The drive toward sustainability in packaging—beyond the quick wins

 Courtesy of McKinsey & Company

By Peter Berg, David Feber, Anna Granskog, Daniel Nordigården, and Suku Ponkshe

Sustainability—particularly regulatory and public concerns around single-use packaging waste—is combining with other powerful trends to drive major changes in consumer packaging. Regulators are moving on the issue, and Fast-Moving Consumer Goods (FMCG) companies and retailers are proactively making bold commitments to improve both the sustainability of their packaging and to fundamentally rethink their packaging systems.

There will be significant impact on packaging converters and their value chain, which could threaten the survival of many in the industry. However, for packaging converters with the right focus and innovation capabilities, the new landscape could offer significant growth and new partnership opportunities to support customers in revising their packaging portfolios. Going forward, converters will have to proactively embrace sustainability issues as consumer demands and regulatory requirements multiply.

Consumer awareness to packaging waste in oceans and landfills is driving change

Packaging is ubiquitous in our daily lives and enables minimization of food waste and overall product breakage with advanced convenience features at low costs. Over the past decade, the global packaging industry has enjoyed strong growth, driven by shifts in choice of substrates and expansion of new end-markets. Headline changes include the increased use of plastics to replace other substrates and accommodate consumers’ demand for convenience, but also the economic boom in China and other emerging regions.

However, widespread usage of single-use packaging containers has resulted in a heavy burden on the environment, and the management of packaging waste is facing a crisis due to two unresolved challenges:

Packaging recyclability. Large amounts of packaging produced today cannot be recycled in existing recycling systems. This is especially true for multi-material packaging, which today poses a significant and unresolved challenge in recycling.

Packaging recycling and leakage. Recycling rates for plastic packaging are relatively low. In the United States, for example, waste is generally managed with low leakage but recovery rates for packaging and food-service plastics are about 28 percent. In Europe, the plastic-packaging recycling rate reported was somewhat higher at approximately 40 percent, compared to approximately 80 percent for paperboard, and 75–80 percent for metal and glass (note, however, that overall data collection quality on recycling rates is rather immature, so real-world rates may differ from reported figures). Emerging regions (Asia in particular) are under the most pressure, because packaging demand growth is outpacing global growth rates, and waste-collection systems—let alone recycling—are not in place at the required scale. Global leakage or unmanaged dumps of all plastic material flows (both durable and non-durable) is estimated to be around 19 percent, and only 16 percent of all plastic waste is re-processed to make new plastics. In fact, most of the global plastics waste goes into incineration (25%) and landfills (40%), meaning that these materials are lost forever as a resource, despite plastics’ potential for reuse and recycling.

This has not gone unnoticed; public awareness of packaging waste leakage, especially plastic waste, into the environment has increased significantly to an all-time high over the past 12–24 months. The visceral images of the effects of ocean plastics pollution have stirred up consumer sentiment around the world.

Governments have started to respond to the public outcry

Governments, on all continents, have responded to public concerns regarding packaging waste, especially single-use packaging waste, and are implementing regulations to both minimize environmental waste and improve waste-management processes (Exhibit 1).

Some of the largest and most developed countries and regions are taking significant steps to introduce regulations to drive sustainability, while others are still operating as per the status quo, with limited or no regulations in place. For example, in the US 16 states have enacted statewide regulations around packaging waste, which tend to target single-use plastics, shopping bags, and increasing recycling targets. Several more bills are pending to be approved over the next 3 years. Meanwhile, Europe has progressed further than some other regions when it comes to sustainability. Measures announced in May 2019, under the “New EU Directive for Single-Use Plastics,” aim to reduce leakage of the ten single-use plastic products most often found on European beaches. Additionally, some countries—in particular France, Germany, and the United Kingdom—are going above and beyond the already robust recycling regulations across the European Union with Extended Producer Responsibilities (EPRs). These countries are implementing even more aggressive targets, fees for introducing non-recyclable packaging, and additional legislation such as only using recyclable packaging, setting higher recycling targets, and so on.

In Asia, Thailand recently announced a nationwide ban on single-use plastic bags at major stores effective January 1, 2020, and aims for a full ban by 2021 to reduce plastic leakage into the environment. India has shelved plans for a full ban of single-use plastics for now, but is pushing for increased awareness campaigns and more collection points to improve collection and curb waste. China has banned imports of plastics waste and approved legislation to ban/reduce single-use plastics, increase recycling, recovery, and recirculation of used plastics. Latin America had relatively low commitments to sustainability with few regulations in place through the early 2000s. However, in the past few years there has been a considerable rise in awareness: between 2016 and 2019 many local and federal bills have been approved or proposed in countries across the region. For example, Chile is banning plastic bags for business and Mexico City is banning single-use plastics.

FMCG companies and retailers are acting fast to go far beyond traditional lightweighting initiatives

Historically, actions by FMCG companies and retailers have mostly focused on quick wins such as reducing weight and materials usage to enable them to lower their packaging costs. A development that has also been enabled by strong material innovation upstream at substrate producers such as resin producers. These moves have favored substitution of rigid packaging formats with use of flexible packaging and pouches (Exhibit 2).

