Sean Riley: Hi, and welcome to UnPACKed with PMMI. I'm your host, Sean Riley. Today we're trying something a little different by sharing one of our new PMMI Media Group Through the Line podcasts. On this episode, I interview Packaging World chief editor Matt Reynolds about PW's annual outlook report, and more specifically, the outlook for e-commerce.
Survey respondents revealed that e-commerce is still booming, but margins are shrinking, and the cost and complexity of doing business in the space are rising every day. There is a lot to unpack here, so let's have a listen.
Today I'll be picking the brain of Matt Reynolds, editor-in-chief of Packaging World, who reported on this area of the research. Before we begin, a little background on this endeavor, which I'm going to repeat multiple times, is available for free online in its entirety at pwgo.to/8693.
The inaugural annual outlook report on e-commerce reflects unique survey responses collected from brand owners, CPG, and FMCG Packaging World readers. This online survey was deployed via email, and all responses were recorded between July and September 2024. The survey was devised and pressure tested with CPG experts.
That is all the housekeeping we can do to get out of the way in the beginning. Now, we're going to jump in with Matt. Before we dive into the packaging-specific data from the report, Matt, how have e-commerce and direct-to-consumer changed in the past few years, and what's their outlook?
Matt Reynolds: Yeah, from a big picture 30,000 foot view standpoint, it's growing. It had been growing at a reasonably steady clip prior to the pandemic. The pandemic goosed it and supercharged it, and it changed the way that a lot of consumers expect to do their shopping. And what used to be an exclusively retail environment became a retail e-tailer mix.
So you have some people who the only reason they'll go to the market is to buy fresh produce and go to the fresh aisles on the outside aisles. And now they're doing everything, especially on the home care, home goods, soaps, cleaners, and cleansers. These types of things might only be bought online. Then, some folks even took it a step further and got into these subscription programs, where it's automatic replenishment.
Sometimes from a packaging standpoint, those are nifty because they can be refilled programs where you buy one big, large, durable package and then over time you're refilling that with, say, lighter weight, like a flexible packaging that comes to your doorstep. So, all these conveniences and efficiencies were introduced to the consumers at the onset of the pandemic. Those who hadn't jumped on board already, suddenly this was thrust upon them, and they're not letting go. This is not going away.
Yeah, so I think not every product is going to be conducive to e-commerce. If you sell ice cream, it's going to be really difficult and it's not impossible. We've seen some brands do it, but that's going to be difficult. But, for a certain percentage of products that are conducive to the e-commerce channel, it's either stable or growing, by and large.
We mentioned those replenishment programs. I'm in one, my dog is in one because he gets one bone a day. So, shout out to Dingo Bone Company. He gets one rawhide a day, and I'm roughly at a clip where I get an Amazon reminder every month, "It's about time to replenish," and sure enough, I'm down to a few bones. So even my dog is on a replenishment program. So all of that is to be said, sounds great for e-commerce, right?
Sean Riley: Yeah.
Matt Reynolds: It sounds like it's going nowhere but up.
Sean Riley: Times are booming.
Matt Reynolds: Times are booming, but the margins are shrinking and actually getting worse. So prior to the pandemic, and this is kind of a squishy date. Is it 2015? Is it 2010? Could you go back that far? In that range, it was untapped, and frankly, it was a landscape that didn't have a lot of players in it, so it was ripe for exploitation and consumers were just diving in.
So all that's to say that the cost of acquisition for consumers was fairly low, comparatively low. There were only so many platforms. It was a unique, novel thing. People were willing to pay a little bit more. You could almost call it a bit of a gold rush period. It was a brand new shiny thing. Only a few people were doing it well. There were only a few channels and so on.
Over the past few years, accelerated by the pandemic, it's grown into a much more mature marketplace, mature landscape that's more complex, has a lot more players, a lot more layers and players, Amazon being the central one, but now you've got things like drop shipping platforms, which might be a website that sells dog bones or dog food or whatever it is that I was just talking about. But they don't hold any inventory. They don't hold the product that's still fulfilled by the brand owner, by the person going to market. It's just more of a turnstile.
So with all of the new platforms out there, and then separately, with all of the new, not necessarily new, but all of the channels, the carriers, the UPS and FedEx, all these different... There's a variety of ways to get that product to you. It's just becoming more and more complex on multiple different levels, and it becomes expensive to manage, expensive to keep an eye on. The business is growing, the margins are small, the end of the gold rush is here, and now the savviest brands have to get smart and be really... It's not a, "If you build it, they will come" situation any longer.
So, one person I talked to about this was Lynn Power. She's the founder of hair care brand MASAMI. And yeah, this is a direct quote, so I'm going to try and read it specifically. "Brands today spend a lot of time working on their product, launching it, and then they're surprised that people don't immediately buy it, like the early days of e-comm. You have to work to get customers, and the cost of acquisition is high. You have to be scrappy and experiment a ton because you don't know what's going to work. What works today might not work tomorrow. You have to be willing to spend not just on the product and packaging, but on getting the sales right."
