Boxing clever: the giants making a packet
Online shopping has made cardboard a high-growth sector. Jack Torrance asks how long it can last
The corrugated cardboard industry might not top many people’s lists of possible career choices. Box-making factories lack the glamour of showbusiness, the ideological fervour of a technology start-up and the opulent decor of a City bank, but the industry has become hot property.
A boom in online shopping has helped the combined market value of DS Smith, Mondi and Smurfit Kappa, the three largest London-listed cardboard packaging giants, soar almost three-fold over the past five years to more than £23bn.
Their combined profits have grown at a similar pace to £1.5bn over the same period.
But as shoppers tire of excessive packaging amid fears of its impact on the environment, there are concerns that this extraordinary growth run could be short lived. DS Smith has US retail behemoth Amazon to thank for a big part of its growth.
Sales have more than doubled since 2012 after it became a major supplier of the ecommerce company’s cardboard boxes, riding on its coattails as it carved out a big chunk of the world’s retail market.
“We got behind them in a big way and we’ve been amazed by the growth,” DS Smith chief executive Miles Roberts tells
The industry’s factories tend to be fairly spread out as manufacturers aim to locate near their customers to reduce transport costs and respond quickly to spikes in demand.
“As [Amazon] has opened more distribution centres, we’ve basically been following them,” Roberts says.
Other changes in shopping habits have helped. More one or two-person households mean more people buying smaller portions and therefore more packaging sold per person, says Roberts.
“We’re also seeing people going into discount stores and convenience stores more.
“The thing about those store formats is they have very limited space, and therefore the way the product is presented becomes extremely important.”
Packaging companies have also benefited from broader turmoil in the fiercely competitive grocery industry.
Ken Bowles, Smurfit Kappa’s chief financial officer, says: “The large retailers and FMCGS are competing for shelf space in a very congested market and we have a number of tools to improve the visibility of products on the shelf.”
Meanwhile, the sector is in the grip of M&A fever. In the past week alone, DS Smith inked a deal to splurge £1.45bn on Spanish rival Europac, and Smurfit Kappa managed to rebuff an €8.9bn (£7.8bn) approach from US giant International Paper.
Oliver Staple, of accounting firm EY, says packaging has been “by far the most active” part of the broader industrial products sector in terms of transactions, with more than 300 per year globally over the past 10 years.
“Over the next 10 years, we don’t see that trend changing too much,” he says. Many of the deals have been done by private equity firms tempted to the sector because of “relatively recessionproof ” products, Staple adds.
But the cardboard giants haven’t been shy of getting involved either, acquiring dozens of smaller competitors between them as they have spread across Europe.
“In the past six years, I think we’ve done something like close to 30 acquisitions,” says Bowles, with the €460m takeover of the Netherlands’ Reparenco last month being “among the biggest”.
That deal allowed Smurfit Kappa, which is still run by the grandson of its founder Jefferson Smurfit, to boost its supply of paper by 400,000 tons, ensuring it can keep up with the industry’s growth.
However, the consolidation is underpinned by a broader strategy. Roberts says a large number of DS Smith’s clients have struggled to increase revenue in recent years and have been forced to cut away more vigorously at costs to maintain profits.
One way to do that is reducing both the number of suppliers they rely on and the number of different types of packaging they use, allowing them to buy in bulk and cut admin spending.
“We try to respond to all of this by putting much more focus on to our corrugated boxes and building a supply base where we can supply
‘If you’re just a regional player you’ll find a lot of customers won’t work with you any more’
customers, not just across the UK … but right across Europe,” says Roberts.
“If you’re just a regional player then you’ll find a lot of customers won’t work with you any more because you’re not a multinational company – these smaller players are finding their market start to shrink.”
The number of family-owned companies in the industry has accelerated the consolidation, says Natasha Valeeva, an analyst at Rabobank. A lack of succession planning has given the acquisitive giants plenty of ripe targets.
Packaging may be in rude health, but the industry isn’t without its critics, particularly those concerned about its impact on the environment.
Box makers insist their products are among the most sustainable options available.
DS Smith is Europe’s biggest recycler of fibres and Roberts boasts it can take a used box, pulp it to make new paper at its mills, turn that into a new box and return it to a customer within 14 days.
Packing techniques have also come in for criticism. Online shoppers complain about receiving huge boxes full of air with a tiny product inside, but Bowles says retailers have been upping their game in that respect.
In any case, the cardboard companies stand to benefit from a backlash against their rivals in the plastics industry, who have been under fire amid fears of the damage the material is doing to the oceans. Supermarket chain Iceland has pledged to banish plastic from its own-brand range, including replacing plastic food trays with paper-based
Staff at Amazon’s Swansea fulfilment centre. The company and other online retailers have boosted demand for cardboard packaging