Box buyers: Know what’s behind your price
Understand the material and operational costs behind your price and improve negotiations with your box suppliers
A brand’s packaging choices are more important than ever. Booming e-commerce is accelerating shipping box demand. Social media is increasing brand exposure and “unboxing” videos remain popular. Brands know packaging communicates values and quality, as well as protecting product.
Packaging buyers’ choices are now in the spotlight in their own company. The decisions packaging procurers make can be critical to a brand’s bottom line.
Packaging sourcing strategies – the right package at the right place at the best cost – is becoming a core competency for brands to accelerate growth and avoid risk.
What you need to know about paper packaging costs
- The largest, and most variable cost, is in the paperboard material used to make boxes
- Not all paperboard material is made using the same process, or fiber input
- Knowing key differences and vocabulary can improve your box supplier negotiations
Knowledge is leverage
Packaging is not a simple one-box-fits-all approach. The diversity of product needs (large/small, perishable/non-perishable, etc.) and the range of brand intent (such as luxury or sustainable) means that brands have a variety of choices to make to satisfy customers. It’s not just volume that increases costs. Brands must also manage variety at volume that keeps up with demand.
The most common types of packaging are corrugated boxes (which is made up of containerboard), folding cartons and rigid boxes. Buyers’ choices and brand needs will greatly vary your incurred costs.
Understand your box supplier’s costs
Your supplier’s profit margins can largely dictate your price. Looking inside the packaging market to understand mill production costs, transportation costs and exchange rates will help you gauge price fluctuations and anticipate them in the future.
According to packaging buying expert Sara Greasley, “Because there are so many variables that affect unit cost, and manufacturers, salespeople and brokers are often reluctant to give you an answer to this seemingly simple and straight forward question”.
For many packaging paper grades, paperboard material is the single largest input cost in paper manufacturing. It comes in mainly two forms –natural fiber known as wood and recovered fiber. A mill’s cost sensitivity can be impacted both by the type of fiber used and how it is sourced. Prices for recovered paper can be fairly volatile. Monitoring fiber costs can help buyers prepare for price changes.
The risks of not knowing what’s behind your price
Risk can come from simply not knowing. Relying on others to determine your packaging strategy and your packaging fate. This can mask the underlying cost or hide different options that are needed to create an efficient, differentiated packaging strategy. For example:
- The mill costs associated with producing the substrates or paperboard that make up your packaging can have a downstream effect that are often hidden from buyers. Key cost inputs include energy, labor, shipping, converting costs, and fiber – the latter being the most significant and variable cost category.
- The majority of recycled mills producing linerboard carry less cost when compared with integrated mills which produce pulp onsite, creating an avenue to deliver against sustainability demands at lower overall cost.
- The interconnectedness of recycled fiber markets became obvious during the peak of the Covid-19 pandemic. The availability and price fluctuations of OCC – a key input for recycled corrugated boxes - were particularly acute. OCC was unavailable in some regional markets, and inventories piled up in others. This was made compounded by complexities brought on by ongoing changes from China, which has reduced its global imports of OCC dramatically in three years.
Staying ahead of the market and your packaging costs in a hotly contest and growing market can keep your cost margin healthy.
The cost of sustainability: Recycled liner can be more volatile
Consumer demand for sustainability has placed a focus on eco-friendly packaging and the industry is responding. An increase in e-commerce delivery has shown consumers how much packaging material is being produced and thrown away. In response, recycled containerboard production is making up a larger portion of total US production. Similarly, recycled linerboard - paperboard used as the facing material for corrugated boxes - is expected to grow nearly 40% during 2017 to 2023.
According to Fastmarkets economist Derek Mahlburg, the recycled share of US containerboard capacity has already risen from 28% to 35% since 2010. To meet demand, seven new 100% recycled-content machines are to start up in the USA 2021-2022.
The trend for recycled packaging itself is unsurprising as brands respond to consumer preference. The issue is that many buyers have not evolved their commercial contracts and forecasting methodologies to aligned to the actual materials that comprise the packaging they source today. They are either tied to the wrong composition or the wrong paper grade price altogether.
Take recycled linerboard and virgin kraft linerboard for example. One, recycled linerboard is generally cheaper (by about $80 per ton), and, two, it is more volatile.
Tying contracts for recycled boxes to virgin linerboard prices could inflate costs. It could also mean buyers miss the opportunity to establish escalation and de-escalation mechanisms to price or cost changes.
The path forward: Market knowledge is a core competency
Understanding market dynamics is quickly becoming essential for any brand buying boxes whether to mitigate risk or create strategic advantage. Keep in mind:
- Consumers expect more from brands. Packaging is the physical representation of a brand and can say a lot about a business’s values and purpose.
- Brands have addressable financial leverage – at volume – to make a difference
- And all of this has to happen at the speed of a hotly contested market.
Buyers who can understand and anticipate the impact of market and price signals will be advantaged in a rapidly growing and competitive market.
Learn more about what’s behind the price of boxes made of containerboard and carton board with two free cost indexing examples. Click here to access.