The pressure to innovate remains high

Between sluggish demand, regulatory headwinds and growing pressure to innovate, here’s how the market is reorganising itself - and where opportunities for consolidation, growth and sustainable transformation await. Ahead of the publication of the M+A industry analysis Q1/2025, Dietmar Flügel and Mario Males from BDO AG Wirtschaftsprüfungsgesellschaft provide an exclusive insight into current developments in the packaging industry. Read part 1 here.

Dietmar Flügel: The decline in the ifo Business Climate Index was due to several factors: subdued demand as a result of the ongoing recession and moderate economic expectations in Germany, high macroeconomic and geopolitical volatility - which in turn has a negative impact on willingness to invest - high material and energy costs, high international competitive pressure, a shortage of skilled workers and a high degree of bureaucratisation. However, these factors are not only affecting the packaging industry, but also reflect the current tense situation in large parts of German industry.

Many packaging companies are experiencing declining sales and are reporting an expanding order situation, which in turn is leading to a reduction in capacity utilisation. As a result, companies are increasingly considering temporary production adjustments, such as reducing shifts or temporarily shutting down individual plants in order to respond to fluctuating demand. Overall, the demands on the operational and technological flexibility of packaging companies are increasing in order to be adequately prepared for situational challenges and crises.

In the medium to long term, there will inevitably be significant changes to packaging manufacturers' machinery. Far-reaching legislative changes in the circular economy require companies to make time-critical investments to comply with new environmental standards, such as the EU Packaging Ordinance (PPWR). In order to secure their long-term competitiveness and comply with regulatory requirements, companies must reorganise their processes and input materials in such a way that they permanently integrate circular economy concepts, resource efficiency and the use of recyclates, ideally without compromising on the functional performance of their end products.

Mario Males: The observed price reductions can be interpreted in part as an indicator of the ongoing competitive and demand pressure in the industry. The price trend in the plastic packaging segment in particular was volatile in the first quarter of 2025. In the paper packaging segment, on the other hand, many manufacturers see themselves under pressure to raise prices, while the market as a whole remains uncertain and price negotiations are challenging in dynamic times. Although price cuts have become less frequent for glass packaging, the business situation remains tense due to subdued demand.

Long-term sustained or recurring price reductions inevitably lead to increased pressure on margins, which usually results in more intense price wars and predatory competition within the packaging industry. Intensified price competition can also act as a stumbling block for necessary investments in innovation and sustainability, as financial equity becomes scarcer and the ability to service debt for investment loans is restricted.

Dietmar Flügel: We are seeing increasing consolidation in the still highly fragmented and only moderately growing German packaging market. In addition to strategic investors, family offices and financial investors in particular, who acted as acquirers in around a quarter of the global corporate transactions of packaging manufacturers in quarter 1/2025, have increased their interest in this sector in recent years. Financial investors can achieve significant competitive advantages through targeted company acquisitions and the associated economies of scale that result from bundling medium-sized and smaller companies as part of buy-and-build strategies. At the same time, financial investors initiate AI-supported measures to improve efficiency and performance in order to increase the competitiveness of their packaging companies.

The ECB's recent interest rate cuts are improving the affordability of transactions. and thus creating more favourable conditions for an increase in deal momentum, particularly for financial investors. Private equity also has significant uninvested capital (‘dry powder’) totalling around USD 1.2 trillion worldwide, of which around USD 3.5 billion is in Germany. Small and medium-sized companies in particular face organisational challenges when reaching certain critical company sizes. In these cases, financial investors can offer considerable added value with their comprehensive management expertise - including with regard to the development of structures, efficiency programmes and margin optimisation - as well as their financial strength.

The pressure to innovate remains high, driven in particular by new regulatory requirements, demanding sustainability targets and changing consumer behaviour. Companies must invest more in sustainable materials, circular economy concepts and technological progress in order to remain competitive. Innovations such as automation, digitalisation and smart packaging are key to increasing efficiency, tapping into new market segments and standing out from the competition. The ability to quickly implement innovative and sustainable solutions in a volatile market environment is becoming a key success factor in securing and expanding the market position of packaging manufacturers.

Mario Males: The dynamic development in the increasing use of recyclates by German packaging manufacturers is a positive signal on the way to a circular economy that takes into account both stricter regulatory requirements and technological progress. Nevertheless, the study cited shows that key targets - such as the use of one million tonnes of recyclate by 2025 - are likely to be missed. The use of recyclates in contact-sensitive packaging and the fulfilment of the ambitious PPWR targets remain particularly challenging. To accelerate the transformation, progress in collection, sorting, ‘design for recycling’ and faster authorisation procedures for recyclates in food contact are absolutely essential. In addition, product-specific recyclate use quotas, levies on packaging that is difficult to recycle and financial incentives for the use of recyclates could strengthen supply and demand in a targeted manner.

Dietmar Flügel: Small and medium-sized companies in particular are facing considerable challenges. Compliance with the Packaging Ordinance requires investments in modern technologies under difficult geopolitical and economic conditions as well as adjustments in packaging design, production and closer cooperation along the entire supply chain. The sometimes complex requirements regarding reusable quotas, recyclability and extensive documentation obligations are forcing packaging companies to prepare for the challenges in a structured manner at short notice. Many smaller packaging manufacturers are already finding it difficult to keep track of the constantly growing regulatory requirements and implement them in a legally compliant manner while maintaining product functionality. It is therefore to be expected that stricter requirements will further strengthen existing consolidation trends in the industry.

Nevertheless, German packaging companies are well positioned overall in a European comparison, benefit from a high level of innovation and in some cases have made significant progress in the development and implementation of sustainable packaging solutions.

Mario Males: Materials that are difficult to recycle, such as coloured plastics or multilayer packaging, for which hardly any suitable recyclates are available, are particularly problematic. In order to significantly improve recyclability, the focus is shifting to the development of new packaging designs - especially those that rely on monomaterials and easy separability. A holistic approach also requires investment in sorting and recycling technologies, research into more recyclable materials and the nationwide development of efficient take-back and reusable systems. These measures entail additional logistical requirements, structural adjustments and considerable costs. Implementation is made more difficult by the lack of harmonisation at EU level, as there are national differences in infrastructure and inconsistent standards. Overall, the PPWR is forcing the industry to undergo fundamental change - but also offers the opportunity to act as a catalyst for innovation, the circular economy and environmental sustainability. The prerequisite for this is joint, practical action by politics, business and society.

Read part 2 of the interview.