As in many other industries, the COVID-19 pandemic has led to serious damage to the packaging sector. In this article, Barry Sheehan, director of Arrowpoint Advisory, a mid-market financial advisory group at Rothschild & Co., looks at the key short-term and long-term trends that may result from this disruption, and how this could affect investment and M & A packaging activities.

Elastic sector

The global packaging sector is a vast and relatively mature market. While some segments grow faster than others, overall industry growth rates generally track long-term GDP. During the decade following the Great Financial Crisis, we saw strong growth in many sectors of the economy, and investors, seeking to return their capital, naturally preferred assets that could gain access to this growth.

Although the relationship with GDP makes packaging companies somewhat cyclical in nature, they tend to operate in less discretionary end-markets, such as food and pharmaceuticals. Because of this, the industry has historically been considered to have relatively protective characteristics. As we enter a period of increased uncertainty, investors may attach greater importance to enterprises operating in more “sustainable” sectors, such as packaging. In recent weeks, we have already seen a sharp increase in the demand for packaging materials in areas such as food packaging, and especially in ready-to-sell packaging for the grocery industry, due to the need for retailers to meet growing consumer demand and quickly replenish shelves.

Sustainable Options Revisited

One of the key industry trends in recent years has been a major shift in consumer sentiment in favor of green packaging solutions. Although COVID-19 is unlikely to stop this in the long run, it may have some effect on the rate of change in the short run. In the UK, for example, the Department of the Environment, Food and Agriculture (Defra) lifted the ban on plastic straws, stirrers and cotton buds (which was due to take effect later this month) until October 2020.

The food service sector also had to rethink its approach to the use of reusable or reusable goods, which may carry transfer risks. Even before the lock, some coffee chains, for example, returned to using disposable cups. The preferences of retailers and buyers can also shift toward more pre-packaged goods, such as fruits and vegetables, rather than buying them without packaging. Such options can speed up replenishment, shorten processing times and be considered safer by consumers.

In fact, we can see that the principles that have served packaging for a long time – maintaining safety, hygiene and product safety – come to the fore during the current crisis. Although this may be a temporary trend, it means that current consumer demand is likely to be more, not less, of packaging.

The Impact of E-Commerce Growth

Other sectors of the packaging industry will see stronger growth as consumer habits develop into long-term behavioral changes.

With the closure of most physical retail stores during the lockout, online orders thrive as retailers try to support sales. Other retailers, who traditionally did not have a strong online presence, were also forced to switch their business model to e-commerce to ensure survival.

As a result, packaging requirements for e-commerce are very high. Currently, retail is aimed at delivering products to consumers safely for the first time, so the importance of packaging to protect products using resistance technology has never been so important. Retailers want to minimize the risk of product loss or damage in order to reduce potential financial losses and profits.

Ready-to-return packaging will also increase the likelihood that retailers will be able to return the returned product faster and without damage, giving them the opportunity to quickly place goods in their warehouse inventory when their availability may be insufficient.

ECommerce packaging specialists in this sector are reporting increased demand, and this is likely to continue. While some consumers will return to physical retail as soon as normalization resumes, for others we can see longer-term changes in consumer habits. This can make such professionals attractive as targets for large companies or as platforms for future acquisitions.

Substitution effect

The current crisis is unique in that no other recession in peacetime led to the physical shutdown of the main street. Although closing stores in the short term will reduce the need for disposable packaging for stores, demand may switch to alternative uses. For example, disposable take-away packaging options are in high demand, as consumption patterns switch to food delivery. Along with the fast-growing business for new food delivery giants, selected local restaurant and grocery companies are also currently launching their own take-out or food delivery services, adapting their business models to meet new consumer needs — all of which require packaging for food supply. delivered safely, warmly and attractively.

Supply Chain Impact

Packaging companies, like everyone else, will need to adapt to a global pandemic, and supply chains will inevitably fail. This forces packaging companies to look for contingency plans and better understand their supply chains and their vulnerabilities. This can accelerate existing trends, such as China Plus One in the US, as companies seek to reduce dependence on any one country. It may also mean preference for domestic suppliers.

M & A activity

Although M&A activity in the short term is likely to be more restrained, COVID-19 will create new opportunities. A sharp decline in the price of shares of publicly-listed companies may make them more likely targets for takeover. We are also likely to see consolidation in the market as companies come together to survive and strengthen their market position. However, at the same time, when Asian economies begin to recover, we can see increased interest in Western assets. Thus, in the medium and long term, there is reason to believe that consolidation in the sector will continue.