Market mega trends
Food packaging as a sub sector is complex as it encompasses many different segments, from rigid to flexible, metals to plastic, and many different end-use markets, including mass retail, HR&C and food delivery. It is also influenced heavily by changing consumer patterns and trends which manifest themselves in several key mega trends for the market. Covid-19 has, as for most industries, disrupted and changed the course of these to varying extents . The main impact that Covid-19 has exerted is an emphasis on the role that packaging plays in hygiene and how it can be leveraged during this time.
Sustainability / hygiene
Despite an initial set back in importance during this pandemic, in which consumers were reticent to trust reusable products , sustainability still remains top of mind for many consumers. In particular, they are keen to understand and be educated on how to live more sustainably. The challenges in this area easily categorised into three key areas:
- Reduce: limiting the volume of packaging to the minimum required for preservation
- Reuse: the continued reduction of single-use plastic packaging and encouragement of biodegradable materials
- Recycle: increase in recycled materials leading to circularity despite issues of scale
We believe that investment will be required to face these challenges, with particular focus on mid-sized companies, who may lack the resources to do so. Private Equity backed food packaging producers will likely play a leading role in the consolidation of the market.
Evolving consumption behaviours
Consumer behaviour towards food is shifting and influenced by many different external factors. The focus on convenience, speed and ease is driving change in food consumption, alongside a desire for transparency from suppliers and an emphasis on sustainability. The evolution of consumption impacts packaging features as well as distribution channels. Over the last several years, consumers have been moving towards more mobile, on-the-go forms of purchasing, as well as out-of-home and food delivery. In addition, Covid-19 has created a pull-through demand on packaging of essential groceries, canned foods and ready meals as people were confined to their homes . Conversely, companies focusing on the food service channel (e.g. those serving HORECA) have been harder hit given the reduction in demand  and will be slower to return.
Flexibility in supply chains and products
The pandemic has highlighted the importance of an agile and flexible supply chain. Packaging companies that have been able to act with an agile response to Covid-19 have capitalised on a different market entirely, for example Essel Propack (producer of laminated tubes for food stuffs, among others) began producing tubes for sanitiser formulations . In addition, flexible packaging such as for juice pouches, or granola is becoming the fastest-growing segment due to its superior performance is only likely to increase as it offers more cost effective, advanced solutions .
These trends are reflected in the M&A activity that is occurring and the impact this has on valuation, for example the acquisition of Moorgreen Flexible Packaging by Cromwell Polythene, to expand their capabilities. As packaging becomes more complex, the market is becoming more diversified which is leading to niche areas such as smart packaging, these areas are being dominated by one or two companies for example, Mondi Group. Whilst these markets are smaller than more established commodity packaging markets (e.g. the global commodity paper-based containerboard market is ~$50bn) , these companies can occupy as much as two-thirds of a much smaller (e.g. $500m) but more profitable market. Smart packaging, in particular those focused on innovative solutions to reducing waste, is one of the factors acquirers look for in packaging companies because of their specific skill set and scalability. This is demonstrated by recent transactions that indicate a premium will be paid for these assets, as evidenced by the acquisition of DS Smith, a sustainable flexible packaging company, by Liqui-box for 9.9x EV/EBITDA 
Activity for Q1 2020 has reflected this move toward complex packaging, with 29% of deals completed in the flexible packaging space . We are also starting to see packaged foods reaping the benefits from maintaining supply chains at the beginning of the pandemic, leading to accelerated pursuit towards an exit .
This fragmentation in the market sees larger more traditional packaging companies (e.g. plastic packaging) look to the M&A market to gain access to new technologies and expand their product portfolio . In particular, we believe that, Private Equity will be a key part of consolidating the market and creating larger platforms. This consolidation of the market continues to drive deal activity in the packaging sector, this is notable for example in the disposal of CGL Pack to Faerch and on the acquisition of IPACKCHEM by Sagard Private Equity, .
We expect that businesses focused on food packaging in the home will lead the charge in M&A as this industry looks to push forward, post-Covid. It is clear that diversification is driving both value and higher valuations in this sector, and concentration on specific areas of development will be critical.
With niche companies looking to expand and move forward, and larger companies looking to gain knowledge and upskill their offering, M&A will play a crucial role in driving innovation and growing the market.