Five Key Factors Reshaping Packaging Design and Operations

Packaging professionals must think outside the box, as customers, investors, and regulators are demanding leaner, cleaner, smarter, and more sustainable solutions to market and protect products.

Just a few years after the pandemic pushed e-commerce to new heights, shifting consumer patterns and record-high inflation have since taken a toll on product demand and packaging manufacturers' profitability. Upcoming government regulations are expected to have further impacts, involving the materials used in packaging and how its disposal or reuse is managed.

Manufacturers and processors are trying to get ahead in this environment by adopting innovative designs, integrating operations, and experimenting with new forms of collaboration up and down the value chain.

As this year's legislative sessions and fiscal calendars progress, and ESG (environmental, social, and governance) target years approach, here are a few notable industry trends the Packaging Dive team is watching. What else are you keeping an eye on? We look forward to hearing from you at[email protected]。

Inflation uncertainty continues to hang over packaging companies

For packaging companies seeking stability in an uncertain economy, whether and when inflation will be brought under control in 2023 is a pressing question. The Producer Price Index (PPI) and other key indicators showed that in February,inflationary pressures eased. This trend could reverse the decline in consumer demand and customer inventory destocking that has plagued the industry and weighed on earnings over the past year.

According to alatest reportreleased by the Packaging and Processing Technologies Association (PMMI) and AMERIPEN, the industry is still expected to grow from this year through 2025, but the pace may slow during that period. The 500 billion packages sold in the U.S. in 2021 are expected to reach 532 billion by 2025, but the compound annual growth rate of 1.7% in 2022 is expected to slow to 1.5%.

Although there are signs that federal efforts are beginning to curb inflation, the process is slow, and dampening effects are still expected at least through the second quarter—and this depends on avoiding a full-blown recession. Goldman Sachs Vice President Adam Samuelson predicts that packaging companies will see flat to low single-digit volume growth this year, with growth concentrated mainly in the second half. His industry research focuses on consumer packaging materials, including flexible and rigid plastics, paperboard, and beverage cans.

The extent to which inflation and the post-pandemic shift in consumer purchases from goods to services have impacted different packaging sectors varies, showing a clear divergence between consumer and industrial segments.

"Over the past six to nine months, protective packaging has been an area where volumes have been challenged—the impact of destocking has been most significant," Samuelson said. "We don't expect a strong rebound in activity in these areas."

On the other hand, certain consumer packaged goods (CPG) categories, such as essential food and beverage items, typically have resilient demand even in challenging economic times, he said. Part of the slowdown is due to brands passing inflation-related costs on to consumers, a situation that could reverse if brands lower prices this year, but that is not expected. Samuelson said forecasts indicate that "overall, incremental pricing actions from here will be much more moderate," as sharp increases in costs related to raw materials and freight/logistics have eased.

But executives and analysts warn that it will still take more time to control inflation and unlock positive effects on packaging demand. "Given what we saw in February, relative to volume trends in December and January, there is no indication that things have changed," Greif Chief Financial Officer Larry Hilsheimer said on a recentearnings call."

Manufacturers seek automation opportunities

Despite economic uncertainty, packaging manufacturers may not necessarily halt investments in automation this year, especially in less economically sensitive and resilient areas like food and beverage, Samuelson said: "In these less volatile areas, capital expenditure is showing steady momentum."

Capital expenditure cuts are most likely in protective packaging and other more economically sensitive industrial sectors. "Some parts of these areas are not as strong because the market is readjusting from pandemic highs," Samuelson said. Still, companies continue to announce new or upgraded "state-of-the-art" facilities using modern, efficient technologies.

Automation can bring long-term cost savings to manufacturers in multiple ways, and these savings add up—especially during periods of financial turmoil. Samuelson said labor cost savings are a "key part" of the automation investment calculation, but he also pointed to many other benefits, including energy efficiency: "I don't want to define it solely as labor savings."

For example, Graphic Packaging International recently announced a $1 billion investment in a coated recycled paperboard mill in Waco, Texas, in order to close older, inefficient, and higher-cost plants and enhance manufacturing sustainability.

"Obviously, the modern technology embedded in these new machines can bring significant step-change improvements in production costs compared to machines that are decades old," CEO Michael Doss said on a recentearnings call."

