Why Are Packaging Costs Going Up?
Coping with inflationary pressures across your packaging supply chain
Emerging from an unprecedented economic (and social) situation caused by the Coronavirus pandemic, many are predicting a period of price inflation over the coming months.
But there are some areas that are already seeing pressures on raw materials, transport, and increased demand. One of these is packaging and, in particular, that manufactured from corrugated cardboard.
But why are packaging costs rising? And are there any ways you can either overcome or mitigate these increases?
Fortunately, there are a number of ways that you can deal with these price rises, although understanding just why this is happening can help considerably when coming up with a strategy that works for your business.
This guide aims to highlight the 9 key reasons packaging costs are rising – and how you can beat the increases.
Quick Reference / Contents
Inflationary pressures across all industries
Before we start, however, it is worth noting that it is not only the packaging industry facing the challenge of rising inflation.
In fact, many leading publications have recently reported that whilst companies across the manufacturing spectrum have generally seen a strong bounce-back following lifting of coronavirus restrictions, inflationary pressures are being seen across a range of sectors.
In fact, the UK inflation rate more than doubled in April, as a rise in energy and clothing costs drove prices higher.
The jump to 1.5% in April from 0.7% in March, means consumer prices are rising at their fastest rate since March 2020 at the outset of the pandemic.
So, although optimism is returning amongst manufacturers and businesses in general (partly due to the knowledge that many consumers and companies alike will have delayed significant spending until restrictions eased), many are reaching the point where unsustainable increases to their overheads are beginning to be passed on to their customers.
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 they can be overcome.
Fortunately, the answer – at least when considering corrugated packaging – is that there are a number of ways that cost increases can mitigated.
By making your packaging work harder, ensuring it is the optimum specification and by taking advantages of applicable added value services, it is possible for you to maintain or even reduce overall costs.
However, before doing so, it is important to understand the reasons the average cost of packaging is rising, and the specific ways these can potentially be countered.
The 9 reasons packaging costs are rising
So, what are the factors specific to your packaging that are seeing costs rise?
The list below covers a number of 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 in particular, are almost certainly having a knock-on effect from other areas. They will, as such, be contributing to the cost of your packaging.
Taking a holistic view, at least a few (and probably more) of the following nine factors are leading to your packaging costs increasing:
- Price of paper and materials
- Exceptional demand (and stock piling)
- Labour costs / shortages / minimum wage increase
- Cost of transit / logistics
- Number of manufacturing processes
- Inefficiencies / lack of investment
- Sub-contracting / reselling
- General overhead rises
- Inefficient use of packaging
But is there anything you can do about this? Continue reading for advice and tactics to ensure your packaging is as cost effective as possible.
01: Material Increases
Price of paper and materials increasing
Put simply, the cost of the raw materials used in the manufacture of corrugated cardboard (i.e. papers) are at all-time highs. There are a number of factors that have contributed to this, and which are covered in more detail in this article on cardboard shortages.
Firstly, with regional and national lockdowns, the requirement for social distancing (and its effects on productivity) as well as increased staff absence due to Coronavirus, there is simply less paper available, driving up costs.
Planned maintenance and increased exports of paper 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 either.
All of these factors have been reflected in the price of cardboard (across all types and grades of board), 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 switching to custom sized boxes to reduce the overall amount of material used.
There is also some good news on the horizon. With new paper manufacturing capacity coming on board imminently and COVID restrictions easing (if not completely lifting), many are predicting that corrugated prices could begin to fall or at least stabilise in the third quarter of 2021.
02: Supply & Demand
Increased demand for corrugated packaging driven by ecommerce
Another factor that has led to the increased cost of corrugated packaging is the surge in demand caused by the pandemic.
With consumers stuck at home, the switch to online shopping accelerated rapidly. The consequences of this were virtually all businesses selling online having an increased need for corrugated ecommerce packaging to ship orders.
Combined with the difficulties experienced by paper manufacturers, the simple economics of supply and demand led to unavoidable increases in both the raw materials and finished packaging itself.
This situation was also further exacerbated by many businesses stockpiling supplies.
With lead times from many manufacturers stretching out to months rather than days / weeks, many businesses (including ecommerce giants such as Amazon) have been purchasing excess packaging to ensure continued supply of orders.
And whilst there is little that can be done to alleviate this particular issue (most businesses would view increased volumes of online orders as a good problem to have) taking advantage of a VMI (vendor managed inventory) agreement could help mitigate similar situations over the longer term.
Labour costs / shortages / minimum wage increase
Perhaps one of the more overlooked reasons for the increases being seen in packaging prices, is that of labour costs.
