FTSE 350: Environmental issues to the fore in 2018 for packaging

We have no reason to doubt the thrust of his argument, but recent events suggest that concerns are mounting over the impact of the packaging industry from a wider environmental perspective, particularly in relation to marine conservation. Simply put, the argument is gaining political prominence. Over time, this could have a profound effect on the business models of FTSE 350 packagers, most notably RPC, although for the moment any potential commercial implications are hard to gauge.

At home, prime minister Theresa May recently announced a 25-year environment strategy to eliminate all “unnecessary” plastic packaging and has suggested to high-street grocers that they create plastic-free areas within their stores. Brussels has also unveiled plans for all plastic packaging on the EU market to be recyclable by 2030, the consumption of single-use plastics reduced, and the intentional use of micro-plastics restricted. The imperative to curtail the use of plastic has been given added impetus by the decision of China to ban imports of plastic waste from the start of this year. Before the ban, China was the world’s dominant importer of plastic waste, accounting for 56 per cent of global imports.

Meanwhile, Iceland Foods has become the first major retailer to commit to phasing out plastic packaging for all its own-brand products by the end of 2023. Retailers have a habit of following suit when rivals get a march on them in terms of ‘socially responsible’ initiatives, so we might realistically expect similar commitments over the coming months. An increasing number of brands will likely adopt sustainable products that distinguish them from the competition.

Although it’s difficult to say how readily packagers would be able to adapt to widespread commercial change on this basis, it’s perhaps telling that the government has opted for what appears to be a long-term timeframe. Nonetheless, investors in the sector will need to follow the issue closely; in addition to potential disruption, such a shift could present new profitable opportunities in terms of recycling and the innovative use of materials in the industry.

Certainly, one change under way that has had a wholly beneficial effect on the sector is the growth of e-commerce. It has effectively spawned an industry within an industry. Packaging for e-commerce, rather than simply a means of shielding products from damage in transit, is increasingly being used as an adjunct to marketing, not only as a response to growing online commerce, but also as part of the so-called ‘retail experience’ associated with given brands.

The logistics involved in shipping millions of individual products bought online has also resulted in the development of bespoke, higher-margin packaging products. Another form of marketing, point-of-sale packaging, has also been driving innovation in the industry. This packaging supports sales promotions typically found near to the checkout counters in retail outlets, and has been developed to lure impulse-purchase-inclined consumers.

Some constituents, such as DS Smith (SMDS) have positioned themselves to exploit broader industry changes through targeted acquisition, which feeds into a wider trend within the European packaging sector towards consolidation, a dynamic we’ve previously highlighted within these pages.

On a more prosaic note, existing investors would have noted rising cost-push inflation that emerged during the second half of 2017. Shares in Mondi (MNDI) headed south after the group revealed underlying performance for the financial year would fall short of market expectations, partly due to rising costs for wood, energy and chemicals. Meanwhile, profits for Smurfit Kappa (SKG) at the half-year mark were held in check by rising input costs, specifically “unprecedented recovered fibre cost inflation”. Anecdotal accounts suggest these pressures have eased somewhat, but it should be remembered that financial performance is partly dependent on how readily the packagers have been able to pass price rises through to customers.