One of the peculiar things about the pandemic is that we are likely to witness long-term change on the back of inactivity, or rather enforced idleness. Many business segments will be reduced in scale, particularly anything deemed customer-facing, with business models evolving rapidly due to the accelerated adoption of digital technologies.
That last point is key as the shift towards online channels, be it related to retail markets, home-working or healthcare, offers substantial commercial benefits for companies over the long haul. The extent to which e-commerce habits have become ingrained is difficult to gauge, and it is quite possible that some consumers hanker for a return to a kind of idealised analogue yesteryear. But the direction of travel is clear enough, with only the extent of change open to debate.
But apart from pandemic-linked constraints, the primary reason why the e-commerce transition is gathering impetus is simply down to the bottom line. Research from McKinsey shows that “companies that embed digital sales into their marketing models see five-times-faster revenue growth compared with previous levels, as well as 30 per cent higher acquisition efficiency and cost reductions of 40 to 60 per cent within sales”.
Those potential benefits are hard to ignore; as is the imperative to respond to changing consumption modes. The latest Pitney Bowes Parcel Shipping Index reveals that Amazon Logistics has become the second- largest UK carrier by volume, trumping the likes of Hermes and UPS (NYSE: UPS) in the process. Changing demographics and the roll-out of 5G infrastructure should further cement retail trends, but other factors beyond increasing volumes are driving specification, at least in terms of packaging.
Increasingly, manufacturers are seeking to differentiate their product offering from rivals through the development of imaginative packaging which seeks to preserve, as far as possible, the satisfaction that consumers attain from the unboxing experience, while ensuring that any design can still survive the rigours of multi-phase deliveries.
Unfortunately, the surge in home delivery volumes has meant that online retailers, and by extension packaging companies, are having to square the marketing angle with heightened consumer concerns over sustainability, specifically in relation to over-packaged goods or items delivered in non-recyclable materials. Deliberations over the impact of microplastics on the ecosystem have become a key consideration for funds employing environmental, social and governance (ESG) criteria, so packagers – and their customers – are increasingly looking at biodegradable alternatives.
S&P Global’s (NYSE: SPGI) Sustainability Yearbook 2021, which provides in-depth analysis and ESG ratings on corporate environmental stewardship, features articles on: “Driving the energy transition,” and "Packaging and plastics in a global context” – sustainability is now a mainstream issue and one that investors cannot ignore.
Smurfit Kappa (SKG) notes in its 2020 year-end release that its products are 100 per cent renewable and produced sustainably. Indeed, it is listed on various sustainability indices and “performs strongly across a number of third party certification bodies, including MSCI and Sustainalytics”. The Dublin-based packager even lists failure of environmental compliance as one of its principal risks and uncertainties, though it was a more prosaic area – increased recovered fibre costs – which fed through to a 50-basis point reduction in the cash margin and a 13 per cent drop in adjusted operating profits.
Still, beyond the reiterated 2050 net carbon target, its eco-conscious shareholders can take solace in the fact that cash profits of €1.51bn (£1.33bn) were ahead of guidance and the board felt justified in hiking the annual pay-out by 8 per cent to 87.4 cents a share on record free cash flow.
