Host:
Welcome to Insight Exchange presented by L.E.K. Consulting, a global strategy consultancy that helps business leaders seize competitive advantage and amplify growth. Insight Exchange is our forum dedicated to the free, open, and unbiased exchange of the insights and ideas that are driving business into the future. We exchange insights with the brightest minds of the day, the most daring innovators, and the doers who are right now rebuilding the world around us.
Host:
The consumer package goods industry faced several major challenges in 2021. The industry seems to be weathering the COVID-19 pandemic, and CPG companies spend on packaging is no exception, with spending on packaging continuing to increase in line with long term trends across a range of brand product categories. To better understand how brand owner packaging needs are evolving, and the implications for the industry and investors, L.E.K. Consulting conducted its fourth annual brand owner packaging study in the summer of 2021. In this episode, we discuss some of the insights that were revealed. We hear from L.E.K. partner Thilo Henkes.
Thilo Henkes:
Hello, my name is Thilo Henkes. I'm a partner at L.E.K. Consulting, been with L.E.K. for 21 years and lead our global packaging practice.
Host:
We also receive insights from L.E.K. partner, Jeff Cloetingh.
Jeff Cloetingh:
Hi, my name's Jeff Cloetingh. I'm a managing director and partner with L.E.K. Consulting, based in L.E.K.'s Boston office. Pleasure to be with you today.
Host:
Thanks gentlemen. To start the discussion, Thilo, tell us about the brand owner packaging study. Like, how long has it been around? How many people typically participate? What industries do those participants represent?
Thilo Henkes:
Well, thanks very much. The brand owner survey is an annual survey that we have been running at L.E.K. Consulting, this is now our fourth annual survey. We are typically reaching out to about 500 brand owners. Those brand owners cut across end markets, roughly in a similar split to what we see more broadly in the packaging market. That is to say food, beverage, health and wellness, beauty and personal care, household and pet, and the relative mix of those respondents, as I mentioned, is roughly in line with what we see as far as packaging in these end markets is concerned.
We also make sure that we have a nice split between tier one versus tier two versus micro brands. We define those roughly as tier one brands having a billion in sales or greater, tier two being between 500 million and a billion, and then micro customers being less than 500 million in actual retail sales. We try to get a good cross section in the marketplace of respondents, and we are asking brand owners a series of questions each and every year. Those questions are regarding trends related to their spend on packaging and SKU growth. The questions also relate to sustainability and make shifts that brand owners are looking at by substrate. Our questions also relate to usually topical type questions, such as the growth in e-commerce. Jeff, anything you'd add to that?
Jeff Cloetingh:
Sure. Within a brand owner, there are a number of different types of decision makers. We make an effort to get to the brand owner themselves, the procurement group, packaging engineers, folks in supply chain, folks in marketing, and finance. So, a good mix of different roles within a brand owner. Importantly, I think, within some of the major end markets, whether they be food and beverage, or beauty and personal care, household and pet we're really trying to get to a really good representative submarket type of split as well. Getting brand owners from dry food, frozen food, snacks, liquid, and canned food, fresh food, alcoholic beverages, non-alcoholic beverages, food service, et cetera. We make a very deliberate effort to get to a very broad and deep set of the key decision makers at brand owners for this study.
Host:
Jeff, were there any key trends that stood out in this year's study?
Jeff Cloetingh:
There were four really important trends that we saw surface in this year's study. Number one is brand owners expect to spend more so going forward than they did historically, somewhat of a step change in expected spend. Number two is that there were some very interesting dynamics in terms of SKU proliferation, the number of products that brand owners have on the shelves expanding over the past couple of years, taking a temporary step back in the pandemic time period, and then expected to continue to accelerate on a go-forward basis.
The third trend is around the expectations in terms of continued focus on sustainability. Brand owners, many of whom have a 2025 packaging sustainability goal, who want to spend a little bit of time talking about how many of them actually feel like they're not at the requisite pace to meet many of those objectives by 2025. Then, the fourth is around e-commerce, the velocity of e-commerce, and the need for many of these brand owners to put in place fit for channel type packaging that are going to be more suitable through the e-commerce channel, as opposed to your traditional brick and mortar channels. Thilo, anything you'd add?
