I have an addiction to next day delivery. And judging by the regular box fort in the lobby of my building, so do my neighbours. It wasn’t always like this though - I remember five to seven days being the standard delivery window, long before I started to see red at anything over 24 hours. So what changed?
Well, Amazon. As soon as the tech giant started offering its Prime service to customers, next day delivery became the new normal for us all. That single change in proposition continues to massively affect the whole postage and packaging industry across the board, and with brands and customers both moving towards an exclusively online relationship, it’s time to look at investment opportunities in the sector again.
Quite simply, the online products we used to ignore because they’d arrive next week are now dropping into our baskets and arriving tomorrow. We’re also living in smaller family units and consuming more ready meals and individual portions. This increases the volume of orders we place on a daily basis and puts less emphasis on buying in bulk. The result is a hike in the constant supply of packaging required to wrap the goods we want and get our purchases to us.
However, whereas individuals can spend sporadically with manufacturers and retailers, the companies themselves need much more stable relationships with packaging suppliers so they are always prepared to meet our needs. If not, there’s probably another site we can give our money to.
These business to business relationships are useful to look at from an investment point of view. Retailers can have multi-year contracts with packaging suppliers meaning revenue streams can be smoother. It can also be a bit of a pain to organise a new supplier so there can often be room to negotiate increased prices and still keep a client in tow.
Because these relationships can be sticky, they provide a way for investors to access the fortunes of the end client, who may need more corrugated cardboard, branded bags or tin cans, while maintaining exposure to multiple buyers in case orders stall in a specific sector.
Second-order thinking is important to identify the companies one step removed from the fickle consumer but stable enough to generate consistent revenues to invest back into the business.
What’s happening at the moment?
2018 was a tough year for retail but a rebound in the online names at year end and into 2019 could give us a clue to the long-term winners in the sector. Online businesses need more packaging for their postage-based business models and if they are to dominate retail from now on, that only means an increase in their packaging needs.
There has also been quite a bit of consolidation in packaging providers over the past year, as companies expand overseas and look to bring their business relationships with them. Online businesses are not held back by borders but often their packaging partners are. Opening up new markets on the delivery end means building scale, streamlining spending, and gaining market share.
Global partnerships mean high barriers to entry for any potential competitors, as well as increased cost synergies across all markets.
What to keep in mind?
Regulatory pressure to use environmentally friendly packaging is growing. That’s why it’s useful to look at the companies already taking this into consideration and planning accordingly. Then there are consumer shifts towards customisation, like personalised bottles, as well as a rise in the sharing economy. Why buy a powerhose to use twice a year when you could rent one online and send it on to its next user? In the same vein, subscription plans for everything we use could become the norm, with knock-on effects for regular deliveries from businesses of all sizes.
And we haven’t even touched on the need for higher sophistication in traceable packaging and theft prevention.
In short, the packaging industry needs to keep up with the rate of change we see elsewhere, in online retailers and our expectations as consumers. The winners will be the ones who keep the pace.
What’s a good way to invest in packaging?
The UK market is home to some of the biggest names in the space like DS Smith and Mondi as well as some of the lesser-known firms like RPC and the Macfarlane Group. They might not ring many bells but with a laundry list of clients like Amazon, Nestlé, Procter & Gamble, and Unilever investors might start looking at their doorstep deliveries a little differently.
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