April 2021 saw a further increase in the national living wage and national minimum wage, adding to businesses costs throughout the packaging supply chain.
And, despite the doom and gloom regarding the UK job market (caused by millions being on furlough, and the loss of well know businesses such as Debenhams, Top Shop and many other high street chains), UK job vacancies are actually at their highest for more than a year.
With fewer EU nationals in the UK looking for work – with many having left due to the pandemic and Brexit – it actually means that many manufacturers are facing a competition for suitably trained / skilled staff.
This, alongside inflationary pressures already mentioned, is further pushing up costs which are eventually being passed on to customers.
04: Transport Costs
Cost of transit / logistics
Transport is another area that is contributing to rising costs.
Fuel costs have seen 6 consecutive months of increases and are now at their highest levels since January 2020 (just before prices started to fall due to the pandemic).
The average cost of oil has again risen, with around $5 dollars added to the price of a barrel during April.
Add in the increased workload for third party delivery firms / couriers (caused by the increase in ecommerce fulfilment) and it means that transport costs are continuing to rise significantly.
And although this isn’t directly tied to your packaging cost, it is almost certainly having an impact.
There are ways you can alleviate this though.
Firstly, if you have spare warehouse capacity, it may be possible to order large volumes (minimising delivery charges) and utilise the extra space for storing your packaging inventory.
Alternatively, if you explore using a different board grade, you may also be able to realise transit cost savings through lighter weights and less volume (both in terms of the packaging being shipped to you, and you sending it on to customers).
Similarly to this, custom size packaging (being the optimum size and not too big) can reduce your courier costs, and allows you to send more items per pallet. This can, in turn, reduce your own shipping costs.
Inefficient manufacturing and conversion costs
Whilst not linked directly to inflation, the number of manufacturing processes and the way in which your packaging manufacturer is operating has a direct impact on the cost of your packaging.
This can be even more acute if the general overheads and costs for your packaging supplier are rising.
What many packaging suppliers are seeing is that due to high demand, and erratic supply of material, they are not running their plant in the most efficient way. Many are also juggling customer requirements, influencing how jobs are prioritised rather than doing things in the most efficient manner.
Besides this, if the cost of running a machine (in terms of labour and power) is increasing, and your packaging makes 2 or 3 passes (e.g. for secondary scoring, folding, stitching or printing), then any small increases may be multiplied two or three-fold.
As with dealing with increased labour costs, the thing to ask is if your packaging is using the most efficient manufacturing processes, and if not, what can be done to fix (or at least improve) this. The cost saving should follow.
06: Lack of Investment
Ageing machinery / equipment
Similar to packaging manufacturers running inefficiently adding to the cost of your packaging, the equipment being used to manufacture it can also be a factor.
Both the pandemic and a general lack of economic confidence (partly caused by Brexit) has 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 your packaging may not be being manufactured efficiently.
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 / reselling
As with many businesses during the pandemic (and especially those supplying products which are in high demand) 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, then they will be experiencing all of the same issues that you may be.
This where price rises (or at least a proportion of them) are very quickly passed on to customers.
However, if you are in this situation, you have one of the easiest solutions available to you.
By working directly with a packaging manufacturer, you can effectively cut out the “middle-man” and can often achieve much more favourable pricing.
It is worth bearing in mind that whether this is possible or not 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.
General overhead rises
On the back of all of the above, general overheads for businesses (and indeed individuals) are rising.
Whilst there is not a lot that can be done about this (although the Bank of England are already discussing using interest rates and monetary policy in an attempt to keep inflation under control), the mantras repeated throughout this guide should be applied wherever possible.
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?
By answering all of these questions, it 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.
09: The Wrong Packaging
Cost increases being exacerbated by poor packaging choices
Perhaps the only completely avoidable issues that many businesses face, is using packaging that is over specified, 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, it is often overlooked that your business may be using excessive packaging – and in particular what is often classed as “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 that you use to seal them.
If you are using specialist bags or papers, such as VCI corrosion inhibitors or anti-static protection, then could these properties be incorporated into the outer container (again eliminating the need for additional items and the process for adding these when packing)?
You could even consider changing the sizes of your boxes. A tailored box, which would usually be 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 reduce 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 they are handled.
Why packaging costs are rising...
Once you know the reasons behind why your packaging costs are rising, it is much easier to know how to address them.
By ensuring your packaging is as lean and efficient as possible, you are likely to see some significant gains in cost performance – helping to balance out the unavoidable factors that are currently driving prices up.
Just remember to factor in all potential considerations, and don’t be afraid to discuss your concerns with your packaging supplier.