While people were adjusting their lives in response to the coronavirus pandemic, the crisis was triggering multiple market disruptions. These disruptions will have both short- and long-term ramifications for the global packaging industry, which generates $900 billion a year. The biggest changes include dramatic shifts in consumer channels, new or heightened hygiene and consumer-safety concerns, highly volatile raw-materials prices, lifted single-use packaging bans, and the disruption of several end markets (such as hospitality and restaurants) by stay-at-home orders. What’s more, we expect the current crisis to reshape existing megatrends in the packaging industry.
When the world emerges from the COVID-19 pandemic—most likely a minimum of a year from now—packaging companies will need to raise their performance in multiple ways: balance sustainability goals with stringent hygiene requirements, step up their e-commerce games, and compete in a novel customer landscape while facing strong cost pressures. To navigate these choppy waters and stay ahead of the competition, packaging converters1 and other packaging companies must rethink how to move to their next normal. And, while doing so, they must not lose sight of five imperatives that will position them for success.
Progressing megatrends in packaging
Packaging companies will need to rethink their focus and market approach. We expect the impact of the pandemic to alter important megatrends that were already reshaping the packaging industry before the crisis and raising the bar for performance (Exhibit 1).
Redefined sustainability
Before the COVID-19 crisis, sustainability was top of mind for the packaging value chain, particularly in relation to regulatory and public concerns regarding single-use packaging waste. Regulators in many countries were moving rapidly on the issue, and fast-moving consumer goods (FMCG) companies and retailers were making bold commitments to both improve the sustainability of packaging and rethink their packaging systems.
With the onset of the COVID-19 crisis, however, sustainability has taken a back seat to concerns about hygiene and food-safety issues, which have become higher priorities (see sidebar, “Balancing sustainability and hygiene”).
With this in mind, how will the sustainability agenda, which had become an important consideration for the packaging industry, shape the aftermath of the COVID-19 crisis? We believe that sustainability will remain a key industry-shaping trend, offering strong competitive advantages for a resourceful packaging converter. However, sustainability should be redefined alongside hygiene and consumer safety concerns. In fact, the present enhanced focus on hygiene and food safety is likely to become an element of the next normal and a high priority for both consumers and packaging customers (FMCG companies and retailers)—indeed, across the entire value chain.
For example, some retailers are applying new approaches to safety and hygiene, many of which are likely to persist after the pandemic subsides. Consumers increasingly demand hygiene-assured items and single-use wrapped items. Packaging design, the choice of substrates,2 or specific functionality to ensure the minimal viability of the virus could significantly influence packaging-material preferences.
From this perspective, packaging companies will have to address both sustainability and hygiene concerns alongside cost, performance, and convenience requirements. Moreover, volatile raw-materials prices and interruptions to recycling services could further disrupt markets. In response, companies could test new avenues for promoting the sustainability agenda—for example, by introducing truly biodegradable (compostable at home) packaging materials to reduce the leakage of packaging materials into the environment.
E-commerce demands
The coronavirus pandemic is spurring drastic changes in consumer habits. During the crisis, consumer spending on groceries—particularly food—has dramatically increased, and shoppers are buying their goods online, fueling a strong acceleration of e-commerce shipments and other home-delivery services.
We expect demand for grocery e-commerce to remain high post-COVID-19. This pattern is already playing out in Asia—particularly in China—the first country to confront the pandemic. Some industry forecasts predict that US online grocery sales will settle at or above 10 percent already this year,3 compared with 2 to 3 percent before the crisis.4 If, in the long term, the majority of products across all categories go through the online channel, e-commerce as the next normal will have significant implications for the packaging industry—particularly for primary and secondary packaging, given that most packaging has yet to be optimized for the e-commerce channel.
Indeed, e-commerce-approved packaging will need to be tested to prevent product damage, optimized for e-channels, and tech-enabled for filling speed and productivity. E-commerce packaging is currently required to be three to four times more robust than traditional on-the-shelf packaging. As a result, many manufacturers will seek packaging that facilitates e-commerce shipping. E-retailers are increasingly using artificial intelligence and automation to fill orders and stock warehouse products. Taking full advantage of these technologies to enhance speed and productivity will require novel approaches to packaging and redesign; for example, primary and secondary packaging are more and more likely to merge.
