On May 14, approximately 130 commercial leaders and financial sponsors in the packaging sector gathered at the Future of Packaging conference in Chicago to discuss key opportunities for value creation in the industry. The defining theme explored throughout the conference’s keynote, endnote and panels was the evolving expectations of consumers, brand owners, packaging manufacturers, materials suppliers and investors across the topics of innovation, sustainability and operating performance. Here are the 10 key takeaways:
- The outlook is positive for 2024 packaging fundamentals. A challenging 2023 saw volume declines across most substrates and retailer/brand owner destocking, but sentiment is improving across the value chain as brand owners refocus on more balanced volume-price growth and as promotional activity expands. Consumer packaged goods (CPG) brands are showing more elastic demand following significant pricing action to drive revenue growth since 2021, peaking in 1H 2023. This has led to a renewed focus on volume growth initiatives, which benefits packaging companies because packaging volumes have historically tracked CPG volume demand over the long term.
- Sustainability remains a key growth theme for investors. As corporate sustainability objectives continue evolving to include product life cycle or ecosystem-wide metrics — such as water usage, CO2 emissions and others — sustainability is expected to play an important part in the battle of the substrates. Packaging converters will likely take a crucial role in enabling these corporate sustainability goals with sustainability enhanced businesses being rewarded with approximately a 1x turn valuation premium relative to their peers. However, credentials are now under greater scrutiny. There is more demand for data-backed results and proof points demonstrating how sustainability is integrated into the core business model.
- Secular growth themes are poised to impact the packaging landscape. Several idiosyncratic themes are expected to play a greater role in 2024, notably GLP-1 and radio frequency identification (RFID). GLP-1 may create an obstacle to growth in food consumption with mixed implications for subsequent packaging usage. However, continued adoption of GLP-1 weight loss drugs is creating opportunities for companies, ranging from drug-contact packaging/solution providers to secondary protective packaging that allows safe delivery of the drug to patients. Additionally, packaging can play a crucial role in enabling key growth areas such as the expanded role of RFID tags and smart technology in real-time inventory management intelligence as well as brand security, authentication and consumer engagement. Packaging businesses seen as supporting these leading-edge areas are being rewarded by the market with elevated valuations versus their peers that have more limited exposure.
- SKU rationalization is not packaging rationalization. Many brand owners have undertaken stock-keeping unit (SKU) rationalization efforts, often reducing SKU counts by 10%-20% and typically capturing 150-175bps of margin improvement. Rather than driving a decrease in packaging needs, these efforts have often placed new importance on packaging decisions as brand owners prioritize price pack architecture, reinvest in ensuring that core brands stand out on the shelf, and develop channel-specific packaging for ecommerce. Further, new products are shifting toward more brand extensions (e.g., leveraging brand equity to target adjacent product categories such as moving from cosmetics to face washes or from nutrition bars to cereals), creating new packaging opportunities.
- Consumer convenience is a key brand-owner focus. The fifth annual “State of Snacking” report from Mondelez International found that 6 in 10 consumers favor small, more-frequent meals throughout the day. This is driving new products with a greater focus on more functional packaging that’s easier to open and makes product sharing easier too. Brand owners are looking to converters that have both the technology and the responsiveness to adapt to this next wave of innovation, which is centered on piloting new formats locally and “failing fast” before scaling nationally with winning concepts. This focus on more rapid product innovation to drive consumer convenience creates opportunities for large and small converters as brand owners seek supply chain responsiveness and resiliency post-COVID.
- Sustainability is a continued focus for the packaging community, but further work remains to achieve goals. Some progress has been made toward reaching sustainability goals. For example, the share of post-consumer recycled content has increased from 6% to 12% of total packaging by weight. The share of plastic packaging that’s reusable, recyclable or compostable has grown from 63% in 2019 to 65% in 2022, but reaching the 100% target by 2025 is a formidable objective. Most brand owners are committed to achieving sustainability goals and working with converters that can support those initiatives.
- Regulation is expected to play a key role in sustainability initiatives. The U.S. sustainability regulatory landscape is highly fragmented with most regulation at the state or municipal level. Extended producer responsibility (EPR) mandates are continuing to be implemented. Regulations have been passed in four states (California, Colorado, Maine and Oregon), representing about 17% of the U.S. population, and potential EPR mandates have been introduced in at least 10 other statehouses. With the increase in adoption of EPR requirements, there is a growing demand for national standards to reduce supply chain and label complexity for both brand owners and converters.
- Investors are increasingly volume focused. As the packaging market recovers from a six-quarter volume recession (from 3Q 2022 to 4Q 2023) driven by elevated raw material costs and destocking dynamics, the focus is on the ability to pass through higher pricing, but it’s also on driving organic volume expansion. Companies with demonstrated category leadership positions and consistent strong volume performance coming out of 2023 are expected to be viewed more favorably by investors.
- Transaction activity continues to reset post-COVID. Packaging transactions peaked in 2021 and have declined 13% annually on a volume basis to 2023 while multiples compressed about 1.5 turns, driven by higher interest rates, protracted elevated inflation and softer consumer sentiment. However, we are seeing increasing optimism in M&A sentiment in 2024 as packaging investors (both sponsors and strategics) are leveraging new playbooks from creative structuring to longer processes to better engage strategic buyers to joint coordination on integration to unlock growth.
- AI creates opportunities for packaging stakeholders. The integration of artificial intelligence (AI) tools into packaging business models may help create added value for potential customers and opportunities for differentiation from competitors. Effective AI capabilities can enable packaging companies to move up the value ladder from providing only products to an integrated platform that creates incremental customer stickiness and value. AI tools can expand the speed at which products are tested and developed, identify data trends and insights not previously seen, and allow for greater production and sales efficiency. While the ultimate end state of generative AI tools is still unclear, its potential impacts are quite significant, and packaging players now have opportunities to be at the forefront of change rather than simply reacting to it.
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