ogies into packaging—create tailwinds.
Authors: Paolo Baldesi, David Feber, Nick Santhanam, Paolo Spranzi, Abir Tewari, and Shekhar Varanasi
Source: Mckinsey & Company
In the early 19th century, the French government offered a prize of 12,000 francs to the inventor who could create the best container for preserving food for Napoleon’s army and navy. That contest gave rise to the tin can. The number of packaging innovations that have surfaced since that time are too numerous to count. Just a few notable examples are gable-topped milk cartons, bubble wrap, and single-serve pouches.
Packaging originally served as just a container, but its role has evolved to include more sophisticated functions, such as advertising. Some packaging is so iconic and easily recognizable that consumers automatically look for it when shopping. Recently companies have begun investigating smart packaging equipped with sensors. The packaging industry has evolved as well. Packaging solutions (PS) is now a $900 billion market and an important segment within the broader industrial sector. Within PS, players are classified as either packaging converters, which produce or provide materials for packaging, or equipment companies. (For an insider view of the industry and its evolution, see our video with WestRock CEO Steve Voorhees).
After years of failing to create value, the PS sector has generated economic profit every year since 2013. It has also closed the performance gap with the industrial sector as a whole, which has long had a better track record. Three factors are behind this improvement. First, PS companies improved operational performance, with margins of earnings before interest, taxes, depreciation, and amortization expanding to 10.3 percent for the period from 2013 to 2017, up from 8.3 percent for the period from 2002 to 2007. Second, they used capital more efficiently. Capital turns improved to 1.9 times for the period from 2013 to 2017, compared with 1.7 times for the period from 2002 through 2007. Finally, PS companies had steady revenue growth. They achieved a 2.2 percent compound annual growth rate from 2013 to 2017, compared with 1.4 percent for the industrial sector as a whole.
When we reviewed performance within the PS sector, we found that a few companies strongly outperformed others in each packaging subsegment. After investigating the reasons for their outstanding performance, we found that performance is strongly predicted by a company’s Quality of Revenue (QoR)—a measure that focuses on three strategic elements that often determine the extent of a company’s success: products, strategy and operations, and business models.
We believe that the PS industry is poised for additional growth as several trends—including continued growth in e-commerce and emerging markets, shifting consumer preferences, increased interest in sustainable materials, and the integration of advanced technol