Thilo Henkes:
I think that's right, Jeff. Couple of key takeaways, some of these takeaways, continuing trends and dynamics that we've seen over the past four years, some of them showing some interesting new dynamics. Now let me add a little bit more color to some of them. On the increased total spending, we've actually seen, despite the impact of the pandemic, brand owners have indicated to us that they actually intend to increase their spending by almost about 70 basis points in terms of the growth of spending than what we saw last year. We're actually seeing an expectation of about four and a half percent growth over the next couple of years.
Interestingly, this is largely coming from tier one brands, but not far behind tier one brands are also tier two and micro brands. All in all, what this tells us is that there is still robust growth expected for packaging suppliers to these brand owner customer segments. We would expect to see that growth in demand for packaging to be well north of GDP growth, and that really continues to tell us, as we've known for a while, that brand owners do see packaging spend as a very favorable ROI. It is a way to differentiate the brand on the shelf, and a way to differentiate your brand relative to your competitors. We see, I think, continue new good news as far as brand owner spend on packaging.
Likewise, on the SKU proliferation front, as you mentioned, Jeff, we did see a bit of a pullback as we often do during market cycles of brand owners pulling back some introduction of new SKUs, but we are seeing as we're coming out of the pandemic and into the 2001 timeframe, a reversion back to introducing those new SKUs. Introducing new SKUs, of course, also has a direct impact on packaging, as all of those new SKUs are generally getting differentiated packaging. There is an increased demand for packaging as we see the SKU proliferation. Again, we see good news here, and again, it's the tier ones and specifically a lot of beverage brands where we did see some of the pullback, but that we are starting to see that growth coming back and generation of new SKUs. Jeff, you want to talk a little bit about things that we've seen on sustainability in e-commerce in a little bit more detail?
Jeff Cloetingh:
Sure. It's no surprise that brand owners have been very public with their 2025 goals. These goals go something along the lines of 50, 75, a hundred percent of a brand owner's packaging being recyclable, made with recycled content, biodegradable or compostable, reusable or utilizing less material. When we look at brand owners report on themselves as to how they're progressing amongst those goals, while some of them say that they have a degree of access to recycled content, a very high percentage indicate that they don't have enough recycled content to be able to meet some of these goals. As they think about the transition from one packaging format to another, or the legacy substrate, packaging substrate relative to where they need to get to in order to achieve these 2025 goals, many of them feel as if they're quite far behind. They're only about 40% of the way there, and at the current pace are unlikely to meet those 2025 goals.
In thinking about the implications on the packaging community, it represents a significant opportunity to support brand owners with innovation related to novel substrates, innovation related to making sustainable substrates and materials more cost effectively, to be competitive with some of the existing packaging materials and formats that brand owners are utilizing today. In some cases, we are actually seeing supply of post consumer recycled content be increasingly more important to the converter community. In fact, some converters have backward vertically integrated into municipal recycling facilities, purchasing of these MRFs, or municipal recycling facilities, helps with reducing the supply risk of being able to have access in the future. A lot of dynamics at play that we think will continue to be incredibly dynamic as brand owners seek to achieve their 2025 packaging sustainability goals.
Host:
Given the need to weather the COVID-19 pandemic, can you share with us what the study revealed about the challenges facing brand owners as a result of the pandemic?
Jeff Cloetingh:
Sure. I can put one challenge out there, but Thilo, please jump in as well. One challenge during the pandemic in particularly brand owners that were serving the grocery channel was to be able to find ways to meet elevated levels of demand for not only center aisle goods, but also perimeter of the store goods, as a very significant percentage of consumers shifted their calories from food service channels, quick service restaurants, limited service restaurants, full service restaurants, towards the at home food and beverage channels such as grocery.
Given the existing supply chains, not only for packaging, but also of food product, many brand owners found themselves in a unique challenge of trying to find ways to keep product on the shelves and avoiding stock outs. Interestingly, although over the course of the past five years there's been a tremendous amount of SKUs that have been introduced, which shortens the run lengths, but introduces some complexity in the production process, in particular changeovers and the time that it takes to changeover, that led to a situation where brand owners were not able to produce as much as they could have if they were to otherwise simplify their lines.