Momentum builds for materials management and marketing regulations

A wave of state legislation in the U.S.—along with federal actions and overseas proposals—could bring numerous changes to packaging design and management. All of this could further prompt packaging companies to help brands switch materials, adjust how they invest in circularity, and even push them to focus on reusable solutions.

U.S. packaging manufacturers have not yet faced extended producer responsibility (EPR) systems, but four states have passed EPR laws in the past two years and are working toimplementthem as early as 2025. Although only a few of the many introduced bills have made progress (including anotable proposalin Washington state that recently failed to advance), many states, including Maryland andNew York, are still considering EPR for packaging during the 2023 legislative cycle.

As some brands set recycled content goals for their products, legislators are following suit. A few states have already set minimum recycled content requirements, including California, New Jersey, and Washington, with varying scopes. Some states are also considering incorporating such requirements through EPR legislation.

Marketing-related regulations and guidelines are also being developed at the state and federal levels. For example,Californiais preparing to crack down on which packaging can use the chasing arrows recycling symbol and is advancing implementation steps in 2023. At the national level, the Federal Trade Commission (FTC) and industry stakeholders are preparing this year to discuss the first update in a decade to theGreen Guides, which guide the appropriate use of environmental marketing claims.

Overall, the diversity of bills has raised industry concerns about harmonization—that is, how different laws might create challenges for packaging design and distribution.

Packaging companies with significant operations and sales in Europe are also watching the EU, which is considering major revisions to its packaging waste regulations to push away from single-use items.Major companies affected by the upcoming changes, such as McDonald's, arecampaigning against the timeline for phasing in reusable packaging starting in 2030。

PFAS residues in packaging draw attention

Uncertainty about where and how PFAS—per- and polyfluoroalkyl substances, also known as "forever chemicals"—will be regulated in the future will continue to raise questions for packaging facilities and products this year.

At the federal level, the Environmental Protection Agency (EPA) and the Food and Drug Administration (FDA) are taking steps to determine "safe" levels of PFAS in different environments. Last year, the Keep Food Containers Safe from PFAS Act passed the Senate as part of the FDA Safety and Landmark Advancements Act, but those provisions ultimatelywere notincluded in the House-passed Food and Drug Amendments of 2022.

How the newEPA actions on PFAS in drinking waterwill affect facility management, such as paper mills, remains to be seen. A2022 EPA surveyindicated that the remaining U.S. pulp and paper mills known to use PFAS plan to phase it out within this year.

At the state level, PFAS regulations primarily target food packaging, with numerousrelated bills under considerationthis year. State laws set to take enforcement action include those in Colorado, Vermont, Maryland, and Minnesota. As PFAS regulation intensifies, its scope could expand to more products rather than being limited to specific types of packaging.

As with other increasingly regulated aspects of operations and design, some companies have voluntarily sought to eliminate PFAS from packaging before any requirements are passed.

"When consumers want to know what substances are in packaging, or regulators want to ensure future compliance, I think they should look directly at the supply chain," said Melissa Lavoie, project manager at the Northeast Waste Management Officials' Association and head of the Toxics in Packaging Clearinghouse, emphasizing the importance of fully understanding input materials and requesting certificates of compliance.

Plastics sector could become an M&A hotspot

The packaging industry is no stranger to mergers and acquisitions, driven in recent years by generational transitions and pandemic-era economic pressures. However, observers say it is too early to tell whether 2023 will be a big year for M&A.

"Packaging is a mature market that is already fairly consolidated," said Kyle White, managing director of equity research at Deutsche Bank and lead analyst for paper, packaging, and environmental services. "Given the current market environment, deal activity could slow down."

White pointed to economic uncertainty and higher transaction costs due to rising interest rates as key factors for large companies this year. Onthe latest round of quarterly earnings calls, several companies lowered their growth expectations for 2023, focusing on cost control and more targeted spending.

Large public companies are still making deals, such as WestRock selling its remaining stake in the RTS Packaging joint venture to Sonoco—a transaction currently under review by the U.S. Department of Justice. But observers expect increased activity in the plastics sector, especially among private companies or smaller players. That industry remains more fragmented than other material categories and still has numerous family-owned businesses.

Another factor that could drive packaging M&A activity is private equity firms, which are increasingly being attracted to the sector given its more stable cash flows and perceived resilience during economic downturns.