Sonoco Products Navigates Volume Headwinds Amid Inventory Destocking and Tepid Consumer Spending

Equity Analyst

Spencer Liberman

Sonoco Products makes a wide range of consumer and industrial packaging, from Pringles cans to foam automotive bumpers to toilet paper cores. The company operates over 300 manufacturing facilities and serves customers across 85 countries, with North America accounting for roughly 75% of sales. Its two primary segments, consumer packaging and industrial paper packaging, supply customers with both flexible and rigid packaging products that serve nearly any packaging need. In recent years, Sonoco has undergone a portfolio transformation; it now focuses on a few core businesses and has divested from nonprioritized products and markets like high-density film, European contract packaging, and more.

Sonoco’s consumer packaging segment accounts for roughly 53% of consolidated revenue and produces a wide variety of flexible and rigid packaging that mainly serves food, beverage, and personal product end markets. Rigid paper-based containers represent the largest portion of the segment (roughly 40% of sales), with metal (30%) and plastic (30%) packaging accounting for the remainder of segment revenue. In the food business, packaging materials are held to a higher standard as they need to protect products from damage while limiting spoilage. Sonoco’s customers are highly concerned about reputational and legal risks that could result from spoiled food, which can lead to strong relationships between food processors and the packaging producers.

The industrial paper packaging segment (35% of consolidated sales) produces fiber-based packaging for industrial, consumer discretionary, and consumer staple end markets. All of the paper Sonoco produces is from recycled materials and roughly half is used internally for the company's paper-based packaging products, with the remainder sold to third parties.

In 2022, Sonoco acquired Ball Metalpack for roughly $1.4 billion. Ball Metalpack is one of the largest producers of steel tinplate food containers and aerosol cans, with roughly all of its sales in the United States. This move expands Sonoco’s food packaging portfolio while reducing its exposure to cyclical industrial end markets.

Business Strategy & Outlook

We do not think Sonoco Products benefits from an economic moat, despite being one of the largest packaging producers in North America. A majority of the packaging products produced by Sonoco are not proprietary to the firm and have relatively uniform manufacturing techniques. Transforming resins into food trays, recycled fiber into cardboard cores, or wood into utility reels is relatively easy with today’s manufacturing techniques and does not lend itself to durable competitive advantages. Sonoco’s competition is abundant, with competitors varying in size from larger packaging conglomerates to regional producers with expertise in particular products and end markets. While there are some traces of cost advantage and efficient scale moat sources, we do not think they are substantial enough to award Sonoco an economic moat.

Sonoco is one of the largest producers of flexible and rigid packaging products, often maintaining a top-five market share position in the regions it operates. Sonoco’s vast product portfolio enables it to partner with large packaged goods companies that require packaging for a wide variety of products. It's easier for large customers to partner with Sonoco for their packaging requirements rather than sourcing packaging from numerous small competitors with limited portfolios. Nevertheless, most of the packaging Sonoco produces is not unique, and strong competition can exist in any one substrate—in particular with paperboard, rigid and flexible packaging, and ends and closures. When one of Sonoco's multiyear contracts expires in one of these competitive markets, its customers will probably hold competitive bids in order to minimize their costs, and there's no guarantee that Sonoco will retain the business on attractive terms. 

Some packaging companies are able to generate durable competitive advantages from the low value/weight ratio of their products. This is the case for aluminum beverage can and steel food producers. In these instances, beverage cans and steel food containers cannot be shipped more than 200-300 miles, which gives producers an advantage over competitors located further away that would need to incur higher transportation costs to sell their products. Aluminum can and steel food container producers generally benefit from an efficient scale moat source, where a few large competitors serve regional markets and the entry of an additional competitor would likely impair the profitability of the incumbents. Producers operate large plants to spread fixed costs and engage in long-term contracts with customers, which leads to predictable demand. Due to the high costs associated with producing metal packaging, competitors are encouraged to act rationally and have over the years. In 2022, Sonoco purchased Ball Metalpack for $1.4 billion, which added steel food containers and aerosol cans to its portfolio. Now, metal food containers account for roughly 15% of Sonoco’s consolidated revenue. While we think the metal food business probably benefits from a transportation cost advantage, it is not a large enough business to support an economic moat for the consolidated Sonoco, in our view.

