Coping with inflationary pressures
What is causing packaging price increases in 2022
Packaging price increases have become commonplace over the previous 18 months. Increased demand for boxes caused by the growth in eCommerce deliveries, alongside raw material shortages and energy prices, has driven up most packaging prices. The Plastic Packaging Tax is also causing some packaging costs to rise.
A particularly turbulent two years for the wider UK economy (and businesses worldwide) have provided the backdrop to these cost increases. And now, with annual inflation nearing 10%, any packaging price rises are perhaps unsurprising.
But why, specifically, are packaging costs going up? And are there any ways you can either overcome or mitigate these increases?
Fortunately, there are several approaches that your business can employ. However, understanding exactly why this is happening can help considerably when developing a strategy that works for your business.
This guide highlights the 12 key reasons packaging costs are rising – and how you can beat the increases.
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Inflationary pressures across all industries
Before starting, however, it is worth touching on the fact that it is not only the packaging industry facing the challenge of rising prices.
With headline inflation now at 9.9% – with prices increasing at the fastest rate for more than 40 years – the costs of everything from fuel, energy, raw materials, labour, and consumer items are rising significantly.
Are price increases worth fighting?
The question many are now asking is whether the price rises are inevitable (and unavoidable) or whether there is any way businesses can overcome them.
Fortunately, the answer – at least when considering corrugated packaging – is several ways you can mitigate cost increases.
You can maintain or even reduce overall costs by making your packaging work harder, ensuring it is the optimum specification, and taking advantage of applicable added value services.
However, before doing so, it is essential to understand why the average cost of packaging is rising and the specific ways you can potentially counter this.
The 12 reasons packaging costs are rising
So, what are the factors specific to your packaging that are seeing costs rise?
This list covers several points that relate more widely to the overall state of the UK economy, plus some that are more specific to just the packaging market.
There are also some points that, whilst not directly affecting inflation in this sector, are almost certainly having a knock-on effect from other areas. As such, they are likely contributing to the cost of your packaging.
Taking a holistic view, at least a few (and probably more) of the following 12 factors are leading to your packaging costs increasing:
- Consumer behaviour and demand
- Price of paper and materials
- Energy prices
- Strength of Sterling
- Interest rates (financing)
- Cost of transit and logistics
- Labour costs
- Plastic packaging tax
- Number of manufacturing processes
- Inefficiencies and lack of investment
- Sub-contracting and reselling
- Inefficient use of packaging
But is there anything you can do about these factors? Continue reading for advice and tactics to ensure your packaging is as cost-effective as possible.
Supply and demand
Increased demand for corrugated packaging driven by eCommerce
The first point to address is supply and demand – and how changing consumer behaviour has significantly increased the use of corrugated packaging.
Historically, consumers would visit retail stores to do a large proportion of their shopping. For the businesses operating these “bricks and mortar” locations, it would involve shipping multiple products in large transit packaging before displaying the individual products for shoppers to purchase.
And whilst eCommerce was growing fast, the COVID-19 pandemic supercharged the switch to online shopping (some sources indicate five years of growth in just 12 months).
This shift in consumer behaviour meant individuals now have many goods delivered to their homes instead of purchasing in-store. This shift means businesses use more eCommerce packaging to ship individual items rather than larger transit packaging to ship multiple items. Effectively, this drastically increases the requirement for packaging (it takes considerably more boxes/material to ship individual items than bulk shipping to a store).
The popularity of food delivery services such as Abel & Cole and Hello Fresh growing in popularity exacerbated levels of demand further. Subscriptions to everything from wine to knitting supplies also increased eCommerce packaging use.
With much of this shopping behaviour now the norm, the overall demand for corrugated packaging has increased.
And as simple economics tells us, when demand goes up (and supply does not follow suit), prices are soon to follow.
The price of paper and materials increasing
Besides the increase in demand for corrugated cardboard, the cost of the raw materials used to manufacture the material (i.e. papers) is at all-time highs. Many factors have contributed to this, which this article on cardboard shortages covers in more detail.
Planned maintenance and increased paper exports at the beginning of the pandemic have also led to imbalances in the paper markets, which are only just beginning to be corrected.
Uncertainty over Brexit and currency fluctuations have done little to help, as energy price rises caused partly by the Ukraine conflict. This second point has also limited the supply of certain raw materials, alongside businesses looking to source materials and products from companies that do not have financial links to Russia or Belarus.
These factors mean that the price of paper – the material which makes up cardboard – has been rising, with the knock-on effect being more expensive packaging.
All these factors directly impact cardboard prices – across all board grades – which in turn filters into the cost of your packaging.
But is there anything you can do?
The answer depends on the type and styles of packaging you use.
It may be possible to analyse the material your packaging uses and change this to a lighter, cheaper board grade, thus mitigating any cost increases due to material.
