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Contract Packaging/Manufacturing Industry Booming, but Watch Out for Headwinds

New report from CPA shows that after a short pause at the start of the pandemic, the CP/CM industry ‘has come roaring back.’ Meanwhile, changing supply chain and innovation paradigms are reshaping the industry.

According to the report, the CP/CM industry is forecast to grow at a 10.2% CAGR through 2025 to reach $121 billion in revenue, up from $67.5 billion in 2019.
According to the report, the CP/CM industry is forecast to grow at a 10.2% CAGR through 2025 to reach $121 billion in revenue, up from $67.5 billion in 2019.

Despite the colossal challenges faced by businesses resulting from the COVID-19 pandemic, the contract packaging/contract manufacturing (CP/CM) industry in North America is one market that met those challenges and is alive and kicking. In fact, it’s bounding forward at a growth rate that’s “rarely seen outside a Petri dish.” That’s according to Carl Melville, COO of The Melville Group, whose firm produced the recently released sixth edition of CPA, The Association for Contract Packagers and Manufacturers’ State of the Industry Report.

“This is a great time to be in our industry,” says Melville. “In spite of probably the biggest shock to our economy, certainly since the Great Depression, our industry has done phenomenally. After a very brief pause, it has come roaring back.”

According to the report, the CP/CM industry is forecast to grow at a 10.2% CAGR through 2025 to reach $121 billion in revenue, up from $67.5 billion in 2019. That number is slightly down from the 11.9% projection made in the last report (2017/2018), but still twice the rate of those industries it serves. “Our industry has been around a long time, and it’s continuing to experience double-digit growth,” says Melville. “I think we should celebrate that.”


Watch video   Watch "Contract Packaging Growth Through 2025," from PACK EXPO Connects.

However, he cautions, while celebrating these numbers, CP/CMs also need to be aware of a number of industry headwinds—some resulting from the pandemic, some exacerbated by the pandemic, and some that had already begun gaining steam pre-COVID-19. Among them are the expanding value chain, SKU rationalization, repatriation rates, the era of upstream sustainability, and labor cost differentials/labor shortages.

Along with these issues, the report also covers (among many other things) the short- and long-term effects of COVID-19, the status of merger and acquisition (M&A) activity, and packaging equipment statistics, which were provided by PMMI, The Association for Packaging and Processing Technologies.

Business, M&A activity thriving

As defined in the report, CP/CMs are companies that provide contract packaging, contract manufacturing, and secondary packaging services for food and Consumer Packaged Goods companies. It does not include private-label producers. The report covers CP/CMs in North America (the U.S. and Canada) and includes input from 150 industry insiders—i.e., industry practitioners, CP/CM owners, CEOs, executives, customers, and vendors. To these insights, The Melville Group added qualitative and quantitative primary and secondary research.

PMMI provided statistics on equipment investment by the CP/CM industry for the CPA's State of the Industry Report.PMMI provided statistics on equipment investment by the CP/CM industry for the CPA's State of the Industry Report.As noted, the CP/CM industry continues to exhibit significant growth, despite the turbulence caused by the pandemic. “This was a very essential business last year, and CP/CMs, for the most part, have done incredibly well,” says Melville. “We’ve added a lot of value to the economy. We’ve kept the food supply open, and we kept it safe. We should all be very proud of the work we’ve done in food and CPG, as well as in delivering PPE and all the other things our industry has done.”

M&A activity, which had been setting new records every year for the previous 10, took a pause in early 2020. As Melville relates, the bond market froze up during the early days of the crisis, but as the year progressed, M&A activity began to pick up in a big way. In fact, Q3-2020, saw a $1 billion deal. “New co-creation happens for every big merger that occurs, and there are still more folks entering the space,” Melville adds.

According to M&A information provided by investment banking firm Blaige & Company, there is almost $1 trillion of capital sitting on the sidelines ready to be invested. Melville clarifies that this isn’t just for the CP/CM industry, but this includes several sectors of which the CP/CM is one. Continued industry consolidation through M&A will have a transformative effect on the industry, he says, with significant impacts on the supply chain, investments, and how customers interact with suppliers.

“As these larger and larger platforms form, as they’re taking company A, B, and C and making company X, and then combining that with company Y to create an even larger organization, the value propositions for customers are changing,” says Melville. “The number of services a customer can receive from a given provider changes, and the scope of that supply chain continues to enhance the value chain.”

Demands for turnkey services and innovation grow

Being able to provide customers with more services along the full supply chain will be an important differentiator, as one of the headwinds discussed in the report is how customer expectations continue to grow. Among the reasons cited are budget cuts, changes within legacy food companies, and small, upstart firms looking for a more expansive suite of services.

These growing expectations present both a challenge and an opportunity. According to Melville, the biggest challenge for a CP/CM is not just how to serve those needs, but also how to serve them without adding to their cost structure. “As you know, the kiss of death for a CP/CM is to become their customer. Then it becomes almost impossible to adds value,” he says.Customers are also increasingly looking for innovation from their CP/CMs in nearly every area. “Brands are continuing to grab for innovation with both hands anywhere they can find it,” says Melville. “These are some of the larger, more successful companies in the country and in the industry, but they’re under incredible pressure from the channel—be it e-commerce or grocery retail—to produce innovation. They are looking for innovation anywhere they can find it, and CP/CMs are already a source for that.”


Read article   Get perspective: Read article on the 2017/2018 CPA State of the Industry report

These include innovations in product, packaging, materials, processes, equipment, formulation, and business and financial areas. Says Melville, “Brands are looking toward their suppliers and saying, ‘Not invented here is dead on arrival. So bring me some packaging innovation. What can you do for me that I can’t already do for myself?’”

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