It’s one of the joys of Christmas: opening gifts that have been carefully packaged and beautifully presented. But as consumers get into the holiday spirit, there will be little festive cheer for the packaging industry.
Christmas and the preceding Black Friday and Cyber Monday events are an annual crunch point for the packaging industry. This year, however, there are additional issues at play. While the pandemic-induced pressures may have thawed, supply chains are feeling the pinch in other ways.
“This peak period puts a huge strain on the packaging industry every year. This year, the pressure is even harder. A combination of raw material price rises, material shortages and inflation are resulting in cost pressures as well as availability problems,” says Emile Naus, partner at consultancy BearingPoint and previously head of logistics strategy at Marks & Spencer.
The inflation challenge
Rewind to 2020. Back then, packaging was in hot demand, particularly corrugated cardboard boxes. The pandemic caused an online shopping boom, with paper mills asking customers to put in orders weeks ahead of the usual schedule to ensure availability.
On top of this, some paper mills shut down production because of Covid-19 outbreaks. Meanwhile, recycling efforts also slowed down; many consumers were hoarding cardboard boxes, which didn’t help. This fuelled a cardboard shortage and pushed up prices.
Demand for cardboard has fallen in the past few months as the cost-of-living crisis has forced consumers to rein in their online spending habits. In a trading update for the six months to the end of October, packaging giant DS Smith, which supplies Amazon, KP Snacks and PepsiCo, said that like-for-like corrugated box volumes were slightly lower compared to the same period last year. Another leading provider, Smurfit Kappa, reported that its volumes were flat in the nine months to the end of September.
With raw material and energy prices remaining high and volatile in the near-term, some cardboard manufacturers have decided to hike the prices of products to pass cost inflation onto customers. Smurift Kappa said on its most recent earnings call that its prices had crept up 2-3% in the third quarter, though it added that the price hike would likely be over for now after spot gas prices and waste paper prices had cooled.
But it’s not just soaring energy and transportation costs weighing on packaging supply chains. Volatility in foreign exchange rates – triggered by September’s calamitous mini-budget – has been an unforeseen obstacle in the run-up to Christmas.
“When the value of sterling fell to its lowest against the US dollar, it affected international trade of raw materials. Because of freight lead times, the impact of this won’t really have been felt by UK companies until they are well into the December peak period,” says Dale Brimelow, operations director at packaging manufacturer and consultancy Duo.
Some companies may have avoided any issues by building a buffer of cardboard boxes for the peak season, says Naus. But packaging takes up a lot of space compared to its value, so holding huge inventories of materials doesn’t necessarily make economic sense.
“Companies that have opted to purchase [on the spot] or take a shorter-term approach to purchasing and planning are more likely to be in the danger zone when further supply chain disruptions occur in the lead up to the Christmas period,” adds Vinny Gidley, who heads up supply chain management and business process outsourcing at Paragon Customer Communications.
The recruitment challenge
Cardboard box lead times can vary depending on the quantity and size required. They typically take as little as one to two weeks to be delivered, but seasonal pressures mean this can stretch to up to six to eight weeks.
This festive season’s lead times could have been a whole lot bleaker if proposed industrial action had gone ahead. Thousands of workers at both DS Smith and Smurfit Kappa voted to strike over a pay dispute before union members agreed an 8% pay rise at the end of November.
Industrial action in 2023 can’t be ruled out. But even if it doesn’t materialise, workers who feel underpaid and undervalued are an indicator of a bigger problem: packaging manufacturers could struggle to attract and retain talent that could help it weather industry headwinds and seasonal pressures in the future.
According to a 2021 survey of industry senior leaders by executive search firm Heidrick & Struggles, 70% of respondents preferred to source talent from within the industry. Packaging companies are in a Catch-22. The top talent often seek roles in innovative companies, but the industry will struggle to innovate without first attracting the top talent. A perceived lack of innovation was cited as a main barrier to hiring executive talent by the respondents.
“One of the biggest threats to packaging supply chain stability in the UK is labour scarcity. Packaging manufacturers have experienced a drain in talent since Brexit and the pandemic, with people moving both out of the sector and the UK. There’s no pipeline of emerging talent to fill jobs,” warns Brimelow.
Packaging manufacturers need government-level support to address recruitment challenges, Brimelow says. There needs to be an overhaul of apprenticeship schemes as well as a flexible skills fund to enable companies to attract talent.