Shifting consumer preferences
During the Great Recession, consumers cut back spending on nonessentials, traded down, and shifted channels. The latter two consumer behaviors were sustained after the recession. During the COVID-19 crisis, we have again seen noteworthy shifts in consumer behavior, both by category and by channel:
Category. There is a stronger consumer focus on essentials, both up- and down-trades, and a strong pull-back of discretionary spending. There are also signs of consumers returning to larger, more well-known brands.
Channel. Consumers have rapidly adopted and tested new channels, with a significant shift to online shopping. In addition, lockdown measures around the world have led to so-called nesting behavior, with staying at home replacing visits to coffee shops, spas, restaurants, and other activities. In the future, many consumers may conclude that their home is a more convenient and less expensive option to meet their social needs.
We expect consumers to continue to be price sensitive, oriented toward price and value brands; to maintain, even accelerate, engagement with online shopping; and to focus even more on health and hygiene. Changing consumer preferences will result in further product-mix changes at FMCG and retail customers.
If these behaviors are sustained after COVID-19, the implications for packaging companies, including shifting profit pools, will be widespread. Operational processes must become more flexible and agile if the companies are to speedily develop products that will meet new and existing consumer demands, including a demand for convenience.
Fast-moving cost pressures and more regional supply needs
Consumers are pessimistic or unsure about the pandemic’s lasting effects: for example, about half of US consumers are being very careful about spending their income. In addition, cost pressures in the packaging industry are expected to increase across regions as customers decrease their packaging budgets. In a recent global B2B survey, some 27 percent of respondents expected to reduce their packaging budgets by 4 to 10 percent in the short term; about 12 percent, by 11 to 25 percent; and 12 percent by as much as 25 percent.5 As a result, to keep their plants cost competitive, packaging converters must further assess and take advantage of cost-reduction opportunities.
Packaging customers are also revisiting and adapting their supply chains in the COVID-19 crisis. In particular, customers that currently rely on global supply are now considering making their footprints more regional, by either adding regional suppliers or replacing current cross-regional ones. Packaging converters with global sales and, more important, raw-materials suppliers must explore how they can develop a regional supply chain (possibly through co-location with customers) as well as greater vertical integration. Their aim will be to increase the flexibility and resilience of packaging production, and, among other goals, to create transparency for customers regarding stock levels and backup plans for supply. These shifts could also present opportunities for working together with customers, for example, through joint packaging research and development and production planning.
Speedier digitization of the value chain
A further consequence of the pandemic is an expectation that all parts of the value chain will become more digitized, to reduce supply-chain and production risk. We also expect more automation, AI, and remote support to drive productivity and result in greater resilience.
With real-time reporting and analytics, customers will aim to track supply chains far more closely than before, perhaps shifting from annual or quarterly to weekly monitoring. Increased transparency is not only a matter of cost efficiency, but also a way to help build a more resilient supply chain and assure the health and safety of products. For packaging converters, this move could offer opportunities to support customers by increasing the integration of technology in the packaging itself—for example, through radio-frequency identification.
Five imperatives for the next normal in packaging
To be able to navigate the crisis and position themselves for success, packaging companies should consider taking the 12 actions, or a subset of those actions, that are outlined in Exhibit 2. The actions fall under five overarching imperatives for packaging companies: assure revenue growth, conduct M&A scans, manage cost pressures, stay abreast of regulations and policies, and deleverage where possible.
Which of the 12 actions an individual packaging company selects—from embracing and adapting to the online shift, to considering new acquisitions, to managing the price volatility of raw materials—and how the company prioritizes them will depend very much on the company’s starting point upon emerging from the COVID-19 crisis: particularly, its portfolio mix and exposure to different regions, the end uses of its products, and the substrates of its packaging.
We urge packaging companies to assess the ability of their strategy to address these five market imperatives in light of the changing megatrends, and to revamp their approaches to the market and strategic focus accordingly. By doing so sooner rather than later, they will position themselves for success in what will become the next normal for packaging.
