Every year, companies spend billions on packaging for their products. According to a recent research report by Smithers, the value of the global packaging market was $917 billion in 2019. It will grow to $1.05 trillion by 2024.
The cost of packaging depends greatly on the types of products a company sells. Packaging costs also vary based on the types of materials used and complexity of packaging designs. Because of these differences, packaging costs can range from less than 2% to 10% or more of total product cost.
Frequently, companies invest substantially in packaging because of a widespread belief that effective packaging drives improved brand performance. In L.E.K. Consulting’s January 2020 survey of brand managers and other packaging decision makers at CPG companies, roughly 80% of respondents said they believe packaging is important for the success of their overall brand. In addition, nearly half of the respondents (48%) expected to increase their packaging spending in 2020.
The Online Shopping Cart is a Packaging Game-Changer
The COVID-19 pandemic is having an undeniable effect on packaging. As with business generally, the impacts have been uneven. The economic recession has decreased the demand for packaging by companies in some industries. Simultaneously, however, changes in consumer shopping and buying behaviors are driving increased demand for some packaging types.
One of the more significant drivers of increased demand for packaging is the explosive growth of online shopping. It’s not surprising consumers turned to online buying during the economic lockdowns triggered by the pandemic. Currently, there is an emerging consensus some of these changed shopping behaviors will “stick” long after the pandemic ends.
The shift to e-commerce is clearly shown in the most recent quarterly earnings of large retailers. For example, Walmart reported in August that its U.S. e-commerce sales were up 97% compared to the same fiscal quarter of 2019. In July, Amazon divulged online product sales were up 40% compared to the same quarter of last year.
E-commerce sales are also growing because more companies are using a direct-to-consumer (DTC) strategy, either as their sole or primary go-to-market model, or as a complementary approach to their traditional distribution model. eMarketer recently estimated U.S. DTC e-commerce sales reached $14.28 billion in 2019 and will grow by 24.3% to $17.75 billion this year.
The impact of e-commerce’s expansion on the packaging market is substantial. Recent research by Smithers uncovered the total volume of packaging for e-commerce (globally) was $37.5 billion in 2019. Smithers predicts the value of e-commerce packaging will reach $63.3 billion in 2023. (Note: This research report was published in 2019, before COVID-19, and therefore may well underestimate the growth of e-commerce packaging.)
Effective Packaging Procurement is Essential
The growing investment in packaging has elevated the importance of this spend category for procurement professionals, but packaging is often a difficult category to manage effectively. For one, many companies, particularly CPG companies, are continuing to expand the varieties of products they offer. This proliferation of product SKUs usually results in a proliferation of “packaging SKUs.”
The rise of e-commerce adds complexity to the packaging category because companies that ship directly to customers must typically add various forms of “protective packaging” to withstand the rigors of the fulfillment process.
Given the characteristics of the packaging category, many companies would benefit from using an e-sourcing solution to manage packaging procurement. In my experience, however, the majority of companies still rely on email and spreadsheets to manage much of the day-to-day work required to procure packaging materials.
To manage packaging procurement effectively and efficiently, an e-sourcing solution needs to provide three core capabilities:
- Product Description: Packaging materials often require detailed (and sometimes highly technical) specifications to adequately describe the finished “product.” Therefore, a robust e-sourcing solution for packaging will enable buyers to enter all the specifications relevant for a wide range of packaging materials (e.g., boxes, sleeves, bags).
- Competitive Bidding: Many packaging materials are essential for the daily operations of a business and, as a result, are often sourced using longer-term contracts with trusted suppliers. However, a variety of packaging materials are available from numerous qualified suppliers. Companies can benefit from obtaining competitive bids when establishing longer-term supplier relationships. A capable e-sourcing solution for packaging will allow buyers to easily seek bids from prospective suppliers and manage the competitive bidding process.
- Order/Project Management: A robust e-sourcing solution for packaging will permit procurement professionals to manage the individual orders placed under long-term supply contracts. It will also provide tools for managing communications and other aspects of the buyer/supplier relationship.