Packaging innovation has come a long way since the early 19th century when the “French government paid a cash prize for the tin can, deemed the best invention to preserve food for Napoleon’s military,” said McKinsey & Co. (New York), promoting its latest report on innovation trends in the packaging sector.
Consumer packaging plays a huge role in the success of brand owners as they seek to attract consumers. Smart packaging is becoming a big way to allow consumers to interact with the brands they love and buy. For example, “embedding a near-field communication chip in a bottle of Remy Martin premium cognac to guarantee authenticity might be the modern-day equivalent of the tin can,” said McKinsey & Co. “Or it could save lives from food and drink tampering.”
Many innovations over the years have improved packaging performance and enhanced sustainability. McKinsey & Co.’s study suggests that will continue, even as the packaging sector is “disrupted” by five trends:
- Growth of e-commerce;
- a shift toward sustainable materials;
- changing consumer preferences;
- disruptive technologies; and
- greater margin pressure on retail and consumer packaged goods
“These trends will create new opportunities for companies to improve their performance against all dimensions of quality of revenue and drive the next wave of operational efficiency,” said Nick Santhanam, McKinsey Senior Partner and Leader of the Industrials Practice in North America.
|Image courtesy McKinsey & Co.|
Packaging is profitable. That’s one of the conclusions of McKinsey’s study. “Since 2013, packaging solutions companies have generated profits, closing the gap with the industrial sector as a whole,” said McKinsey. After more than a decade lagging the industrial sector, packaging solutions improved operational performance with a 2% EBITDA margin expansion. Companies used capital more efficiently and realized higher revenue growth, which contributed to a 2.2% compound annual growth rate from 2013 to 2017. By contrast, the industrial sector declined 1.4% in the same period.
Packaging companies have a strong global presence, though demand patterns are shifting, noted McKinsey’s report. “The Asia-Pacific region accounts for about 43% of total demand, followed by North America with 24% and Western Europe with 18%,” said the report.
Between 2017 and 2022, about 70% of packaging growth will come from emerging markets, McKinsey projects. Annual growth is forecast to be highest in China (5.2%) and India (5.8%) during this six-year period. To understand these numbers in context, consider that North America is expected to see only 1.2% annual growth.
McKinsey offers a proof point: “China’s online retail market accounts for 80% more internet sales than the U.S., even with the growth of targeted efforts like Amazon Prime days.”
While the packaging sector generates about $900 billion in annual revenues worldwide, McKinsey notes that the sector is “highly fragmented and extremely competitive.” The top 25 to 30 companies account for less than 25% of the total market. More than a thousand small, private companies that serve mostly local customers account for the bottom 25%. Between these groups lie more than 500 small to midsize companies.
Merger and acquisition (M&A) activity has long been strong in the packaging sector. According to McKinsey, many packaging companies are using acquisitions to gain scale and acquire technologies in search of an advantage. In the past decade, most packaging innovations typically originated with consumer goods brand owners or raw material suppliers. An analysis of 45 large packaging companies showed an average of more than three technology-targeted acquisitions per company over the past five years. The targets are typically small companies. The median transaction value is about $70 million, said McKinsey’s report.
“We need to focus on innovation,” said Ted Doheny, President and CEO of Sealed Air. “And if we’re not moving fast enough, that’s when we should think about M&A to fill the gap and drive more growth.”
Improving quality of revenue (QoR) is key to driving sustained value creation in packaging. QoR is a measure of market and customer attractiveness with the strength of product offerings and business model. “How a company improves its QoR depends on its strengths and current position,” said McKinsey. “For most companies, it will require considering where the market is today and where it is headed.”