The Impact of E-commerce on Paper Packaging Markets...• Still opportunities for corrugated usage in transit from fulfillment to sorting to “last mile” delivery • In-store pickup

The Impact of E-commerce on Paper Packaging Markets

2019 | Fastmarkets | E-commerce Impact on Packaging 1

OCTOBER 2019DEREK MAHLBURGSenior Economist

Agenda• E-commerce and the North

American containerboard market

• Update on e-commerce growth• Risks and outlook

22019 | Fastmarkets | E-commerce Impact on Packaging

US box demand has jumped ahead of industrial production since 2014

NON-DURABLES PRODUCTION IS TRADITIONAL DRIVER OF US BOX DEMAND• Non-durables industrial production

growth can explain US box demand extremely well until 2014.

• Box demand was anemic through much of past 20 years due to a weak non-durables sector and competition with plastics.

• Box demand has revitalized since 2014, posting its best string of growth performances since the 1990s.


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“Backcast” US domestic box shipments versus actual

Backcast domestic box shipments Actual domestic box shipments

Domestic box shipments’ recent strength corresponds with rise of e-commerce

CLEAR CORRELATION BETWEEN E-COMMERCE SPENDING AND BOX DEMAND• Non-durables production has improved,

but still unable to explain all of strength in box demand

• US box demand rises to nearly 20 BSF higher than traditional drivers suggest

• Motivation for deep dive into topic: The Impact of E-commerce on North American Paper Packaging Markets


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US domestic box shipments’ outperformance and real retail e-commerce spending

Box domestic shipments outperformance of non-durables Real e-commerce and mail order (R)

E-commerce’s ascendance in retail has accelerated over past four years

59Billion dollars of growth per year in nominal e-commerce/mail order in 2015-2018


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Other retail channels E-commerce/mail order retail E-commerce/mail order retail share

34Billion dollars of growth in e-commerce/mail order in 2011-2014

40%At least share of total retail growth for e-commerce/mail order over past four years

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US RETAIL EXCLUDING AUTOMOBILES AND GAS

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E-commerce definitionsUS Census definition:

“…sales of goods and services where the buyers place an order, or the price and terms of the sale are negotiated, over an Internet, mobile device…, or other comparable online system. Payment may or may not be made online.”


Fastmarkets RISI “e-commerce and mail order retail”:Excludes online-negotiated automobile and fuel salesIncludes mail order sales

Refined definition allows accurate comparison of e-commerce spending with box shipments to e-commerce end-uses

Manufacturer/warehouse

Fulfillment center

Sorting center

Parcel delivery

Consumer

E-commerce retail uses seven times more corrugated per dollar than traditional retail


Manufacturer/warehouse

Retail store

Consumer

BRICK-AND-MORTAR LOGISTICS E-COMMERCE LOGISTICS

90%Of box shipment strength since 2014 explained by e-commerce


19%Growth in e-commerce boost in 2018, strongest performance yet

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Box “outperformance” and e-commerce boost

E-commerce wholesale trade boost E-commerce retail boost Other

The e-commerce boost is alive and well STRONGEST PERCENTAGE GROWTH YET IN 2018

North American containerboard profitability peaked in 2018 despite capacity bulge

E-COMMERCE BOOST ENABLED INDUSTRY TO ABSORB MAJOR NEW CAPACITY ADDITIONS AND STILL INCREASE MARGINS• Relatively high margins and demand

growth have drawn new entrants to containerboard industry

• Despite above-average capacity additions, operating rates and profitability climbed throughout 2017-2018

• Industry concentration a factor in long-term trend, but containerboard HHI decreased from 2012-2018


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Capacity growth and kraftliner profitability

%ch N. American containerboard capacity US kraftliner price/US South variable cost ratio (R)

Real growth in e-commerce and mail order slowing since 2015

7.7%Growth for real e-commerce and mail order slowest since 2013


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Nominal growth in e-commerce, mail order and non-store ex. autos and gasReal growth in e-commerce, mail order and non-store ex. autos and gas

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Electronic shopping and mail order sales growth

12%Year-over-year growth in first half of 2019


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Non-seasonally adjusted nominal sales growth for NAICS 4541

Year-over-year growth Year-over-year growth for 3-month rolling average

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Customized boxes and fan-fold


• Boxes created as needed for individual orders, reducing dead space and eliminating need for inventories of different box sizes

• Estimated that implementations can reduce box volume by 40% and corrugated area by about 25%; case studies show corrugated area reductions of about 15%

• Segments with greatest exposure: furniture, computer hardware, sporting goods

• Lowest-hanging fruit already reaped?

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Overbox reduction and SIOC


• Reduced usage of overboxes for protection as primary packaging shifts to e-commerce orientation

• E-commerce packaging emphasizes protection, while in-store packaging competes for consumer attention and makes theft difficult

• Will result in larger corrugated usage declines than custom boxes, shift corrugated consumption to CPGs

• Overboxes will continue to be used for aggregation, anonymization

• Segments with greatest exposure: electronics, equipment and hardware, toys and hobby goods

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Mailers and in-store fulfillment


• Smaller items are increasingly being shipped in padded envelopes

• Still opportunities for corrugated usage in transit from fulfillment to sorting to “last mile” delivery

• In-store pickup or local store delivery usually in woven/plastic bags and represents a total loss of the e-commerce boost

• Segments with greatest exposure: clothing, jewelry, media, drugs, health, beauty

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What’s driving the interest in corrugated reduction and fulfillment alternatives in e-commerce?

HEAVY USAGE OF CORRUGATED IN E-COMMERCE MEANS MORE ATTENTION TO COSTS• Containerboard price increases

• Wasted shipping space

• Consumer frustration with packaging; Amazon’s Frustration-Free Packaging Program

• Amazon will charge $1.99 per eligible package that does not participate in FFP

• USPS enacting stricter dimensional weight rules


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Price indices for US containerboard and flexible packaging

PPI for plastic bags and pouches PPI for corrugated and solid fiber boxesFBA corrugated price index

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Sustainability

Primary packaging redesign

Branding

2018 | Fastmarkets | Name of Presentation 16

Opportunities for paper packaging in e-commerce

Sustainability

Trends in fulfillment/packaging

Risks to e-commerce corrugated usage

Corrugated cost increases


50Billion dollars or more of average real growth expected in non-recession years


85%Of forecast growth in e-commerce/mail order attributable to market share gains

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Cumulative growth in real US e-commerce and mail order spending

Growth due to underlying retail strengthGrowth due to market share gainsE-commerce/mail order share of retail

E-commerce spending set to continue strong growth

Thank you!

The Impact of E-commerce on North American Paper Packaging Markets• Exhaustive dive into US and Canadian e-commerce statistics

• Risks quantified in three vectors (economy, e-commerce market share, e-commerce linkage with corrugated) and 27 scenarios

• Effect of e-commerce on containerboard/corrugated demand, operating rates, prices, profitability

• Forecasts through 2023 for economy, e-commerce spending, containerboard, corrugated, impact of e-commerce on box/containerboard markets

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For more:www.risi.com/e-commerce_study

Derek MahlburgEmail: [email protected]


http://www.risi.com/e-commerce_study

The Impact of E-commerce on Paper Packaging Markets...• Still opportunities for corrugated usage in transit from fulfillment to sorting to “last mile” delivery • In-store pickup

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