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Tuesday, April 16, 2024

Packaging’s less than perfect world

Neil Farmer surveys the challenges facing the UK packaging industry in a global economy

I have major concerns over the UK economy and the investment climate in the country.

Smurfit Kappa, as is now well known, is in the process of merging with WestRock to create a packaging giant, with combined revenues of $34 billion. The listing of the combined group will be in the US not the UK, meaning Smurfit will exit the London stock market, retaining only a secondary listing in the UK. The belief is that the combined group will achieve a higher valuation on Wall Street over the longer term. The US market has more liquidity than the UK and higher ratings, creating more value for shareholders. Opportunities abound in the US for Smurfit- the deal will provide the company with 65 percent of its business in the Americas.

The domestic UK market has limited attraction for ambitious packaging companies at present, in my opinion. The business outlook in the UK, notably the lack of economic growth and productivity, plus the continuing regulatory and red-tape delays (and costs) as a result of Brexit, are adding to the country`s woes. This applies to other sectors as well, with important companies in the process of leaving the London market for the US, such as CRH, the building materials group, and most notably Arm Holdings, (much in the headlines at present). Another British tech company, Imagination Technologies, was also reported in The Sunday Telegraph to be planning to go public on the New York market.

I take no pleasure in writing about this litany of failed opportunities and mistakes. I came into the packaging industry in 1978 on the back of a vibrant packaging sector, with companies including my own, players on the global stage. Over the subsequent 40 plus years, this presence has whittled down, through many reasons, into a small list of UK quoted packaging businesses, who are embracing the opportunities of a global world.

Limited understanding of packaging companies in the city

It has been argued by some that London financial markets do not understand or even necessarily wish to understand the packaging sector. I have certainly encountered a lack of understanding in the city of what the British packaging businesses actually do or their importance to the economy. I feel the purchase of RPC Group by Berry Global in 2019 to some extent eradicated this and certainly the primary listing of Smurfit Kappa in London raised the investor profile, as has the continuing success of DS Smith, another London listed packaging company.

The future is global

So, where do we go from here? The future is global, that is for sure. For example, there is clear commercial logic for Smurfit to merge with WestRock. The new company could become the “go-to packaging partner” in a global world, according to the statement issued at the time of the deal. The two firms have 500 operations and 67 mills across 42 countries. The continuing move towards a switch to paper and paper-board based packaging from plastics is also an important consideration in the future development of the combined company`s markets.

The inevitable consequence of the deal is, of course, a rationalisation of the industry. Merger & Acquisition (M&A) activity, smaller deals and disposals will inevitably occur. The sector will move into a new phase of activity as a consequence of the merger, with changes occurring further down the supply chain an inevitable consequence.

Sustainability issues

Another and more positive consequence of the Smurfit/WestRock deal is Smurfit`s continued commitment to invest in sustainability and support the circular economy. The company itself undertook a survey in April 2023 in conjunction with The Financial Times newspaper among 440 senior business executives in 11 major economies. The survey claimed that sustainability is pivotal for business leaders despite many not having a robust strategy. Indeed, only 11 percent believed they had a robust and actionable sustainability strategy. However, 61 percent said sustainability is changing the way they measure financial performance. Importantly, 47 percent of respondents prioritised packaging innovation as the way to meet their net zero targets. This commitment is likely to continue after the deal, based on my experience of the company and the sector, and is to be applauded.

DS Smith survey

My belief in the importance of improvements in sustainability achieved by packaging innovation is shared by consumers in the UK. There is little doubt that environmental performance in respect of packaging is a high priority for the British public. In September 2023 DS Smith announced the findings of some detailed research, which showed that 26 percent of online shoppers would stop ordering from a company if they experienced too much unnecessary packaging. The DS Smith research also revealed that 22 percent would do the same if the packaging was not recyclable or difficult to recycle. The most important finding was that consumers indicated a strong preference for sustainable and recyclable packaging. Notably, four in five said they would prefer to receive a product in paper or cardboard packaging. This preference was so strong that 21 percent said they would be willing to pay more for plastic-free packaging.

The sustainability demands of UK consumers

This vindicates all that I personally feel about the packaging sector at present. I know the global market is probably slipping away from UK based businesses. The UK is making slow progress in trade deals with global super powers such as the US. It may eventually get a deal with India, but the trade deals to date, post-Brexit, have been limited in scope and value in terms of GDP. A diminished role on the global stage awaits, for the reasons I have described above. However, when it comes to the importance of sustainability, the British people are very good at putting this issue at the top of their priorities. This is particularly so at a time when consumers are facing a cost-of-living crisis, resulting in the need to restrict spending and potentially choose less expensive brands. With fierce competition, brands will lose customers if their packaging does not meet the high sustainability standards demanded by discerning consumers. They have been warned.

Conclusion

The UK economy, like the packaging industry, is at a crossroads. There is a great deal of uncertainty about the future. The global status of the country might never return to pre-Brexit levels. There is therefore a greater need than ever before to succeed in packaging innovation, technological advancements, and improvements in environmental performance.

We need these to continue and in a big way.

 

 

Neil Farmer
Neil Farmer
Neil Farmer, Managing Director, Neil Farmer Associates. One of the world’s leading authorities on packaging and a fellow of the Institute of Packaging. Author of Trends in Packaging of Food, Beverages and other fast-moving Consumer Goods (FMCG), published by Elsevier.

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