Packing it in: drivers of global packaging consolidation 

The last five years has undoubtedly been period of consolidation for the packaging industry.  But is this trend set to continue into 2019? We think so and here are the reasons why.

The global packaging sector is a vast but relatively mature market. While some segments, such as flexible packaging, are growing faster than others, such as metal and glass, the overall industry growth rate tends to broadly track GDP. In a sector where organic growth can be limited, strategic acquirers seek to create shareholder value through accessing new, faster growing, geographical markets, acquiring technical know-how and delivering operational synergies. M&A has been a key way to achieve this. Take for example Graphic Packaging’s $1.8bn acquisition of International Paper’s Consumer Packaging Unit in Jan 2018, which estimated to generate $75m in savings by the end of year three.

Another key driver of M&A has been the growth and consolidation of packaging companies’ end customers and suppliers. Customers of packaging companies tend to include major consumer brands such as Coca-Cola, Unilever and Procter & Gamble. In a climate characterized by rising input cost pressures, such influential groups are attempting to mitigate this throughout their supply chain, with packaging companies also being impacted. To bolster their bargaining power, packaging companies have sought to add scale through M&A. Take for example the £4.5bn Ball / Rexam deal of 2016. While it undoubtedly expanded Ball’s geographical footprint and product offering, pressure arising from consolidation of their end customers, such as AB InBev’s £70bn takeover of SABMiller the year before, was also a motivating factor behind the transaction. 

Certain packaging subsectors, such as metal and glass, are already more consolidated than other others, such as flexible packaging. As a result, in recent years we have witnessed more elevated M&A levels in flexible packaging. Notable transactions include Amcor’s acquisition of Bemis and MCC’s acquisition of Constantia. Naturally, there are geographic variations such as the European paper packaging market being notably less consolidated than North America. As a result, all of Europe’s largest paper packaging players, Smurfit Kappa, DS Smith and SAICA have been actively expanding their geographical footprint in Europe though acquisition in 2018.

Since packaging companies tend to be linked to less-discretionary end-markets, such as food and beverage, the industry has historically been seen as having strong defensive characteristics. This can be very appealing to certain financial sponsors, especially if combined with an attractive business plan and a strong management team. As a result, private equity capital continues to play an important role in the packaging M&A landscape – as shown by US firm, Lindsay Goldberg’s €700mm acquisition of Coveris’ Rigid Packaging division, Brookfield Business Partners acquisition of Schoeller Allibert Group and Advent International’s acquisition 40% stake in Manjushree Technopak – India’s largest rigid plastic packaging manufacturer.

All this evidence suggests strategic acquirers and financial investors will remain as committed as ever to M&A. As such, the M&A outlook for 2019 is, in our view, positive.

Global Packaging Trends for 2019

Key packaging trends to watch out for in 2019. 

Sustainability: Inspired by BBC documentary Blue Planet II and increased media coverage, 2018 was the year consumers become increasingly stronger advocates for environmental sustainability - and the market is responding. 

In April, Tesco, Sainsbury’s, Morrisons, Aldi, Lidl and Waitrose were among over forty businesses that supported the UK Plastics Pact– an industry-wide initiative which aims to ensure all plastic packaging can be reused, recycled or composted by 2025. Single-use plastic products have also been in the spotlight, with companies such as McDonald's stating it will replace plastic straws with paper solutions in all of its UK and Ireland restaurants, starting from September 2018. There is also the Packaging and Packaging Waste Directive, which includes legally binding targets for EU28 Member states in relation to recycling and incineration. 

As packaging providers, in turn, seek to offer their customers innovative, environmentally friendly solutions, this trend is beginning to fuel M&A in this space - as illustrated by Duni’s 2018 acquisition of Biopac, a supplier of sustainable disposable packaging for food and beverages.

E-commerce Packaging: While the growth of e-commerce will naturally translate into demand for packaging materials such as lightweight protective packaging and boxes, there is also an evident increase in demand for packaging solutions that are easy to open, returnable and simple to dispose of. Moreover, as the experience of e-commerce packaging must mirror consumer expectations from shopping with that brand in-store, online brands will need to refresh their packaging in order to enhance the e-commerce experience.

Shelf Ready Packaging: The global shelf ready packaging market is expected to grow rapidly, driven by the rise in e-commerce and increased competition from discounters such as Lidl and Aldi. Other retailers are increasingly beginning to see the benefits of shelf ready packaging (which includes product differentiation and potential for increased sales, and as a result of fewer stock outs) and are establishing guidelines to help standardize and transition their shelves as they adopt the new package designs.

Packaging as Marketing: Packaging design is recognized as a platform to develop brand awareness. Customers increasingly perceive it as a part of the core product, with contemporary design typically based on minimalism, communicating only the most important values and elements. Moreover, the combination of digital design capability and quick turnaround, bespoke production is highly attractive for acquirers, as illustrated by Huhtamaki’s 70% acquisition of Ireland’s Cuprint earlier this year for €22mm. We expect more M&A in this space to follow.

Ready-To-Eat: Growing consumer demand for away-from-home meals has led to robust growth in stand-up pouches in the ready-to-eat food category. These solutions are easier for consumers to transport and improve food preservation. And when consumers are eating at home, the growth in delivery service providers such as Deliveroo and Uber Eats will create demand for restaurants/meal providers to focus on increasingly innovative packaging which preserves food and maintains brand credentials. 

By Barry Sheehan

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