The Business Of Amazon Shipping Boxes

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Oh Seymour, not the box factory again!

👍︎︎ 31 👤︎︎ u/Mantaur4HOF 📅︎︎ Jul 16 2019 🗫︎ replies
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For the past few years delivery boxes have been piling up on people's doorsteps and in apartment buildings across the U.S. Faster delivery, easier return policies and free shipping have fueled growth in the retail e-commerce market. Amazon alone shipped over 5 billion packages through Prime in 2017 and in 2019 announced they are expanding their one-day delivery service to over 10 million products. The corrugated box is a great medium for transporting things because it's durable and sturdy and from a damage standpoint you're going to have less risk of that getting damaged in the supply chain. A corrugated box is the brown paper box that is used to ship roughly 95 percent of all products in the U.S. The corrugated boxes is probably the single best mousetrap to get goods from point A to point B, its recyclable and returnable reusable. Shipping cost Amazon $27 billion in 2018 which is more than double the amount it spent in 2015. That growth has been great news for the paper and packaging industry after the move to digital devices caused a drop in production of copy paper and newsprint. There's no question that it's, I don't want to call it a salvation but it's been a ray of sunshine a point of visible growth within companies where other segments of their business were clearly in decline. Amazon has been blamed for everything from the death of brick and mortar retail to the financial woes of the post office. But the rise of e-commerce shipping boxes has provided a boost to the stagnant cardboard box market. The box business now faces a new challenge from lighter and cheaper plastic packaging that has proliferated in recent years due to a transformation in the way packages are shipped. And as Amazon tries to cut down its carbon footprint the containerboard industry is bracing for the fallout. Which begs the question with multiple headwinds on the horizon will paper based cardboard boxes that have been used for generations and thrived in the age of e-commerce continue to flourish or could the cardboard box be facing a new challenger? Cardboard boxes are a really big deal in the U.S. The United States is the Saudi Arabia of trees. Someone's gonna make the first box and that's almost inevitably a mill generally in the Southeast United States. China certainly doesn't have trees and India the extent they do have trees they're not necessarily the right types of trees and shouldn't be dedicated towards making boxes for us. The box business grew rapidly up through 1999 when the U.S. coordinated box market had its peak shipment. Starting in the early 2000s the U.S. corrugated box market faced multiple economic obstacles. The great recession dragged on box demand and even after the recession demand continued to slow for consumer goods like soda and for the boxes that transport them. The move to digital devices also coincided with a drop in demand for copy paper and newsprint. But box makers found a saving grace in e-commerce sales and Amazon sale specifically which were growing at mostly double digit rates in the recession and post-recession years. Those e-commerce sales have become a significant market for the containerboard industry. In 2018 told a U.S. e-commerce sales were estimated to be $512 billion almost 50 percent higher than in 2015. Amazon captured 48 percent of those sales. Most estimates are that e-commerce accounts for about 10 percent of the U.S. box market. Amazon accounts for close to 5 percent of U.S. box demand. By our estimates they are clearly the single largest box user in the US. International Paper with a third of the market I think does closer to 50 percent of all the amazon boxes evidently they got a bit more share than perhaps some of the smaller players. Amazon said they deal with most of the big box makers across the U.S. according to analysts. Those manufacturers include International Paper, WestRock, Packaging Corporation of America and Georgia-Pacific. Some investors were turning to these companies as a way to invest in the e-commerce giant without having to purchase Amazon's pricey stock. People didn't really start talking about buying International Paper or WestRock as a secondary investment in Amazon till about the last five years. Despite the boost from e-commerce sales the box business still isn't growing all that much. And since 2018 their stocks have mostly underperformed the S&P 500. In 2018, 69 percent of International Papers total revenue came from the box business and that sales volume has been mostly flat for the past five years. Although the big producers sold less boxes in 2018 than in 2000, industry consolidation has dramatically narrowed the fields. The handful of big players remaining are based in Memphis, Tennessee, Atlanta, Georgia and Lake Forest, Illinois. Analysts have told CNBC that substantial industry mergers have made it easier to collectively hike prices and those price increases have helped drive revenue. There are portions of the business that are in indisputable secular decline but if you're in the brown part of the business, making these boxes, that's been some very welcome growth. But those extra boxes piling up on people's doorsteps have led to a backlash from disgruntled customers who are sick of receiving golf ball sized products in supersized boxes. It used to be that you'd order a toothbrush and it would come in three giant boxes and you'd say to yourself, what is this? Well, Amazon is trying to rectify that by using fewer boxes and using other types of packaging where appropriate. With e-commerce packaging underfire Amazon decided to change the way they do shipping. In 2008, Amazon introduced the Frustration Free Packaging program. It aims to reduce the extra packaging created when retail packaged products are placed inside Amazon boxes to be shipped. Instead, products certified in the program that are roughly the size of a blender or larger need to be packaged in their own ready to ship boxes. And those boxes also need to be made of 100 percent recyclable materials. For customers that means that the packaging is easy to recycle and the box is easy to open without all the excess packaging materials. For a year. Amazon offered vendors an incentive of a dollar per shipment to modify their packaging. And starting August 1st 2019 Amazon is charging