While holiday shoppers are already panicking about not being able to get their hands on hot gifts, retailers have bigger worries — how to wrap those items and get them to their destinations intact.
Just as with computer chips, packaging materials made out of plastic, paper and cardboard are all in short supply. When sellers can get the critical goods, they find that costs have skyrocketed.
“I think this holiday season is going to be an eye-opener for everybody,” said Andrew Hogenson, the global managing partner of consumer goods, retail and logistics at Infosys Consulting.
Producer price data from the Bureau of Labor Statistics show how the problem is snowballing. “You have a constrained amount of supply of these raw materials at the same time you have an increase in demand,” Hogenson said.
Joe Stefani, a co-founder and the president of Desert Cactus, said, “We’re seeing it right now, and it’s something I would say has progressively gotten worse over the past several months.” Desert Cactus, an e-commerce company founded in 2012, sells licensed collectibles and accessories, such as keychains, flags and stickers.
“I think this year we're going to do somewhere around 750,000 packages going out,” he said — and all of those packages have gotten more expensive.
“For things like boxes, there were already price increases last year. We just got hit with that again this year, and we’ll probably see a similar increase next year,” he said.
Prices for plastic materials and resins, a category that includes plastic packaging materials, have been climbing sharply because of rising demand and the deep freeze that struck Texas in February, which disrupted production.
“The types of materials that would be key and the raw materials that go into them — polyethylenes, polyurethanes — we’ve seen the cost of those raw materials surging to the tune of 50 percent year over year,” said Vipul Shah, the chief product officer of Next Trucking, a logistics technology startup. “The story for packaging is the same.”
An industry shift from single-use plastic packaging materials to sustainable paper products increased demand even before the pandemic.
Simon Geale, an executive vice president at the supply chain and procurement management firm Proxima, said some of the demand for cardboard reflects a trend away from single-use plastic packaging materials. Plastic was falling out of favor among some shippers as more turned to paper products — made from sustainable resources and more easily recyclable — which had increased demand for paper products even before the pandemic.
When plastic prices spiked after the Texas freeze, demand for cardboard envelopes, boxes and padding grew further. Paper mills, many of which were knocked offline in the early months of the pandemic, have been scrambling to catch up since then. Raw material, such as paper pulp imported from China, has been caught up in the shipping bottleneck, and the resulting shortfall is reflected in the price: After having bottomed out in September 2020, the price of cardboard hit a record in January, and it continues to rise.
“With boxes, we’ll have an issue getting certain sizes,” Stefani said. He has resorted to squeezing some items into smaller boxes, although he worries that the shipments could be damaged during shipping as a result. “The packaging is too expensive right now, or we can’t get hold of it,” he said.
The supply shocks are cascading even as more people spend more money online. According to data from the Adobe Digital Economy Index, online shopping rose year over year in the first eight months of the year, a remarkable rise given that there was a huge spike last year over the previous year because Covid-19 lockdowns confined millions of people to their homes. Adobe found that e-commerce now accounts for about 20 percent of consumer spending.
That adds up to a lot of bags, boxes and envelopes, and businesses like Stefani’s are at the back of the queue.
Hogenson said: “Someone like Amazon is obviously going to be at the front of the line to get their share of capacity, whereas these smaller businesses are at the back of the line. They don't have the ability to absorb these costs as easily ... whereas smaller- to mid-sized businesses are going to be stuck or have to pay exorbitant prices.”
“It's really been a case of get what you can, use what you can.”
Geale said: “At the moment, that’s where we’ve seen the run over the last year or so. It's really been a case of get what you can, use what you can.” Smaller companies, in particular, have often had to settle for thinner, lower-quality or more cheaply made containers.
“We’ve seen companies trade down — in particular it’s been the mid-market and lower market who don’t have the purchasing power to forward-buy and have to make the most tradeoffs,” he said.
Shah said: “You're seeing the aftereffects of some fundamental business practices in the global economy. Supply chains ... were built on the principle of not holding inventory, expecting that goods are going to be flowing freely” — a major overlooked vulnerability that was exposed by the disruption of the pandemic.
Because the pandemic exposed flaws in just-in-time inventory management, more online-dependent companies are expanding their networks of suppliers and seeking out domestic sources of packaging materials and containers, and they are more willing to swallow the higher costs of recycled cardboard and paper.
Some analysts hope the disruption will foster innovation that could help pave the way for more sustainable options in packaging. “Some companies are using this as a way to prime the pump in their sustainability initiatives,” Hogenson said.
Geale said the shift is starting to happen at the business-to-business level. “We’re seeing plastic pallets in place of wood and cardboard, particularly in food and industrial parts,” he said. He acknowledged that plastic gets a bad rap, but he said extending the life cycle helps mitigate the environmental impact. “We have a bit of a downer on plastic, but if used correctly and reused in a circular model ... it can be a really strong solution,” he said.
It also helps companies that are being pressured by shareholders and customers alike to shrink their carbon footprints. “Packaging is a real hot spot for consumer consciousness,” Geale said.
Stefani said that before the pandemic, Desert Cactus had been taking steps to convert to more sustainable packaging at the behest of some of his larger clients.
“Right when we were getting into Covid, we were trying to switch a lot of our packages to be more green-friendly [with] post-consumer content,” he said. “For us, because of the types of clients we have — we’re dealing with a lot of institutions, we’re getting into entertainment — these are things they want to see.”
Stefani is finding, however, that he has much more competition when he tries to source post-consumer packing materials. “We switched over, but everybody’s trying to do that right now,” he said. “I think that’s added to the complexity.”
Hogenson said the hope is that the growing pains can spur the breakthroughs that will create more holistic change.
“In some respects, that’s the silver lining of this cloud,” he said. “In the end, you can say this is a good thing, because something needed to kick us in the butt to move to recycled materials.”