Similarly, your pack designs may be able to make more efficient use of material (e.g. switching to a specific FEFCO style) or leverage custom-sized boxes to reduce the overall amount of material used.
Increased costs throughout the supply chain
Both consumers and businesses alike are acutely aware of the current rises in the cost of energy.
Even with governments across Europe stepping in to cap energy increases which are a direct result of the situation in Ukraine, the cost of gas and electricity is around double what it was 12 months ago.
The impact of this is felt almost everywhere.
The cost of manufacturing the raw materials (i.e. paper) has increased significantly, as has the cost of converting the material into boxes and cartons. Even the transit and storage of finished goods have gone up considerably.
All of this filters through to higher prices for your packaging.
As with the general cost of material, the only real strategy to mitigate these costs is to consider the type and amount of packaging you are using. Switching to a lighter weight material may help, as can rationalising your packaging inventory so that you can buy higher volumes of fewer lines (thus gaining economies of scale).
How the strength of the Pound can influence your packaging costs
Whilst it is likely that your corrugated packaging is UK produced, the material used in its manufacture is likely from further afield (particularly in Europe and the far East).
As such, a weakness in the Pound can lead to higher costs of imports for this material, driving prices up. The Pound’s poor performance also inflates energy and transport costs (crude oil trading in dollars).
You may also find that standard products – items such as foams, tapes, and specialist inserts such as Korrvu – are also manufactured and priced in foreign currencies. Peli (cases) and Sealed Air products are just two examples, manufactured in the US and priced in dollars at the point of sale.
Whilst currency fluctuations are difficult to mitigate, using UK-manufactured products may help alleviate some of the associated costs. Service Level Agreements (SLAs) and contracts with your packaging supplier may also insulate you from some of the worst price increases caused by market forces.
How finance agreements and servicing debts can affect businesses
One other area in which fiscal policy may affect packaging prices is interest rates.
Many packaging manufacturers take on debt to invest in new equipment, including financing agreements. If these are not fixed term and are on variable rates, then the cost of servicing what can be pretty significant investments rises when interest rates increase.
And, with inflation still considerably above the Bank of England’s target of 2% (and government spending plans impacting the value of sterling, as highlighted earlier), interest rates will only increase for the foreseeable future.
As such, some packaging businesses may be exposed to the increases in interest rates, with the potential for packaging costs to increase to help offset the additional costs.
Make sure you are working with a packaging business that has invested wisely and is not exposed to such changes.
Cost of transit and logistics
Transport is another area that is contributing to rising costs.
Fuel costs, whilst having fallen back from all-time highs seen at the beginning of the Ukraine conflict, remain stubbornly high. For the UK in particular, the weak Pound is also contributing to the high prices (with crude oil sold in US dollars).
Besides this, a shortage of shipping containers has seen the costs of international freight skyrocket, leading to increased prices of imported packaging products (particularly sundries such as tapes, inserts etc.).
Add in the increased workload for third-party delivery firms and couriers (caused by the increase in eCommerce fulfilment), and transport costs continue to rise significantly.
So although your packaging costs do not correlate directly to this, it is almost certainly having an impact.
The cost of transport increasing has a particular impact on packaging due to its bulky nature.
There are ways you can alleviate this, though.
Firstly, if you have spare warehouse capacity, it may be possible to order larger volumes (minimising delivery charges) and utilise the extra space for storing your packaging inventory.
Alternatively, suppose you explore using a different board grade. In that case, you may also be able to realise transit cost savings through lighter weights and less volume in transit.
Similarly, custom-size packaging (being the optimum size and not too big) can reduce your courier costs, allowing you to send more items per pallet. Custom packaging can therefore reduce your business costs.
Labour costs, shortages and minimum wage increase
Labour costs are one of the more overlooked reasons for the increased packaging prices.
2022 saw a further increase in the national living and minimum wage, adding to business costs throughout the packaging supply chain.
Besides this, the UK unemployment rate has fallen to 3.6% (down from 4.6% during the same period in 2021). This level of employment means employers have to compete to fill positions, driving up the remuneration required to secure good quality candidates. Employees already in various roles have also pushed for pay increases to cope with the cost of living crisis.
Add in fewer EU nationals in the UK looking for work – with many leaving due to the pandemic and Brexit – it means that many manufacturers are facing a perfect storm in terms of recruitment and retention.
These difficulties, alongside already mentioned inflationary pressures, further increase costs (eventually passed on to customers).
A labour shortage and the rise in the minimum wage have affected packaging prices.
Plastic packaging tax
Additional surcharge on specific products
Whilst the focus of this article has largely been on corrugated cardboard and paper-based packaging, increases are happening for complementary products too.
For example, foam end caps and inserts have increased in cost, as have tapes, void fill, polystyrene, films and other plastic packaging used alongside or instead of cardboard packs.