“It’s a problem that urgently needs fixing,” he says. “If not, companies in the UK will increasingly have to rely on imports of finished packaging. This approach isn’t sustainable in an economy that’s striving to be greener and more circular.”
The sustainability challenge
The additional pressures on the industry ahead of this festive season have raised questions over whether and how packaging manufacturers, brands and retailers can respond to consumer demand for sustainable packaging.
Research by fashion retail authority Drapers, in partnership with Smurfit Kappa, found that consumer appetite for sustainable packaging isn’t waning, even if inflation means they’ll have to pay a premium.
A third of 2,000 consumers surveyed for the Sustainability and the Consumer 2022 report said they had bought a product from a retailer based on the sustainability of its packaging. What’s more, 41% have purchased a product specifically because of sustainable materials; this rises to 56% among those aged 18-24.
Just under two-thirds (64%) of respondents indicated that they would be more likely to buy from a retailer that uses sustainable packaging. And although around half (51%) said they wouldn’t be willing to pay extra for sustainable packaging – the figure is higher (65%) among 55-60-year-olds – younger shoppers aged 18-24 would be willing to pay more. In this age group, 64% would be happy to absorb the cost.
While the survey covers consumer purchasing habits in the fashion sector, it’s emblematic of continued support for sustainability among consumers more widely, despite the rising cost of living.
Brands and retailers face a challenge – are they in the financial position to keep procuring sustainable packaging in the current high-inflation environment? Or will they have to default to more cost-effective solutions like plastics and non-recyclable films used to wrap and seal boxes?
“We have moved from a market where sustainability could command a premium price tag to a market where sustainable packaging is price-led,” explains Mike Lammas, managing director of printing company Herbert Walkers, which produces packaging for cosmetics and chocolates and boxes for bottles of premium spirits.
“Sustainability is still a consideration but, in the current competitive market, shelf appeal is king,” he says. “Sustainability is less of an altruistic goal and more of a differentiator.”
Herbert Walkers advises clients on the small changes they can make to deliver similar experiences for consumers. For example, reducing the weighting of cardboard cartons cuts raw-material usage and lowers cost. Such a change will be imperceptible to most consumers and will therefore have little to no negative effect on shelf appeal.
By taking a smarter approach to design – such as ensuring that multiple packs can be cut from a single piece of cardboard, which minimises wasted raw material – it’s possible that sustainability can remain a priority in a high-inflation environment, says Lammas.
“There is also a lot to be said for toning down the luxury finishes, even on premium products. It’s a visual cue for consumers that a brand is taking steps to keep prices affordable,” he argues.
Focusing on small gains to generate cost savings was deemed good commercial practice even before inflation started to bite. Inflation and the cost-of-living crisis have simply accelerated the case for smart design.
“The need to keep prices lower by designing for reduced material consumption could actually prove a catalyst for improved sustainability,” Lammas notes.
The margin challenge
A word of caution, though. If packaging companies find their margins are being squeezed, redesigning packaging products for sustainability’s sake and to ensure brands and retailers can still attract consumer attention might not always be the answer.
If it isn’t approached correctly, it could lead to inferior quality finishes that negate the role packaging is meant to play in the first place: protecting products when they’re being transported and handled.
“While there might be some options to reduce costs through clear design of the packaging, experience shows that excessive cost reductions simply translate into more damages during shipment, with knock-on issues for brands and retailers,” says Naus.
Margins in the packaging industry are relatively tight. If packaging companies must raise the prices of their raw materials, this will squeeze brands and retailers even more. This is particularly true for those that rely on ecommerce sales as online is typically less profitable than in-store sales.
Raw material prices will remain in flux beyond Christmas and the new year. Spot gas prices will be elevated well into 2023 and any sudden macroeconomic event could easily trigger a new spike, driving up fuel and transportation costs as well.
These factors are out of the control of packaging manufacturers. Other than taking a smart approach to design, manufacturers must nail down a solid, long-term strategy, alongside a contingency plan for any future supply chain challenges.
“It’s clear that our industry faces a number of serious challenges at the moment,” says Gidley. “Those who understand the value of strategic planning and economies of scale can reduce the negative impact these added pressures are having on supply chains.”
Lean and efficient operations can lead to cost-performance improvements and even help packaging manufacturers gain an advantage. By building resilience and flexibility into their strategies, packaging manufacturers can put themselves in the best position to deal with complications and reduce the risk of future macroeconomic events creating a nightmare before Christmas.