So I thought that was really a unique insight, the difference between the early, let's say, 2010s and today on what it looks like to operate either a direct-to-consumer brand, an e-commerce brand, or an omnichannel brand that's also on the shelf. So that's kind of the big picture. Packaging is involved, but that is kind of the greater milieu of e-commerce.
Sean Riley: E-comm.
Matt Reynolds: Yeah.
Sean Riley: Now, from a packaging standpoint, how is that impacting packaging? Is it something where they have to have all these different packages to meet the different channels? What is it from a purely packaging standpoint?
Matt Reynolds: Yeah, so let's say a startup brand, they're incurring all these costs, and one of them is going to be packaging. To get their packaging right, and usually it's an iterative process, it might be way over-boxed the first time, and then over time, they trim back on the total amount of packaging used. So it's an iterative process, but it also is a one-time cost compared to all of those other things I mentioned. Carriers, chargebacks that come from mislabeled products, those are constant battles that are daily fights.
Packaging, you get your packaging to where you want it, and then it's sort of a set it and forget it. I mean, there's some input costs. You still have to pay for the corrugated, you still have to pay for the printing, but that's a set fixed thing, and you're not fighting these constant battles. So even a mature brand that's been around for years in the e-commerce sector, they'll reinvent their packaging once in a while. They'll go towards something that's maybe curbside recyclable, and that's an expense, and that's time. If you're doing new printing or printing something new that you have to cut dyes that are a different shape or printing some, so that's all cost, but it's compartmentalized into that packaging refresh period, and then it's done.
You can use that packaging and your product in that packaging for as long as possible, which is different than the ongoing day-to-day costs that come from the carriers, from the platforms, from the drop shippers, from third-party logistics that are actually on your team to help make sense of all that. But there are constant costs, whereas packaging you can look at as an incremental cost, something that's entirely in the control of the brand owner, whereas outside of the brand owner's control is how they deal with those third parties.
Sean Riley: Okay, so I mean to stick with the packaging idea, I want to touch on what... You touched on some of it, but what package attributes are driving direct-to-consumer packaging? I know we took our survey responses and we bounced them off experts to see if they felt the data was correct.
Did they mostly agree with what the survey had to say about the packaging aspect? I know sustainability is going to be in there. Sustainability is always in there, but are there other instances where some felt more strongly about certain aspects of packaging and less about others?
Matt Reynolds: Yeah, yeah. I mean, a very clear big three sort of emerged, and sustainability, you're right on the money, was at the top of those three. But it's sustainability, robustness, and appearance. So those are just single words to describe extremely complex—
Sean Riley: I was going to say they sound very common sense.
Matt Reynolds: Yeah, yeah. Let's go over the numbers really quickly. So 59%, so just about 60% of respondents say sustainability is a critical attribute of their packaging, their e-comm or DTC packaging. 54%, almost the same amount, say robustness is critical, and then 46% say appearance is critical. So all within that 15% range there. Everything else is below 30% in terms of factors.
I would say, and this was argued when we went to some of the qualitative discussions, is that robustness is almost table stakes. Robustness has to be the first thing, and it's almost forgotten about because the package is the number one job. We like to think of ourselves as marketers. We like to think of it as a signaler of ecological mindset or whatever, but its number one job is to get that product to your doorstep intact without breakage, without leakage so that you get the...
And that is undeniably connected to sustainability because if that package has a leak or if it's broken, if that's scrap, if that has to be sent out, again, you're going one step forward, two steps back because that's double the carbon footprint and carrying the product to your doorstep on the packaging side, but it's double everything because it's double the product that you're using. And then the brand owner is not making any money on that, and potentially incurring negative sentiments from the consumer—
Sean Riley: Brand equity, yeah.
Matt Reynolds: ... that just experienced that. Yeah, they're chipping away at brand equity. So really, those top two factors, sustainability and robustness, are sort of two sides of the same coin. Robustness first. You've got to get that product to the doorstep without breakage consistently. And then over time, sustainability can creep in because those two are sort of at tension, over-boxing and using too much material might get your, I don't know, say your shipping wine, get that wine to your doorstep 100% of the time.
There's an argument that'd be made if you're 100% of the time getting that product there without breakage or leakage, you have to wonder, "Am I doing a little bit too much over-boxing?" Are you putting bubble wrap and then bracing, and then it's in three different... You can potentially get a really low breakage or scrap percentage, but what are you spending on the other side of that coin, and is that sustainable, and is it expensive?