Whilst these products have not been immune to inflationary pressures, a secondary factor also affects them – the Plastic Packaging tax.
From April 2022, any plastic packaging containing less than 30% recycled material is subject to a £200 per tonne tax.
This tax has meant virgin polymers are more expensive, whilst demand for recycled materials has increased (pushing up prices). Many packaging sellers pass the costs of the tax directly to their customers.
The bottom line is that, ultimately, the price of most plastic packaging (and sundry items) has increased too.
Inefficient manufacturing and conversion costs
Whilst not linked directly to inflation, the number of manufacturing processes and how your packaging manufacturer is operating directly impact the cost of your packaging.
This influence can be even more acute if your packaging supplier’s general overheads and costs rise.
Due to high demand, many packaging suppliers often do not run their plants efficiently. Many are also juggling customer requirements, influencing how jobs are prioritised rather than doing things in the most efficient manner.
Inefficient machinery and conversion processes can add a surprising cost to your packaging.
Besides this, if the cost of running a machine (in terms of labour and power) is increasing, and your packaging makes two or three passes (e.g. for secondary scoring, folding, stitching or printing), then any small increases may be multiplied two or three-fold.
As with increased labour costs, the thing to ask is if your packaging uses the most efficient manufacturing processes, and if not, what can help to fix (or at least improve) this. The cost saving should follow.
Lack of investment
Ageing machinery and equipment
Although this article has already highlighted interest rates and financing costs for new equipment as a potential for increased costs, the other extreme (i.e. running out of date or poorly maintained equipment) can have an equally significant impact.
Both the pandemic and a general lack of economic confidence (partly caused by Brexit) have meant that many packaging businesses have put off – or been unable – to upgrade ageing and inefficient machinery.
The knock-on effect of this lack of investment is that the manufacture of your packaging is not efficient.
What can you do?
Again, check to see if there is any way the manufacturing processes can be simplified for your boxes. If they cannot, and the costs of inefficient production are increasingly being passed to you, it may be time to look at new suppliers.
Sub-contracting and reselling
Due to the change in consumer shopping habits, as mentioned previously (and pent-up demand following the easing of COVID restrictions), many packaging businesses have seen significant increases in enquiries and order volumes.
Of course, if you are using what is known as a packaging “merchant” – effectively a company reselling products manufactured by a third party – they are experiencing all the same issues you may be.
This scenario sees price rises (or at least a proportion) being passed on quickly to customers.
However, you have one of the most straightforward solutions in this situation.
Working directly with a packaging manufacturer can effectively cut out the “middle-man” and often achieve much more favourable pricing.
It is worth bearing in mind that whether this is possible depends on the type of packaging you use (stock or custom), the volumes you use, and potentially being able to absorb the upfront tooling cost when switching.
However, from a long-term perspective, this can make serious inroads into reducing the average cost of your packaging.
If you purchase through a re-seller rather than a manufacturer, they may pass on general increases whilst maintaining their margins.
The wrong packaging
Cost increases compounded by poor packaging choices
Perhaps the only completely avoidable issues that many businesses face are using packaging which is over-specified, is not suited to specific products or markets, or is simply inefficient.
So it is worth considering that if you can’t reduce the cost of your packaging, one alternative is to use less of it.
Whilst this sounds obvious, your business may be overlooking the fact it is using excessive packaging – particularly “secondary” packaging.
An example of this could be as simple as switching from standard taped boxes to cartons with self-locking bases. These not only assemble more quickly but also halve the amount (and therefore the cost) of the tape you use to seal them.
Suppose you use specialist bags or papers, such as VCI corrosion inhibitors or anti-static protection. Could these properties be incorporated into the outer container (again eliminating the need for additional items and adding these when packing)?
You could even consider changing the sizes of your boxes. A tailored box, usually smaller than the nearest stock option, would reduce the amount of void fill required and the costs of purchasing, storing and adding it. As a side note, this would also minimise volumetric shipping costs and allow you to get more items per pallet – another potential cost saving.
The bottom line is to consider if your products are over-packed, whether you can eliminate or combine certain elements, and how you handle them.
Why are packaging costs rising?
Are you using too much packaging? Is it the correct size? Does it use the optimum material (offering a balance between cost and protection)? Is it easy and efficient to manufacture? Is it easy and efficient to use? Is it helping your transit costs?
Answering all of these questions ensures your packaging is as efficient as possible. And if you haven’t addressed all of these, the cost savings you may be able to achieve could come as quite a surprise.
Equally, once you know why your packaging costs are rising, it is much easier to understand how to address them.
By ensuring your packaging is as lean and efficient as possible, you are likely to see significant gains in cost performance – helping to balance out the unavoidable factors currently driving prices up.
Remember to factor in all potential considerations, and don’t be afraid to discuss your concerns with your packaging supplier.