How much is the label and packaging industry affected by COVID-19? What effects will it have?
There is no doubt that the printing and packaging industry is directly dependent on the end markets. In times like these, however, the market for packaged goods almost seems like a safe haven.
Some industries and categories have a higher COVID 19 risk and the others do not. Looking at the SP500 index, the top 500 companies in the US, their stock index fell by an average of 28% between February 21 and March 12, 2020. Technology companies, banks, travel and transportation companies, especially airlines, were hit hardest. Here, share prices fell by up to 50%.
Although the decline in share prices was also steep for some FMCG companies, their volatility was limited. One example is the share price of a multinational player such as P&G (Procter & Gamble). The 6.7% decline was still better than the overall average of 28%.
Many FMCGs are exempt from downturns and crises, or the trend is milder. It is fair to say that this is a safe haven. However, this cannot be generalised. There is a wide range within the categories and it is important to look at the categories and the markets in detail. In particular, a look indirectly after the hoard purchases of the lockdown is appropriate.
For example, while the US beer market for the major established brands was down 2% in 2019, the US craft beer market grew by 4%. On this solid basis, craft brewers entered 2020, and with the onset of the pandemic, small and independent breweries face very significant challenges.
Much of the sales channel has been eroded by the closure of bars, restaurants and pubs in favor of off-premises beer sales growth. We see a shift in the distribution channel structures here. This trend is coupled with uncertainty in the income situation.
In 2018, sales of alcoholic beverages in the US amounted to $128 billion in value, representing 47% of total sales. 53% sold on-premise with a value share of $147 trillion.
In contrast to the on-premise trend, which is declining or stagnating, the off-premise (supermarkets, liquor stores and online) sales of packaged products are increasing. From a producer’s point of view, the volume of sales is almost the same, but the distribution channels are changing.
Demand for cheap and medium-priced alcoholic beverages could increase, while demand for super-premium and ultra-premium beverages could decrease. As mentioned, the distribution pattern is changing dramatically.
According to the market research company Nielsen, sales of alcoholic beverages in the USA increased by 55% in the week to March 21.
Spirits such as tequila, gin and pre-mixed cocktails were the top sellers, with sales up 75% over the same period last year. Wine sales rose 66%, while beer sales increased 42%. And online sales far outstripped in-store sales. Whereby the increase in online business in the field of alcoholic beverages increased by no less than 243%.
What goes on in some states of the USA doesn’t have to be the same for other countries. In India, for example, the leading breweries Carlsberg, United Breweries, Anheuser-Busch InBev and Bira 91 have sent a joint letter to the government and state governments urging them to allow beer to be sold online if the lockdown is delayed any longer. The Covid-19 lockdown could mean a 25% drop. Therefore, they plead for the opening of the online market. With 2,652 billion litres, India is one of the largest beer markets in the world. In Thailand, sales of alcoholic beverages are coming to a standstill after the government stopped sales for the time being until April 20.
While the long-term impact of COVID-19 on beverage alcohol is yet to be fully known, one segment of the industry that historically tends to be resistant to economic uncertainty is “status spirits,” brands that retail for US$100 or more. In a newly published report examining the status spirits landscape, IWSR Drinks Market Analysis, the leading authority on the global beverage alcohol market, shows that the value of the status spirits market is $8.3bn (excluding baijiu), and increasing at a value compound annual growth rate of 7% (2014-2018), significantly ahead of the total global spirits market at 2% value CAGR.
“Though we conducted our study prior to the current COVID-19 situation, when we look at similar past events, such as SARS and the 2008 financial crisis, luxury goods and status spirits in particular have always recovered to previous levels,” says Mark Meek, CEO at IWSR Drinks Market Analysis. For example, IWSR data shows that between 2008 and 2012, global prestige-plus spirits (generally $100+) grew 82% in volume, and almost 230% in value, which reinforces the resilience of high-end spirits after economic challenges. Adds Meek, “also, our research shows, the majority of status spirits are most often sold in fine wine and spirits retail stores and via ecommerce – more so than in bars and restaurants – which bodes well for these products in this current climate.”
The situation on the German market is somewhat different
The corona pandemic will have a massive impact on the 1,500 breweries in Germany. While exports to important foreign markets collapsed in February, the catering business is now also disappearing. The cancellation of thousands of events and the European Soccer Championship will also hit the industry hard. Due to the declining domestic consumption of the past decades, many companies have increasingly focused on exporting their products. This global orientation is now getting into trouble. The most important foreign markets for German beer are, of all countries, Italy and China, which have been hardest hit by the Corona pandemic. Planning for Italy in particular has had to be drastically revised downwards, and supply chains and business relations have largely come to a standstill.
In addition to 34,800 food stores, almost 10,000 specialist beverage stores supply the population nationwide (Nielsen, 2019). About one third of total beverage sales are accounted for by these cash-and-carry stores, which like supermarkets are not currently affected by closures.
