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 Sunday Telegraph - Money & Business - - Business - Tele­graph. The Sun­day

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

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