M&A in the paper and packaging sector
Economies of scale is vital in the paper and packaging market as it is relevant to International business
Conversation with Carlo Caria
There is a lot of competition primarily from the Asian markets, so to be relevant it is important to have unique products with a particular USP and maintain very high quality.
A case in point was a Dutch company that produced cardboard boxes for snack boxes and pie casings. They had a large contract with a supply chain for supermarkets but because of more competitive pricing from Asia, they lost the contract. Within less than a year they had regained their contract as the quality of their products was far superior than the Asian company. They invested heavily in their plant to be able to print on their packaging thus further increasing their productivity and sales reach.
What we see in this particular area is that there is a very high investment needed to be able to penetrate this market. We calculate upward of 50 million Euros to be able to win relevant contracts for a relatively small position in the market. Obviously, this is a lot of investment to repay and is also only the beginning of a long process of investment and maintenance.
Let’s say for example you hit the ground running with your 50 million investment and have a contract for luxury packaging in the Perfume sector. You will need to invest 6 to 7 million in new machinery within the first ten years, alongside which you will also have to pay anywhere up to 700 k a year in maintenance costs to keep the machines running and in prime condition. If one element in the process is held up due to a faulty machine for example. This could lead to a breakdown in the supply chain and contracts not being fulfilled.
There has also been a shift recently from only packaging to actually filling the packaging, so for example, a company produces packaging for detergents and then the detergent company places a machine in the same plant to fill the packaging with the detergent. This means that distribution and logistics is streamlined so that products can go direct to the wholesalers direct from the packaging plant.
Research and development is also key in entering the market by producing eco-friendly solutions for the packaging industry. A case in point is a company that designed an Eco tape to be used on their packaging, this meant that the tape can be recycled along with the box instead of having to be removed first. The current trend is for one-stop solutions, clients are more demanding and expect that several different needs are met by one producer. This translates in companies being able to produce multiple products and requires investment in stock management and innovative I.T solutions in software.
Another factor to consider is that there is a very direct link between the packaging sector and the Logistics and Transportation sector. To increase profits packaging companies are installing machinery in clients so that for example, when a container with flat-packed packaging arrives at the wholesalers warehouse a machine is in situ to assemble the packaging so that it can be directly shipped to the end client. This saves massive amounts in transportation costs but is also an additional investment in costly machinery and maintenance. A case in point would be if the packaging company had 200 clients, it would need to invest in installing 200 machines in their clients’ installations.
In effect what we can see in this dynamic market is the shift to a whole solution for the packaging industry, companies are focusing on not only the packaging side but also the fulfilment and then shipment of the goods to their final destination. This in turn cuts down on transport and logistics and streamlines the whole production process. All of this requires massive investment in technology and maintenance along with stock management and I.T solutions.
Carlo Caria is the leader of the Paper & Packaging Industry Group. We thank him for this conversation and explanation about this sector.