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The packaging sector's diversity and steady demand across economic cycles make it a standout for many investors, driving robust M&A activity. These attributes have been supplemented by a range of tailwinds, including surging e-commerce, dynamic consumer preferences, digitization, and, perhaps most notably, sustainability.

Indeed, the evolving European regulatory landscape and the sharpening focus on sustainability throughout the packaging supply chain were key themes at this year’s interpack, attended by senior members of the Harris Williams Industrials Group. Here, we discuss the opportunities these trends are creating for companies in the sector and for M&A investors. 

Europe Sets a Course

In 2019, the European Green Deal laid the groundwork to reduce net emissions of all countries in the European Union to zero by 2050. In November 2022, the EU Commission supplemented this proposal with the Packaging and Packaging Waste Directive (PPWD), which aims to reduce 2040 packaging waste by 15% compared to 2019.

One of the key tenets of the PPWD is boosting high-quality, closed-loop recycling and making all packaging recyclable in an economically viable way by 2030. The directive also empowers the European Union commission to establish “design for recycling” criteria and recyclability grades for plastic, paper, metal, and glass. It would reduce the use of virgin materials, with mandatory targets for recycled content, and foster a market for secondary materials. The recycling process for materials must also be economically viable under the EU’s Circular Economy Action Plan, which means materials requiring highly specialized or expensive recycling processing will not meet regulatory requirements.

Packaging Innovators Making Moves

To take advantage of the growth opportunities being created by this shifting European regulatory environment, many packaging producers are developing a range of innovative solutions.

Often, in more regulated applications such as healthcare and food packaging, sustainability must coexist with stringent performance requirements, driving advancements in engineering and material science. Examples include alternatives to single-use plastic such as fiber-based or pulp formulations, fully recycled resins, and other high-performance bio-based materials. Within food and healthcare, temperature control is a paramount concern. More sustainable packaging solutions to this challenge include organic inputs that can be recycled, dissolved in water, or used as plant food.

Other forward-leaning European packaging companies offer reusable packaging intended for e-commerce, helping shippers and consumers reduce the environmental impact of this fast-growing channel. Still others have developed bioplastic wrap made of FSC- and PEFC-certified wood pulp, yet with similar properties to traditional plastic wrap. Beyond a more sustainable composition, such wraps also make home composting easier.

Innovations like these are bolstering demand for more sustainable packaging materials, including recycled and bio-based content. For the former, some of these now in-demand materials were previously put into landfills, sparking investments in new infrastructure, chemical and mechanical recycling capabilities, and bio-based material development.

The U.S. Opportunity

While much of the current sustainability momentum is in the European packaging market, that energy is creating new opportunities for packaging companies in the U.S. “The regulatory regime in the U.S. is immature compared to Europe,” says Brad Morrison. “That provides an opportunity for forward-looking U.S. packaging companies to differentiate themselves by meeting the more advanced European requirements now and by helping to shape the U.S. regulatory landscape.”

Chuck Walter notes the opportunity for U.S. companies to apply lessons learned in Europe to more easily bring eco-friendly products and materials to the U.S. market ahead of schedule and define this emerging market. “Those who drive product innovation will be the winners in the long run, pulling ahead of the competition focused on the status quo.”

An Appealing Package

With built-in end market diversity and steady, recession-resistant demand, the packaging sector has long been an appealing place for M&A investors to deploy capital. Now, the burgeoning eco-friendly market is creating exciting growth opportunities for a wide range of packaging companies and their potential buyers.

By staying ahead of the curve and adapting their products to this dynamic set of trends, companies in the U.S. and in Europe have a unique opportunity to gain share and lead the next generation of packaging innovation.