So again, you have to wonder. You start with a robustness to make sure you get your product there, and then over time can you pull back on the total amount of material used and the types of material used to make that curbside recyclable to make sure you're using recycled material, and then you're using less and less material to hit that balance between there is some scrap finally, but you can be confident that you're not over-boxing and you can live with that, say, one percent breakage or leakage.
Sean Riley: Right. How important is appearance? In a store, you see it on a shelf, it's driving all the marketing. You've already made your selection online or DTC to get something. What difference does it make what it looks like when it shows up?
Matt Reynolds: Yeah, you make a unique point there. When you buy something online or buy it in these channels, you're buying the product itself. I mean, it might be a wine bottle, but you're not buying the box around it. You're not buying the secondary packaging or whatever packaging it takes to get you to the doorstep, generally speaking. You're buying just the product in its primary package. But when you buy something in retail, you're buying the secondary package. So there's serving two different functions there.
So, essentially, when you get whatever you ordered online at your doorstep, it's a good chance to make a great impression on your customer. The other thing about appearance is it's that a brand owner or CPG can totally control. It's up to them, for the most part. I guess there's one exception, and that's when the packaging and the fulfillment is done by Amazon. FBA is an acronym you'll hear, fulfilled by Amazon, in which you send the product to Amazon, and Amazon packages it as it sees fit. So the negatives there are most likely attributed to Amazon, but could be attributed to you.
Regardless, the appearance of your package is something that's totally within the brand packager's control, and there's sort of an arms race out there about it's come to be an expectation, especially for brands that situate themselves as sustainable or environmentally friendly, to play that up in the packaging, to have beautiful packaging, but to maybe use crack corrugated, to eliminate as much as possible plastic.
So the appearance and the feel and look and attitude of the packaging, really, it's the first time somebody's going to interact with your package. But it all comes at a cost. You're going to need design work, and you're going to need to pay for the dyes to create this packaging. But again, it's a one-time cost. You get that done, you get that package that you like, and then you can keep ordering it. It's not going to be the death by 1,000 cuts that's fighting against carriers and potentially fighting against the platforms on which you're selling can become.
Sean Riley: Interesting. So we discussed the beforehand how we were going to lay this out, but I might jump ahead for a second here because while we're saying that, what's popping into my head is because we talked about the packaging part, do most companies now, at this point in the e-comm DTC world, ride with one package across the omnichannel, or do they have specific ones for each outlet? Is it something that they're going to have something in a Walmart, for lack of a better name, and then something different on Amazon, or do they come up with the same sort of design?
Matt Reynolds: Yeah, it's the hardest question. I talked to Brent Lindberg at Fuseneo. It's a packaging design agency that specifically deals with the e-comm channel, and they know Amazon inside out, and he says that for his customers, that is one of the more difficult questions to answer because, essentially, you can think of it as a spectrum where the simplest is going to be one package to suit them all. That's the omnichannel package.
So because it's simplest from a production standpoint, because you're putting whatever widget or dog food or whatever it is in one package, and it's either going out the door on these trucks towards 3PL for the e-commerce or DTC channel, or it's going this direction to Amazon, or it's going to retail, it's going to Kroger. But the package is all the same. You only have one packaging line, one set of equipment, one set of specs for different sizes, two ounces, and 12 ounces. So there's a lot of efficiency in omnichannel packaging.
Where that efficiency breaks down is, say, it's a liquid or something like that. That would do just fine on a retail shelf, but it won't do as well in the many-touch rough-and-tumble world of carriers and distributors and so on. So if it's going on a single journey through distribution, there tend to be a lot fewer touches to retail than there would be if it's arriving on your doorstep.
So, would a brand be forced to overpack or overdo its packaging to accommodate the e-commerce segment, which tends to be much smaller for most big brands? This is not restricted to big brands; for the largest, most sophisticated brands, they're still selling most of their volume through the traditional retail channels.
Sean Riley: Interesting.
Matt Reynolds: So would it make sense for them to alter their package that people are used to on that retail shelf to accommodate a totally separate channel to make that omnichannel package? Of course, there are some examples of products that are just right out of the box, forgive the pun, but right out of the box are good for the omnichannel. Six-sided robust boxes that carry a product like powder or something that's not... Liquid isn't going to be a problem. Leakage isn't going to be as much of a problem.
Sean Riley: A box of diapers is going to be sent the same way and presented the same way.
Matt Reynolds: For the most part, yeah. Absolutely. Because that lends itself to omnichannel packaging. There's a whole other class of liquid and fragile products that go the other direction that require this channel-specific packaging. But that's the other term, is if you're going to have a package that's specific for each channel, you're adding a lot of complexity. You're optimizing for a channel and you're increasing efficiency for each one of those specific channels, but you're adding complexity.
