Historically, many packaging and container stocks have proven to be excellent long-term holdings for investors, providing both growth and income prospects. But investors should understand the basics of the industry before they scour the segment for opportunities. Here are the basics investors need to know.
Approximately half of every dollar of Coca-Cola's product costs come from packaging. Image source: Coca Cola.
What is the packaging and container industry?
The packaging and container industry encapsulates any business related to the manufacturing of containers or packaging services. Some businesses that fall under this sector are pure plays that either provide packaging services or build containers, but some conduct business with a mix of both container manufacturing and packaging services.
Further, the container and packaging industry sometimes excludes container and packaging companies engaged solely in paper and cardboard stock manufacturing, as The New York Times does in its classification of businesses that fall under this industry. But this isn't always the case -- the World Packaging Organisation chooses to include these businesses in the packaging and container industry. In this article, paper and cardboard stock manufacturing related to packaging is included.
Examples of container businesses in the industry include manufacturers of pharmaceutical containers, metal cans, glass bottles, and steel containers. Examples of packaging services provided by businesses in this industry include packaging for private label products using containers like those just mentioned, along with paper and board packaging.
How big is the packaging and container industry?
Due to the many overlapping characteristics of the packaging and container industry with logistics services and other similar sectors, it's difficult to estimate the exact size of the industry. But a 2008 report from World Packaging Organisation forecasted an estimated $563.8 billion in the global packaging market in 2009.
Other reports seem to suggest that World Packaging Organisation's estimate of global revenue may be too conservative. For example, IBISWorld reports $830 billion in global plastic product and packaging manufacturing revenue projected for 2014, a 2.8% growth rate from 2009 to 2014. Further, it reports 2014 sales of $470 billion for global cardboard box and container manufacturing, growing at 1.3% annually between 2009 and 2014. Together, these two sectors equal $1.3 billion in global revenue. And even these two sectors still exclude some sales in the broader packaging and container industry, like those related to metal and glass containers.
Based on varying reports, it's reasonable to estimate that global revenue for the packaging and container industry is somewhere between $1 trillion and $2 trillion.
How does the packaging and container industry work?
The food and beverage and household products markets account for the largest portion of business in the packaging and container industry.
It's not surprising, therefore, that paper and board packaging, used to ship and store many products that fall under these categories, is the most common material used in the sector. Paper and board represent approximately 39% of world packaging consumption, according to estimates from World Packaging Organisation.
After paper and board packaging, plastic, metal, and glass account for an estimated 30%, 18%, and 7% of sales, respectively, World Packaging Organisation said in its 2008 report. The rest falls under "other."
The industry has characteristics of a highly competitive environment. Representative of the commodity-like nature of the container and packaging industry, the sector's net margin of 5% is considerably smaller than the 8% net profit margin the broader consumer goods sector boasts. With very few ways to differentiate itself enough in order to convince a meaningful number of businesses to pay premium prices in high volumes, exceptional operational efficiency and scale are relied on heavily in the industry to achieve above-average returns on equity. Responding to pressures, efficiency and quality control efforts like Lean Manufacturing and Six Sigma are commonly utilized in the sector, Value Line reports.
What are the drivers of the packaging and container industry?
While some of the simple, low-margin packaging and container businesses may provide investors with a fairly defensive investment profile for economic headwinds, the broader industry is largely tied to the health of the economy. With food and beverage and household good products accounting for the largest portion of the industry's sales, wavering discretionary income can reduce spending in these categories, putting pressure on the industry. The broader economy, therefore, is definitely a key driver for the sector.
World Packaging Organisation cites a several other factors as key drivers to growth of the industry, including rising preferences for conveniences, health awareness, and brand enhancement and differentiation. Consider these examples:
- On on-the-go lifestyle is spurring greater demand for convenience food packaging.
- Health awareness is driving growth in sales of bottled water across the globe.
- Packaging innovation is increasingly important for businesses in consumable goods to stand out.
Going forward, emerging markets will become an increasingly important venue for growth opportunities in the industry as their GDPs increase robustly.
