By Pulp & Paper Canada Staff
By Pulp & Paper Canada Staff
Packaging solutions have delivered greater value over the past five years, indicates a new research study by research and consulting firm McKinsey & Company.
The packaging sector is currently being disrupted by five trends that are affecting the bottom line:
- The growth of the e-commerce market
- A shift toward sustainable materials
- Changing consumer preferences
- Disruptive technologies
- 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,” says Nick Santhanam, McKinsey senior partner and leader of the Industrials Practice in North America, in a release.
Turning a profit
Since 2013, packaging solutions companies have generated profits, closing the gap with the industrial sector as a whole.
McKinsey found that after more than a decade lagging the industrial sector, packaging solutions improved operational performance with a two per cent EBITDA margin expansion. Companies used capital more efficiently and realized higher revenue growth, which contributed to a 2.2 per cent compound annual growth rate from 2013 through 2017.
The industrial sector declined 1.4 per cent in the same period.
Packaging companies have a strong global presence, though demand patterns are shifting. The Asia-Pacific region accounts for about 43 per cent of total demand, followed by North America with 24 per cent and Western Europe with 18 per cent.
Between 2017 and 2022, about 70 per cent of packaging growth will come from emerging markets. Annual growth is forecast to be highest in China (5.2 per cent) and India (5.8 per cent) during this six-year period.
To understand these numbers in context, consider that North America is expected to see only 1.2 per cent annual growth.
Proof point: China’s online retail market accounts for 80 per cent more internet sales than the U.S., even with the growth of targeted efforts like Amazon Prime days.
Fragmentation and consolidation
Packaging generates about $900 billion in annual revenues worldwide. But the sector is highly fragmented and extremely competitive. Its businesses measure 0.002 on a scale of 0 to 1 in relation to their industry typical size based on the Herfindahl-Hirschman index.
The top 25 to 30 companies account for less than 25 per cent of the total market. More than a thousand small, private companies that serve mostly local customers account for the bottom 25 per cent. Between these groups lie more than 500 small-to-midsize companies.
Many packaging companies are using acquisitions to gain scale and acquiring technologies in search of an advantage.
In the past decade, most packaging innovation typically originated with consumer products good 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.
“We need to focus on innovation,” says Ted Doheny, president and CEO of Sealed Air, a food and product packaging company. “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.”
Quality of revenue
Improving Quality of Revenue (QoR) is key to driving sustained value creation in packaging, says the report. 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. For most companies, it will require considering where the market is today and where it is headed.
This article was originally published on Pulp & Paper Canada’s website, a sister publication of PrintAction.