Consumers’ food preferences have changed in the western world, with individuals opting for fresh produce instead of processed or preserved goods. This has altered the way people – and therefore companies – view packaging. Ultimately, consumers now want to purchase healthy food packaged in sustainable, recyclable materials. As a result, traditional food processors such as Heinz, Nestlé SA and McCain Foods are struggling to maintain market share as trends turn towards innovative ‘mom-and-pop’ start-ups that create minimal amounts of processed meals and opt for recyclable or compostable packaging. With this, demand for packaging materials such as aluminium and glass has decreased, while demand for low-carbon flexible plastic has soared. The supply chain efficiencies offered by flexible plastic solutions help reduce cost prices and improve profit margins for packaging manufacturers, which has incentivised them to move resources into the research and development of non-oxidising plastic.
However, simply changing factory production for packaging companies is likely to require a minimum of USD 20-25 million up front, resulting in fewer companies being able to adapt operational focus. This has led the market to question what will happen to traditional manufacturers in the food industry. Last week, glass and metal packaging manufacturer Ardagh Group sold a controlling 57% stake of its food and speciality metal cans business in a joint venture with a Canadian teachers’ pension fund. Consequently, its share price fell from USD 18.90 to USD 17.50 within a week. And with USD 8.5 billion in debt, a changing market could further the company’s decline. This is not to say that glass and metal manufacturers will immediately fail. Buoyed by the sales of alcoholic beverages packaged in cans or glass, traditional packaging manufacturers have gained a reprieve. That is, they should maintain market share until a viable, sustainable alternative is created. In parts of Europe, this has already begun; some wholesalers in Europe, such as OffPiste, have taken to selling wine in pouches. Off-Pistes’ offering is comprised of 100% recyclable materials with a composition of roughly 75% paper, 20% polyethylene, and 5% aluminium.
Numerous companies, including Amcor, Danone, Mars, PepsiCo and The Coca-Cola Company, are following suit and have signed up to the New Plastics Economy Initiative, which attempts to rethink and redesign the future of plastic by 2025. Consequently, it appears as though consumers whose buying patterns are driven primarily by planetary concerns will have their version of utopia realised in just a matter of years. However, there are two fundamental areas currently slowing this process down, namely: the exorbitant costs involved, and recycling confusion within the US.
A major question surrounding the changing market is whether the food industry or consumers are willing to bear the brunt of the higher cost and pay more for environmentally friendly packaging. While the market remains optimistic that this is possible, there could be further costs accrued post-consumption given the recycling crisis underway in the US. Research suggests that only 9% of the plastic discarded since 1950 has been recycled, and a further 12% has been incinerated. This has recently become a more pressing issue. While North America once heavily depended on exporting used plastic to China so it could be recycled into shoes and other goods, China has restricted the type of plastic waste it accepts from the US. And this ban is not set to expire anytime soon as the trade war between the two countries has strained the US-China relationship. This has effectively resulted in a recycling calamity, with many US municipalities refusing to accept plastic as a recyclable material, thereby boosting the amount being sent to landfills. Ultimately, the USA’s infrastructure is unable to cope with recyclable materials, and a lack of consumer awareness has resulted in recycling stream contamination, with some consumers incorrectly adding non-recyclable or unwashed packaging to recycling bins. This has even caused leading wood-alternative recycled furniture manufacturer Trex to refuse some recyclable objects in the creation of its products.
The plastic industry is also changing. The demand for the relatively unsustainable polyvinyl chloride (PVC) is decreasing substantially as demand for polyethylene terephthalate (PET) and recycled PET (RPET) grows. Generally, RPET products are made with approximately 80% recycled materials, making it an excellent material for solving the plastic recycling issues currently found in the post-consumption industry. The shift from PVC into PET has been rapid, with some specialists suggesting there has been a 50% shift from PVC to PET in just two years. As a result, companies operating in the PVC arena, even those that have adapted their products in line with demand for PET, are facing problems. For example, Klöckner Pentaplast, the market leader for PVC, is struggling to keep up with demand despite having maximised its PET capacity, and it might have to utilise other PET suppliers to meet growing requirements. Although this would increase costs for the company, it would prevent customers from shifting to a different supplier, which could have long-term effects considering the stickiness of customers within the industry. After all, a food manufacturer without the necessary packaging effectively grinds to a halt. If trust were to erode between a food manufacturer and a packaging company, this would tarnish the packaging company’s brand.
However, there is one packaging company that believes it has an edge over its competitors. An Israeli supplier called TIPA has created an offering made from 100% compostable bio-materials, which it claims rivals conventional plastic for its durability and ability to extend shelf-life. However, technology costs are still extremely high, so the market suggests further research and the development of new methodologies are required to drive costs down, but that it is potentially one to watch for the future.
To access Third Bridge Forum’s Q1 2019 Materials Sector Report click here.
The information used in compiling this document has been obtained by Third Bridge from experts participating in Forum Interviews. Third Bridge does not warrant the accuracy of the information and has not independently verified it. It should not be regarded as a trade recommendation or form the basis of any investment decision.
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