In the past few years, however, packaged goods manufacturers and retailers have started to make commitments to act on packaging waste. Almost all the top 100 FMCG companies (in terms of revenue) have made bold declarations and commitments to drive sustainability over the coming years. Our research shows that these commitments focus on three areas of activity (Exhibit 3): emphasis on full recyclability and a significant higher degree of recycled content are the most widely embraced initiatives, accounting for 60 percent of commitments; this is followed by a reduction of total plastics usage (26 percent) and by the innovation and promotion of change in the use of packaging (14 percent).

At the same time, these sustainability-focused initiatives around innovation and the need for change in the use of packaging are combining with other major industry trends affecting the packaging industry: for example, cost pressures, e-commerce and digitization (in general), and shifting consumer preferences. As a result, FMCG manufacturers and retailers are beginning to experiment with complete packaging redesigns and a fundamental rethinking of their delivery chains (including circular delivery models). They are also looking to curb plastic-waste generation by experimenting with use of metal and glass in returnable systems. In effect, major brands are starting to self-regulate.

In one recent example, a US company launched laundry detergent in new packaging specifically for online orders. The detergent was reformulated to be more concentrated, and its packaging designed to reduce its overall weight to be lighter than the original version in transit. Handling has been improved with a plastic sleeve that fits snugly inside a rectangular cardboard package. In addition, this hybrid mix of substrates adds a further sustainability benefit by using 60 percent less plastic than previously, although we should note that composites can be harder to recycle. In another example, a consortium of leading brands, a logistics provider, and a recycler recently teamed up to test the concept of returnable and reusable packaging—in effect reviving the concept of a “milk man.” The pilot has been rolled out during 2019 in areas of Paris and New York; however, the jury is still out on how much potential exists to justify future scale-up. Meanwhile, certain brands have flagged their readiness to consider packaging innovations that incorporate increased use of fiber-based packaging instead of traditional polymer packaging.

Going forward, FMCG companies and retailers will have to become more aggressive in their approach to addressing sustainable packaging in response to growing consumer awareness and increasing regulatory requirements. It should be noted, however, that curbing use of plastic packaging and changing packaging materials comes at a cost in terms of additional complexities and trade-offs, many of which will be far from trivial:

·        FMCGs and retailers will have to face complicated trade-offs such as recyclability versus carbon footprint and food waste.

·        Not all types of actions have the same impact on the different aspects of the sustainability footprint.

·        Technical and economic feasibility varies by plastic type and application, as well as by geographic region, and cost implications go beyond just packaging material prices and conversion costs.

·        Any packaging material or design change has implications on overall branding strategy, and large portfolios comprised of different plastics, applications, and geographies make strategizing highly complex.

The new challenges around waste management and recyclability are taking FMCG companies and retailers into new and unfamiliar territory. In the past, these organizations have pursued a relatively narrow packaging sustainability agenda that has focused substantially on “lightweighting.” Successfully addressing the new recyclability and waste challenges is likely to stretch the capabilities of their current tools and strategies. Consequently, FMCG companies and retailers will require much closer collaboration with upstream players, packaging converters, and recyclers to successfully deal with these new challenges. One key area is the need to build infrastructure to manage increased recycling by employing more closed systems (that is, bottle-to-bottle recycling to avoid downcycling). Another area is to coordinate changes with film converters and recycling infrastructure to build recovery capability to accept polyolefin multi-substrate films, which could allow for a much larger amount of flexible packaging and other multi-material packaging to be recycled. This also involves developing and scaling more advanced recycling technologies, for example, where the packaging can be converted to liquid hydrocarbons using pyrolysis or gasification, to be used for fuels or as feedstock for producing “new” plastic with similar performance as “virgin-based.”

These types of developments could mark a watershed in the relationship between the FMCG manufacturers and retailers on one hand and the packaging converters on the other. Traditionally, packaging converters have played the role of the compliant supplier to their larger and more powerful brand-owning customers. However, as FMCG companies and retailers discover the need to move from an arm’s length relationship with suppliers to more of a partnership and collaborative approach, new opportunities could emerge for packaging converters—particularly for agile converters that are able to quickly expand their innovation capabilities.

To read the full article, please visit https://www.mckinsey.com/industries/paper-forest-products-and-packaging/our-insights/the-drive-toward-sustainability-in-packaging-beyond-the-quick-wins

About the author(s)

David Feber is a partner in McKinsey’s Detroit office, Daniel Nordigården is an associate partner in the Detroit office, and Anna Granskog is a partner in the Helsinki office. Suku Ponkshe is an associate partner based in Atlanta, and Peter Berg is a senior expert in the Stockholm office.

The authors wish to thank Stephan Görner, Thomas Hundertmark, Greg Kudar, Jörn Küppers, Oskar Lingqvist, Clarisse Magnin, Jukka Maksimainen, Dickon Pinner, Sarah Paleg, Oliver Ramsbottom, Jeremy Wallach, Theo Jan Simons, Daniel Eriksson, and Matt Rogers for their contributions to this article.