Faced with elevated levels of demand during the pandemic, brand owners need to make a hard choice to focus on their brands that were the top brands in their portfolio, to focus on longer run products, to focus on delaying the introduction of new products, to focus on ensuring that they could produce as efficiently as possible, because if you aren't able to produce the incremental 10%, 15% higher volumes relative to the prior year, you risked product not being able to be found on the shelves when consumers reached for that favorite brand. This is a very significant challenge for many brand owners. In particular, for some of the large global tier one brand owners that they needed to navigate over the course of the pandemic.
Thilo Henkes:
That's great. That's right, Jeff. Another significant challenge that is impacting brand owners is the issue of omnichannel, and specifically the increasing penetration of e-commerce for so many different brands. We saw this has actually been exacerbated through the pandemic, because we've seen that e-commerce activity has actually jumped as a function of the pandemic, and it's across segments; food service, food, and other consumer categories.
The conundrum that faces many brands as related to their packaging is, how do I take advantage of that e-commerce channel? Because, the e-commerce, selling through e-commerce puts different pressures on the packaging. Needing to make sure that the packaging can withstand the incremental touch points that actually go through the e-commerce world. Making sure that the packaging is something that can easily catch the eye of the consumer when they're looking at it just on a computer screen, very different from when you're looking at something in person in a bricks and mortar store. The dynamics of e-commerce put significantly different pressure on packaging, put pressures on brand owners to figure out how can I continue to differentiate my product in the e-commerce channel, not least of which is, do I confuse the consumer if I have different packaging in e-commerce than I do through other channels. There is that question as well, that is needing to be addressed by brand owners. Anything you'd add to that, Jeff?
Jeff Cloetingh:
No, I think that's well said, Thilo.
Host:
Thilo, you've mentioned some very interesting things need to be considered from this particular survey. To summarize, what are some of the final key takeaways and most notable findings from this survey?
Thilo Henkes:
I think we continue to see good news going forward in terms of demand for packaging. Not only in terms of continued SKU proliferation, but also in terms of an expanding range of substrates, particularly driven by issues in and around sustainability and e-commerce. There is, however, a clock that is ticking, particularly when we think about sustainability. The 2025 goals that many brands have signed up for, we've got to figure out infrastructure issues within the US to help with recycling rates, and we need to figure out most notably how to handle price differentials between sustainable packaging and virgin-based materials.
The clock is ticking. There's some interesting dynamics that I think spell good news for suppliers of packaging, raw material suppliers, chemicals, companies that provide coatings, converters who are making packaging, distribution channel, equipment manufacturers. There are a lot of good reasons for a lot of the different parts of the packaging value chain to be optimistic based on what we're hearing here from brand owners. But, there is a clock that is ticking. Decisions need to be made, and I think that that is something that everyone in the value chain needs to keep in the back of their mind. What do you think, Jeff?
Jeff Cloetingh:
I agree, Thilo. There is a major C chain set of challenges that these brand owners are facing as a result of demands for new and innovative SKUs as it relates to finding ways to navigate getting product through e-commerce channels and achieving these sustainability objectives over the course of the next couple of years. It's incumbent upon the entire ecosystem to recognize some of the challenges that the brand owners have, and to find opportunities to leverage their own competencies, whether it be around material science, or be around material conversion, whether it be around collection and recovery, or development and design. That, there are an incredible amount of opportunities for those in the packaging ecosystem that are aware of and thinking about how they can support these brand owners in achieving their objectives, which are very ambitious, over the course of the next three to five years.
Host:
While the industry is changing, its trajectory seems clear. Act now to be ready for a world of continued SKU proliferation, intensifying sustainability demands, and a continued shift to e-commerce. If you'd like to learn more, or request access to the full 2021 brand owner packaging study, please contact us at industrials@lek.com. Thank you, our listeners, for joining us today at the Insight Exchange, presented by L.E.K. Consulting. Links to resources mentioned in this podcast can be found in the show notes. Please subscribe or follow for future episodes wherever you listen to your podcasts. Also, we encourage you to submit your suggestions for future insights online at lek.com.
