A major shift took place among packaging companies that attended Pack Expo 2019 versus those that attended in 2018: Sustainability moved “head and shoulders” above all other topics. That analysis comes from CIBC World Markets, a Toronto-based investment banking subsidiary of the Canadian Imperial Bank of Commerce. Competition, labor availability, capital, M&A, resin pricing and even the economic outlook were all subordinate to sustainability, reported CIBC.

“Sustainability will also play a significant role in the consolidation of the highly fragmented packaging industry: Smaller companies without sufficient scale and financial resources to invest in product development and marketing may look to join larger packaging outfits or risk being left behind,” said the report.

Takeaways from a packaging M&A conference in Chicago, hosted by AWA Alexander Watson Associates, also cited sustainability as becoming a "table-stakes" issue, according to CIBC. “Sustainability is now the most important topic throughout the packaging value chain, reaching from the materials supplier to the converter to brand-owner customer through to the end-use customer,” said CIBC. It’s also a hot topic in every packaging company boardroom.

While single-use plastic (SUP) packaging is taking hits from all quarters, it is not under immediate threat of being completely obliterated. “We won’t dispute that single-use plastics do not constitute a growth market. However, intelligent plastic packaging will continue to have its place,” said CIBC. “Compared to other packaging materials, plastic offers superior product protection/safety, [a better] life-cycle carbon footprint (including transportability because of smaller size and lighter weight) and consumer convenience.”

That said, it doesn’t mean that SUPs won’t have sustainability challenges, including technical issues related to product safety and health considerations; substitute and competing technologies; the higher cost associated with sustainable packaging initiatives; and changing consumer behaviors, including a shift in mindset to one that is more driven by data and economic viability, said the report.

Sustainability will also impact M&A activity. “Simply put, we see the required investment in R&D and manufacturing equipment as a factor that will incentivize smaller companies to sell,” said CIBC. “From the buyer’s perspective, a target’s sustainability positioning will materially influence valuation.”

In the short term, the impact on valuations may not be great as the economy continues to chug along and capital, both private and public, remains available, explained CIBC. “However, a deteriorating macro picture should eventually cause packaging company valuations to recede from the current 8 to 11X EV/EBITDA multiple range,” noted CIBC. It suspects that the balance between buyers (based on capital availability, motivation to deploy and risk appetite) vs. sellers (competitive positioning, company size and ability to finance sustainability measures) will be skewed in the buyer's favor. The combined macro/sustainability outlook suggests packaging companies will need greater scale and financial resources in order to compete.”

Some sustainability perspectives were offered on CIBC’s names under coverage.

CCL Industries’ efforts as a label converter “are largely process-focused” that will reduce its carbon footprint in product transportation, reducing production waste and increasing the use of recyclable materials. Because CCL, like most label converters, must meet the demands of customers in terms of technical requirements and materials specs, the function of the label within the packaging structure is “primarily decorative, informative and regulatory.” Additionally, CCL “is limited in its ability to determine or influence the sustainability level of its products.”