On May 19, 160+ packaging industry executives and financial sponsors in the packaging sector gathered at the eighth annual L.E.K. Consulting/Smithers Future of Packaging conference in Chicago to discuss key dynamics shaping the outlook of the packaging industry. With challenging conditions for the packaging market persisting, there was an emphasis on the evolving role and importance of topics such as the macro backdrop, M&A, sustainability and operational improvement levers. Here are the 10 key takeaways:
- Packaging macro conditions have continued to be challenging, though the fundamentals of what drives opportunity in the sector remain. Despite a backdrop of broader macro indicators being stronger (e.g., 2%+ real gross domestic product growth in 2024, low unemployment), packaging-sensitive indicators (e.g., industrial production, box shipment volumes, manufacturing PMI) have been more challenged in 2024 and leading into 2025. Persistent headwinds from post-COVID-19 consumer behavioral shifts, destocking and inflation continue to weigh on the U.S. consumer and subsequently on packaging industry volumes. But there is still plenty of gas in the tank when it comes to market fundamentals and opportunities for value creation within the packaging sector — for example, consolidation opportunities in distribution or in flexibles, substrate shifts in the perimeter of the grocery store, and automation, to name a few.
- The emphasis on sustainability has softened among consumer packaged goods manufacturers (CPGs) amid challenges meeting 2025 goals and a weaker consumer wallet. Brand owners that set bold 2025 sustainability targets are recalibrating after facing challenges such as falling short of postconsumer resin (PCR) content goals. With limited regulatory pressure and strained consumer wallets, many CPGs have deferred targets to 2030 and beyond. Nonetheless, sustainability remains a long-term imperative, with the scope of what customers are considering from their packaging suppliers broadening beyond the material substrate to include additional measures such as usage of resources like water and energy.
- Sustainable solution adoption can be accelerated by a thoughtful commercial strategy and segment targeting. Adoption of sustainable packaging remains relatively limited, but manufacturers are finding success through focused commercial strategies. By targeting specific end markets that are earlier on the adoption curve or identifying key applications where there is greater sustainability scrutiny (e.g., blister packs in healthcare), packaging manufacturers have found commercial success despite market dynamics. Manufacturers that have been able to partner with customers to deliver sustainable solutions that meet specific needs and potentially drive other advantages (e.g., taking out cost) have been the most likely to see success.
- Packaging volume growth headwinds have adversely shaped the nature of recent M&A activity. The aftershock of destocking (which was largely resolved in 2024) and weaker volume growth have continued to suppress middle-market deal volumes, with M&A volumes reaching seven-year lows in 2024 that are approximately 60% lower than the 2021 high-water mark. Large-scale deals, however, have seen a renaissance as scaled players have looked to capture synergies through value creation and refocus their portfolios, including through carve-outs.
- Private equity hold periods have been extended given recent volatility. Market conditions have meaningfully extended private equity hold periods, with 40%+ of assets from the 2018-20 vintages yet to retrade. There are, however, more favorable M&A dynamics that drove and are expected to continue to drive activity in the lower middle market and among corporate carve-outs. While uncertainty persists, there is cautious optimism that an increase in platform-sized deal activity may see a return in the near future, with demonstrating organic volume growth a critical catalyst for activity.
- Investors should expect conservative trading multiples outside of top-tier private market assets as well as a more challenging debt environment. Sellers may need to reset their expectations for valuation multiples as evidenced by public company valuations having compressed by about 0.9x relative to before the COVID-19 pandemic. Top-tier assets, however, should remain the exception and achieve historical multiples given that attractive fundamental drivers of investing in the sector remain. One of the larger issues to driving deal completions, however, has been achieving consensus on earning before interest, taxes, depreciation and amortisation (EBITDA) baselines. Overshadowing this is the more challenging debt environment as rates have continued to remain elevated, but the demand profile for packaging businesses is such that distressed scenarios are not expected to become prevalent across the industry.
- Operational initiatives that can drive value creation, ranging from quick wins to transformational, have become more important in the current environment. Hold period extensions have also created longer timelines in which to execute transformational operational investments that fundamentally change how businesses operate (e.g., vertical integration, shaping around centers of excellence) and increasingly differentiate. There continue to be investments (e.g., investments in automation, supply chain streamlining) that can drive meaningful value, and these have been elevated in priority given the current labor and tariff environments. As a result of investments in these types of operational improvements, packaging companies have been able to largely protect margins, with public companies maintaining EBITDA margins of approximately 15%, which are just under the pre-COVID-19 levels of about 16%.
- Supply chain resiliency will be a critical focus for manufacturers going forward to drive cost control, improved customer availability and tighter cash conversion cycles. Supply chain volatility, from tariffs to resin availability, continues to disrupt packaging players. Resilience strategies, including vertical integration and deepened supplier partnerships, are critical for operators, particularly where access to inputs is more constrained (e.g., PCR/PIR). Greater control over and flexibility with supply chains allows converters to be more dependable partners for their customers while also driving faster cash conversion cycles.
- Innovation is an important opportunity to create value for customers while differentiating from competitors. With volumes under pressure, innovation has been solidified as a key vector to drive growth and market share gains. Companies that partner closely with customers to codevelop solutions are capturing share by identifying and solving critical customer pain points the customer may not be aware of. Innovators that are able to create value for customers (e.g., by driving operational efficiency and reducing overall packaging and nonpackaging costs) are the most likely to see success and capture a greater customer willingness to pay for higher-value solutions.
- Tariff uncertainty will continue to drive volatility but also create opportunity for domestic manufacturers. The current tariff situation is impacting packaging operations since 60%-70% of the average packaging business’s cost of goods sold are based on raw materials. Furthermore, while 10%-15% of U.S. packaging demand is provided by imports, 50% of those imports come from Canada, Mexico and China. The near-term tariff environment is expected to remain volatile, with trade policy positions continuing to evolve rapidly. Even as there continues to be some progress on trade deals, the uncertainty and impact on consumer demand have already started to be felt, creating potentially softer near-term demand. Despite this, there are opportunities for domestic converters that can use their domestic footprints as a form of differentiation as brand owners look to near-shore their supply chains. However, investment decisions should create value agnostic of tariff policy and not depend on a specific policy in order to drive acceptable returns.
To learn more about the Future of Packaging conference or request a copy of the presentation materials, please contact us.
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