THE CASCADES OF MARGIN PRESSURE
While FMCG companies were already facing strong margin pressure before COVID-19, this pressure will continue to increase. This pressure is all too easily passed on to the converters. This strong pressure from the producers (FMCG) has already influenced packaging design in several ways. Be it through the substitution of different packaging materials, ” lightweight “, redesigned formats to increase filling efficiency and volume density, smaller package sizes and shelf-ready packaging.
Multiple factors come together to trigger the increasing pressure on producers. One is the increasing complexity of products, rising material costs and the general labour costs, due to the need for qualified employees. This, in any case, will first of all increase the cost base.
Cost pressure from the other direction can also be expected. This is the accelerated trend towards digitalization and automation in the FCMG sector, which is naturally associated with future investments, which will be reflected in CapEx.
While raw material prices in the Food & Beverage sector, for example, have remained relatively stable or increased only moderately if you look at the last 10 years, this may change with increasing climate change if crop failures are expected. That would then be another very specific factor that needs to be weighed up on a case-by-case basis. For example, the increased beer price in Germany cannot be attributed to barley. This is because it accounts for only 4% of the total beer production price.
However, even the sharp rise in the price of malting barley has only a limited impact on the cost of producing beer. Here, other factors such as energy prices, labour costs and water prices have a much greater impact.
Conclusion I – Not the old Song & Dance
At the moment, FMCG producers cannot justify the cost pressure on converters by the increases in raw material costs for the primary product. In fact, it is a matter of systemic costs that affect the entire economy. And this is exactly what requires a different approach to cooperation along the supply chain.
On the other hand, packaging manufacturers, as mentioned, are facing very similar problems. It’s not always raw material prices that drive costs. Here, packaging companies and especially printers face the same systemic challenges as producers. Analogue to the FMCG industry, some print-specific and system-relevant costs have risen disproportionately. This can best be seen from the producer price index for printing inks. In the last five years alone, the producer price for printing inks has risen by 15.7 index points. In addition, paper prices have also risen, although recently pulp prices have been on the decline. But the substrate industry is also facing similar systemic challenges as FMCG producers and converters and it’s not just the pulp price that’s the critical factor. Because the whole, as we know, is always more than the sum of its parts. In contrast to the past, the new cost-driving factors are not predominantly raw material costs, but also systemic transformation costs that concern the entire supply chain. The macroeconomic and socio-economic environment has changed significantly. For all of us.
Smart approaches are needed here. And it is well known that intelligence as such defines the ability to make the right decisions in unforeseen situations.
Conclusion II- Be Smart & Think Twice
The cost pressure triggered by retail and omnichannel will increase. But passing this cost pressure on to the printer and the printer to the substrate industry is counterproductive. Instead, each individual supply chain part must first be optimized internally. The FMCG producers, especially the big brands, should first try to solve the shrinking margins by doing the following homework
- Excellence in mass-market product innovation and brand building, including premiumization
- Advantaged consumer access via mass-trade relationships
- Developing market-category creation alongside rising incomes
- Operating model that drives consistent execution and achieves cost reduction
The mergers and acquisitions of the last 20-30 years in the FMCG-Sector, especially Food & Beverage alone have developed their own style blossom. Different filling and labelling systems for one and the same product. Different substrates for one and the same product – often a different substrate at each location. Different printing processes. These facts for itself offer considerable cost potential.
But the printing & packging industry also has hidden, or let’s call it unused potential to work more efficiently:
- Process and workflow optimization
- Digitisation and IoT
- Improvement of the equipment base
In general, the shifts that will be caused by cost pressure, which will come in a combined effect, will have to be managed. This means that overall systemic costs, which can affect all market participants equally, can only be controlled by close cooperation along the supply chain. But this requires innovation and investment. But above all to have enough profits to finance all this. Along the entire supply chain.
In view of the challenges such as Changing Consumer Preferences and Sustainability Requirements, everyone is well advised not to let cost pressure come at the expense of quality, sustainability and R&D. Smart collaboration is in demand.
Read next Thursday: 5 MAJOR TRENDS WILL CHANGE THE GAME IN THE PACKAGING INDUSTRY:
Part 3 – SHIFT IN CONSUMER PREFERENCES