Mineral water and other non-alcoholic beverages.
In the current situation, those manufacturers who focus on this area are particularly benefiting: “Our sales agents include for the most part the food retail trade, specialist beverage wholesalers and retailers. Short-time work is not an issue for us. Our employees are working as usual and we expect sales to remain stable,” explains Sibylle Trautmann, spokeswoman for the Hassia Group in Hesse, for example.
Spirits in Germany
Consumers in Germany have apparently bought significantly more alcoholic beverages in retail outlets because of the initial restrictions in the Corona crisis. From the end of February to the end of March, a good third more bottles of wine went over the counter than in the same period in 2019, according to Nuremberg-based market researcher GfK.
The increase for clear spirits such as gin or Korn is also 31.2% compared to the previous year. The news magazine “Der Spiegel” had previously reported on this. However, growth in the retail sector was offset by sales losses in the restaurant trade, explained GfK retail expert Robert Kecskes.
Mixed Alcohol Beverages
According to the GfK study, sales of mixed alcohol drinks even grew by 87.1 per cent, but these drinks only account for a small share of the total market. People only increased their beer stocks by 11.5 per cent. Beer and soft drinks are more likely to be consumed from labelled bottles at home than tapped in restaurants. For a time, it seems that people are stocking up more, buying less often – but in larger quantities – and prefer to be supplied rather than buy fresh products at the market. This could also have an impact on the volumes of individual packaging solutions such as cans, frozen food and transport packaging. Corona could even have a long-term effect on soap dispensers, refill bags for them and other selected hygiene products, if the consumer’s perception remains that once again washing their hands thoroughly cannot hurt.
The example of China shows how consumer behaviour patterns under the pandemic lead to shifts and changes. While analysts expected a decline in China’s dairy sector during the pandemic, it has been shown that with the onset of the pandemic there is an increased need for healthy food and an even greater trend reversal is becoming apparent.
- Increased consumption of medicine and health care, food, online services and milk / beverages, and significant decrease in consumption of sports / apparel, offline activities, beauty products and services
- With the rise of health concepts, dairy products usher in new opportunities for development Packaged drinks: Purchases of bottled water increase significantly, of fruit juices and vitamin drinks, increase slightly, and of other types, decline
- Alcoholic beverages are impacted greatly, facing a more severe market situation after the epidemic
- Because of the epidemic, most consumers have postponed their plans to purchase consumer electronics. A wave of purchases may appear after the epidemic.
Here too we have geographical differences. Whereas in the US, in February and March 2020, 7% more cosmetics were sold, we see a decline of up to 5% in Vietnam, for example.
It is also not surprising that in lockdown periods, online sales have also – and especially – increased in the cosmetics and beauty sector. In terms of value, online sales accounted for around 20% of total sales in the mid to upper segment. In this segment we have an increase of 47%. And for the division as a whole, 90% of sales are now generated online. The short to medium-term impact of the pandemic on this sector will be significant. In the short term, sales will be affected. However, if we look to the near to medium term, we will see that this is where the growth opportunities will be very great. “Healthy and clean” beauty, which is in trend at the moment anyway, will be potentiated and increase. Here, too, everything will return to normality – to a new normality, but with shifts in purchasing behaviour and product preference.
Developments are reflected by the substrate market
The fact that there are shifts in the market is also visible to the paper industry for label and packaging papers. There is talk of good to very good capacity utilization for some grades. These include primarily tissue and hygiene papers, but also packaging papers and certain specialty papers such as for labels, medical applications or cigarettes.
However, the whole also has a side effect. Due to the dwindling volume supply in the wake of the Corona crisis, recycled paper prices in Germany have risen sharply in recent weeks. Various market participants report that prices for bulk grades rose by €30 to €50 in April. In March, however, the situation on the German recycled paper market was still largely stable. In most cases, the prices of the lower grades remained constant for the first time in a long time, with only occasional further slight discounts. Towards the end of the month, demand from paper mills increased as the first signs of weaker volume supply became apparent. The prices on the spot market are said to have already risen by € 5 to 10.
In a nutshell
- Label and packaging printing in the FMCG sector will be best able to cope with and survive the shock wave of the COVID 19 pandemic. However, the industry as a whole will have to adjust to the fact that key parameters will change.
- The pandemic was a catalyst for online trading.
- Sales structures that are adapted today and undergo a shift will be largely retained in the future
- The benefits and the need for digitisation of printing operations and close supply chain cooperation have come to the fore more than ever before.
- The automation and modernization of processes will become even more important in the future in view of rising raw material prices and a weakening of purchasing power in some segments.
- Some major brands will come under pressure and try to counteract the cost pressure.
- Sensitive supply chains will be monitored even more closely and production in nation states will increase in the future.
- Sustainability will become a core issue
- With this in mind, it is appropriate for label and packaging printers to invest in intelligent and above all adaptive systems.