For the majority of Sonoco’s portfolio, the value/weight ratio of its products does not lend itself to similar competitive advantages seen in the metal packaging business. It is important to note that the value/weight ratio of metal packaging products does generate durable competitive advantages alone. High capital costs and long-term contracts prevent new entrants from joining the market, as doing so would be immediately unprofitable. This creates a strong barrier to entry for new entrants and enables incumbents to earn ample returns. For flexible and rigid packaging products, most are designed with transportation in mind. For instance, plastic clamshell containers used to package fruits are designed to stack within each other to optimize space when shipping. While the value/weight ratio of plastic clamshells is also low, hundreds can fit into a single box for shipment, which improves transportation efficiency. Many of Sonoco’s other flexible packaging products are either designed to stack as well or can be flattened when shipped (like resealable plastic bags and pouches). For rigid packaging, many paperboard-based products are shipped flat and then glued at the packaging facility. This enables the paperboard and other packaging materials to be stacked when shipping, which increases the distance these products can be transported. While Sonoco has flexible and rigid packaging products that likely benefit from a transportation cost advantage (such as composite cans), for a majority of its products, large competitors have similar manufacturing networks and often operate their plants in close proximity. This is because packaging companies tend to operate manufacturing plants near customers to limit transportation costs. We think this largely negates Sonoco’s ability to capitalize on the low value/weight ratio of its products as it is forced to compete with nearby competitors that would incur comparable transportation costs. Without a cost advantage or presence of the efficient scale phenomenon, we do not think that Sonoco, being a packaging producer, possesses an economic moat. 

Some packaging companies operate under a razor-and-blade model. In this model, the company sells its packaging equipment to customers and supplies them with the materials needed to pack their products. The equipment is usually integrated into its customers manufacturing processes, which leads to strong switching costs. As a result, once a customer has integrated a system that functions as designed, required downtime and operational risk of a new system leads to low levels of customer turnover. Sonoco offers packaging equipment for some of its medical packaging materials, but the majority of its packaging materials do not have complimentary equipment. Consequently, Sonoco’s customers are less reliant on the company for its largely commoditized packaging products. Sonoco generally enters into contracts with customers that are three to five years in length, which enables customers to evaluate their packaging contract relatively frequently. Once contracts expire, customers can source new packaging providers without having to worry about the impact that new equipment could have on its manufacturing process. This limits Sonoco’s ability to earn strong returns as it’s forced to compete on price to retain customers.

None

Economic Moat

Sonoco Products

Sonoco Products Co. engages in the manufacture of industrial and consumer packaging products and services. It operates through the following segments: Consumer Packaging, Paper and Industrial Converted Products, Protective Solutions, and Display and Packaging. The Consumer Packaging segment offers round and shaped rigid containers, fiber and plastic caulk and adhesive tubes, and aluminum, steel, and peelable membrane easy-open closures for paper and metal cans. The Paper and Industrial Converted Products segment produces recycled paperboard, chipboard, tubeboard, lightweight corestock, and boxboard. The Protective Solutions segment manufactures custom-engineered, paperboard-based, and molded foam protective packaging and components. The Display and Packaging segment consists of point-of-purchase displays, custom packaging, retail packaging, and supply chain management. The company was founded on May 10, 1899, and is headquartered at Hartsville, SC.

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Earnings data Q1 2024

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Sonoco Products Co. engages in the manufacture of industrial and consumer packaging products and services. It operates through the following segments: Consumer Packaging, Industrial Paper Packaging, and All Other. The Consumer Packaging segment offers round and shaped rigid containers, fiber and plastic caulk and adhesive tubes, and aluminum, steel, and peelable membrane easy-open closures for paper and metal cans. The Industrial Paper Packaging segment produces recycled paperboard, chipboard, tubeboard, lightweight corestock, and boxboard. The All Other segment consists of corporate expenses allocated as operating costs through the business segments. The company was founded on May 10, 1899, and is headquartered at Hartsville, SC.

Packaging company Sonoco SON, +0.16% said Thursday it is raising the price of uncoated recycled paperboard in the U.S. and Canada by $60 per ton effective Nov. 1. The price change will apply to all grades of URB.

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News for Sonoco Products Stock (SON)