Retail Observer

RETAILOBSERVER.COM NOVEMBER 2015 60 C onsumers are changing the way they dispose of their trash. From large material boxes carrying appliances to take-home packaging after a restaurant meal, U.S. and global consumers have made great strides toward sustainability in nearly every realm of life and commerce. Sustainable packaging is in—and taking hold of the market in many ways that are transforming several sectors of the economy from energy and agriculture to transportation and housing. Sustainable packaging is now a $27 billion market, growing at nearly 4% annually across three distinct segments: reusables, recyclables and degradables. Recycled paper and plastic are the vast majority of the sustainable market and will continue to be so for some time, benefitting from consumer familiarity and a well-developed recycling infrastructure. But the landscape is changing. Degradable and compostable containers molded from plastic, wood and non-wood-fibers are making critical inroads, with quick service restaurants (QSRs) leading the way. However, consumer packaged goods (CPGs) may have the greatest long-term growth potential with these types of packaging. The evolving regulatory landscape is only one reason for this increasing trend. These days, sustainability is cool, a fact that brand owners, converters, packagers, retailers and investors can't afford to ignore. Among the key drivers of demand for sustainable and degradable packaging are: • The regulatory landscape in more than 100 cities around the U.S. has required that polystyrene be banned from use in takeout boxes, cups and trays in the food service industry. The EU has seen similar legislative action with its Packaging Waste Directive which requires corporations to collect or fund the recovery of packaging waste for their products. Among the beneficiaries of these latest regulatory moves: degradable molded fiber (DMF), one of the best sustainable choices for restaurants seeking to match the insulation properties of polystyrene. Consumer product companies face less legislative pressure today regarding packaging in the U.S. but are adopting DMF to package products ranging from computers and other delicate electronics to wine and automotive components. • Channel pressures in sectors such as aviation and travel, restaurants, colleges and big-box retailers have started promoting sustainable mandates for accountability. • The all-natural revolution—green products as they are referred to—go hand in hand with sustainable packaging and the market for these products is growing. WHO WINS IN SUSTAINABLE PACKAGING? Recycling remains at the top of the heap as consumers are more familiar with recyclable than degradable packaging. American consumers understand how recycling benefits the environment and know what to do with old newspapers, magazines, bottles and cans. In addition, there is a stronger market for reuse of recyclables versus degradable materials. For instance, multinational CPGs like Coca-Cola provide recycling containers at major sporting events to help secure access to a steady stream of recycled content that they can reuse for bottling. In contrast, degradable materials currently face a lack of demand for the reuse of their content that results in a lack of infrastructure for their collection. While recyclables still own the market in the near terms, degradable packaging will likely benefit from a quiet revolution in sustainable packaging. First, consumers demand uniqueness and have shown a willingness to pay for a choice they can feel good about and that is different, especially if they've already chosen to buy a green product. Second, the degradables market is characterized by innovators who are pushing to be first to market with unique and original packaging solutions (and consumer products companies want their product to stand out on the shelf). Third, diversified converters who innovate in anticipation of evolving demand—from paperboard and plastic pellets to wood degradable molded fiber for example, may find themselves positioned better with their customers. Fast-changing market conditions favor those with broad product lines that include degradable resins as well as wood and non-wood fibers. THE NEXT GREEN FRONTIER Retailers can benefit from the fact that, for many consumers, sustainability is no longer simply a lifestyle option; it's an important choice they feel they can make to protect the environment and it's cool. Consumer product companies, converters and retailers around the world face growing regulatory and channel pressures regarding packaging—and those that recognize the far-reaching implications of this shift toward recycling and degradable packaging will reap outsized rewards if they innovate accordingly. Thilo Henkes Guest Columnist Thilo Henkes is a managing director and partner in L.E.K. Consulting's Boston office. He specializes in transaction support and the development of post-acquisition, value-enhancing strategies for portfolio companies as well as growth options in new markets and new products. GREEN IS GOOD: THE REVOLUTION IN SUSTAINABLE PACKAGING RO

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