FreightWaves has published several stories in recent weeks about ongoing weakness in U.S. packaging demand, the result of intensifying pressure on Americans’ inflation-adjusted income as unprecedented government stimulus support wanes, elevated inflation persists and corporate layoff announcements multiply.
Those pressures were evident in Costco’s March sales results a few weeks ago and have been similarly reflected in ongoing historic box demand weakness and full-year sales and volume guidance reductions by the likes of Avery Dennison, a large label manufacturer, and bottle producer O-I Glass after just one quarter of the year.
Tuesday morning brought more of the same: Sealed Air, the maker of the iconic Bubble Wrap, reported a 9.3% volume decline in Q1 following a 10.4% decline in Q4, both of which are historically steep drops; the company last experienced such severe declines during the Great Financial Crisis.
As readers might recall, much the same applies to box demand; box producers are experiencing the steepest declines since the 2008-2009 period. Sealed Air missed consensus profit estimates in Q1 owing to the sharp volume decline.
While Sealed Air’s headline volume decline is sufficiently eye-opening, there’s even more to the story. Its food packaging volumes were down 2.6%, while its far more economically sensitive protecting packaging volumes were down a cool 18.2%. Many consumers have observed more items being shipped to their front doorsteps in bubble envelopes or paper bags as opposed to boxes, but Sealed Air, a large mailer producer, doesn’t appear to be benefiting. The company attributed the 18% decline in its protective packaging volumes to recessionary conditions in the industrial and fulfillment markets and continued inventory destocking, the latter of which has been a common refrain among packaging companies in Q1.
Many packaging and other companies attributed their unexpected volume weakness in Q4 in large part to inventory destocking and continue to point the finger at the same this quarter as some keep cutting their sales guidance. As for when this destocking will end, that remains unclear. And why should investors expect underlying consumer demand to improve amid historically large bank failures, falling bank lending and rising credit card and auto loan delinquency rates? That question appears to have been left unanswered. Perhaps a better question is why investors shouldn’t expect underlying demand to deteriorate rather than improve, which could prompt continued public company commentary about destocking.
How much confidence should investors have in companies’ current demand and volume outlooks given the above? We note that Sealed Air started out 2022 guiding to about 3% volume growth; instead, the company experienced a 6% decline — and now another 9% decline in Q1. And it’s not as if Sealed Air is an especially cyclical business: About 65% of its sales are to the food, liquids and medical/health care markets.