So, do you as an organization have the sophistication and personnel to be able to tackle that? The largest brands do, within house. The biggest brands do. They frequently will just spawn off an online-only brand. It could be the same product. Call it, I don't know, a soap or dish soap or something like that. It could be the same formulation, but they find that selling by a slightly larger volume, 32, 40, 48-ounce online does really well, where in the retail channel, they might sell 6, 8, 12, smaller individual sizes. And they might be, again, the same product, but totally different brand names on them, and totally different arrays of packages in which they're packaged are channel-specific because, one, these larger packages might require more over-boxing because if it has dish soap, you don't want a leaker in dish soap. So that might require more to get to your doorstep versus getting to a retailer.
So again, the more sophisticated brands are doing that. The companies that have the personnel, manpower, and just brainpower on staff are doing that. Now, that's not true of a lot of startups, but I think startups' out of jail free or cheat card is to turn to a 3PL, that stands for third party logistics company, whose entire raison d'etre is to have that knowledge and have that skillset within to be able to handle a carrier channel platform, but also package style and optimization of package style for the channel.
Sean Riley: Okay. All right. So we brought 3PLs into that. I was wondering about the logistics part. I personally have to think that it's a nightmare, the logistics part of e-commerce and DTC, but at the same time, I have to think now that we're 10 years or 15 years into this, it's been simplified a bit, but I don't think the data has revealed that, has it?
Matt Reynolds: No, no. Well, I think it's gotten more complex. It's become a more complex ecosystem. There's more layers, it's more striated, there's more distribution. I mentioned drop shippers. Amazon's its own thing. You can sell directly from the merchant, or you can sell through Amazon. Every single one of these has a slightly different permutation, slightly different cost structure. I don't mean to make this a commercial for 3PLs, but their knowledge base is to navigate that landscape. So for many—
Sean Riley: That's their niche.
Matt Reynolds: Yeah, for smaller brands that don't have that in-house... And some smaller brands bring that in-house by just they learn it, or they learn one corner of the industry really well. But to be able to really sell across the omnichannel and appear on shelf in retail and also on your front porch, potentially in unique packaging in each case, potentially with the same product in a different brand, you need either somebody dedicated on your own team whose entire job is to understand how to handle the carriers, how to handle the platforms, because all of that, unlike packaging and the packaging attribution mentioned before, sustainability, appearance and robustness, that's all within the control of the brand owner who's selling the package.
It's the carrier complexity, the platform complexity. The questions about "When is it time to split from omnichannel packaging, where one package serves all channels? Is it time to split that supply chain in two and add that complexity to then reap the benefits of the efficiencies that you're creating?" Somebody out there has a master's degree in it. So a lot of people trying to do it themselves are outsourcing that information on logistics, and that's where the 3PLs come in.
Sean Riley: Okay, very interesting. So all right, I mean, we've given them a lot of information, them being the thousands that are listening. What other challenges? We don't want to give away the whole report or the whole section of the report. What other challenges, packaging or otherwise, are on the minds of e-comm or DTC sellers to put a button on this?
Matt Reynolds: Yeah. I think I touched on it already, but just to draw specific attention to it, is that the omnichannel and every channel within it is its own unique animal. There are these distinct things. So the more sophisticated and resource-rich that a brand owner can become, and that's out of a lot of people's control... The more sophisticated and the more resources you have, the more optimized that packaging and your branding options can become for the specific channel.
So the question becomes, "Are you an omnichannel company or are you going to really carve out one niche within the omnichannel to do really well?" And some companies are able to do it all, but I think it just requires brain power and sophistication that might be out of the reach of some startups, but that's why companies are growing and being acquired, and I think these are just steps in any natural growth trajectory for a brand owner.
Sean Riley: All right. That's awesome. So if you want to check out the full Packaging World annual outlook report on e-commerce and direct-to-consumer packaging, again, visit pwgo.to/8693 to download it for free. That's pwgo.to/8693 to download it for free. And we're going to have all the different segments of the outlook report that are all going to be downloadable for free. It can change charts, graphs, really helps illustrate it, and kind of bring to life everything that we discussed here. So it's not just Matt and I talking.
The reports aren't just quantitative. We ran the survey by CPG experts to get their feedback on what they thought of the data, whether they agreed, disagreed, thought it was silly, thought it was great, and feedback to really round out the report. So again, one last time, pwgo.to/8693. And thanks for listening to this edition of Through the Line Podcast. We hope you'll join us for the next one. Thanks, Matt.
Thanks for listening to this episode of UnPACKed with PMMI. If you liked what you heard, be sure to follow or subscribe on Apple Podcasts, Spotify, or wherever you listen. That way, you won't miss any of the industry insights coming your way. While you're there, we'd really appreciate a rating or review. Want more? Visit pmmi.org/podcasts for all of our past episodes and additional resources. Thanks again for tuning in. I'll see you next time.
