability objectives to address new challenges provided that the organization is still making appropriate progress towards it mid-to-long term sustainability objectives.

  1. Supply chain reliability, transparency and trustful collaboration have become paramount: Converters are increasingly seen as a collaborative partner (vs. cost of doing business) for brand owners in solving supply chain obstacles. Converters must deploy a tailored approach as priorities vary considerably based on the size of the brand owner while maintaining a high degree of transparency. Effective communication and partnership can allow brands to qualify alternative materials, streamline packaging options within a brand portfolio (e.g., utilize 2 closures instead of 5 across the portfolio), and proposed more standardized formats for smaller brands to offset lead time pressure. Rationalization programs need to consider the eco-system impact inclusive of solving consumer problems rather than purely a cost exercise – if it doesn’t make dollars, it doesn’t make sense.

  1. The packaging industry is adopting an “everybody wins” approach to drive economic benefit across the value chain: The packaging value chain is complex utilizing ~10 types of packaging, each with multiple upstream inputs, before reaching the end consumer. Market insights tapped earlier within development cycles, from across the full chain create more value for all stakeholders which is yielding an integrated solutions-based approach to problem solving.

  1. Generative AI opens up new possibilities for packaging: Generative AI is in its infancy but has the potential to create an array of value-add opportunities across the value chain to gain consumer insights, optimize production / R&D, and ensure compliance. Actively engaging in how these tools evolve can unlock new, and even uncontemplated, opportunities for all packaging stakeholders.

For more information, please contact industrials@lek.com.

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