a $1.99 penalty for each product shipped that needs to be reboxed. And basically the point of this deadline is for Amazon to get out of the business of packaging. They want their vendors to send them boxes that Amazon doesn't have to touch or rebox. Amazon says that in the 10 years since its rolled out the program in 2008, it saved them from shipping out 500 million shipping boxes and reduced their packaging materials by 244,000 tons. Even corrugate waste that can be properly recycled is still a burden placed on the customer to tear down and properly recycle so this is just a recognition that we want e-commerce to be the most sustainable easiest choice for our customers. In those shift by Amazon have made the corrugated industry rethink the way it does business. International Paper said in an email to CNBC, "At the start of the Ecomm boom it was really difficult to forecast demand. There is a big focus on improving efficiencies through right sized packaging." But, with Amazon using fewer and smaller cardboard boxes in the future that could prove to be bad news for the box makers. Before Amazon launched Prime in 2005 free two-day shipping wasn't a thing. Today it's the norm. In an effort to reduce costs and ship out an ever increasing number of products faster Amazon moved to plastic mailers and plastic bags for many of its smaller products. If your shipping clothes that don't need to be in boxes they can go in a flexible plastic mailer. As a result of which you've seen more and more products go into flexible plastic mailers. Over the past year or so it's just part of Amazon's overall effort to reduce its costs. Over the last few years we've recognized that there is a great role to play for flexible packaging of all types and we've reduced our overall corrugate and shifted many of our smaller items to being shipped out bound in flexible packaging. It's made a pretty profound difference we've reduced substantially our use of corrugate box. Sealed Air a packaging company that invented bubble wrap in 1957 started working with Amazon in 1996 developing inflatable pillows for the company to ship books. The evolution of packaging for e-commerce it really started off quite basic. Whatever item you received you received it in packaging that was probably designed to ship on a pallet and go to a retail store. What e-commerce companies did was they take those items and they put it into another box. What's evolved is you now see a lot more flexible packaging. There is a lot of competition in the mailer market in generally mailers are a low margin product. As of 2019 Sealed Air a leader in the protective packaging market makes food packaging, air pillows and automated packaging systems for e-commerce. Sealed Air had a revenue of $4.7 billion dollars in 2018 up modestly from a revenue $4.5 billion dollars in 2010. When you think about the challenges that e-commerce fulfillment companies face it's really in shipping expense because if you give away shipping I mean someone's paying for that and it typically is the e-commerce fulfillment company. There is a lot of desire to decrease the amount of labor, when you are able to get it, it's hard to retain it and it's expensive, automation has really been where we have spent a great deal of our time investing. Around 2010, Amazon started using Jiffy padded envelopes with Kraft paper on the outside in plastic bubbles on the inside. Over the last two years we have invented two different kinds of flexible mailers. One is the blue and white all plastic mailer. We've recently launched in the last six, eight months a paper padded mailer that's actually fully recyclable with the paper stream. Amazon said they made about 10 million shipments using the paper padded mailer and depending on the month the plastic mailer is used about 20 to 30 percent of the time. So really when we come down to deciding if the product is of the size it can go on a mailer, it's not likely to be damaged by going in the mailer, the mailer is always the better fitting option and frankly is easier for the customer to choose to recycle than breaking down a corrugate box. We're driving in that direction for many different reasons. But those plastic mailers generally are not accepted in municipal recycling programs and you'll need to bring them to a store that accepts plastic bags. Many cities have film recycling and take back programs through stores then that plastic mailer makes sense but we've basically moved away from a non-recyclable to two recyclable options. Plastic mailers have some benefits for the environment. A corrugated box uses 23 times more energy and produces six times more CO2 than a bubble mailer to manufacture. Plastic mailers take up less space in containers and trucks making shipping more efficient. But in the paper versus plastic debate not everyone agrees. Environmentalists argue in practice the plastic mailers aren't better for the environment. They say these products need to be recycled separately from other plastics and they aren't recyclable in curbside bins. Two huge barriers to recycling. The latest stats from the EPA show that corrugated boxes were recycled at a rate of 92 percent in 2015 while plastic bags, sacks and wraps were recycled at a rate of 13 percent in 2015. When you think about what is the greatest pain point for the consumer after having it get there safely arrive on time people are concerned about receiving something that is plastic or made a poly because of the environmental concerns. Some waste management companies say plastic packaging also causes problems for the recycling systems. Plastic mailers get caught in the recycling machinery slowing down the process and raising the costs for recyclers and sometimes contaminating entire bundles. Until Scotty on the Enterprise can beam the products from the warehouse to your living room I think Amazon's gonna be good for the corrugated business. I think there's going to be noise I think you're gonna have challenges from time to time where people say, "Should we try and the plastic pouch?", in the long run plastic is gonna be on the wrong side of history. Because Amazon is a market leader in the U.S. e-commerce sector any move away from cardboard to plastic mailers could signal a shift for the entire industry. The corrugated box could be about to undergo a major facelift. We're seeing some major trends among consumers and what they're expecting from e-commerce and the first one is actually this desire for increased engagement with the package. In 2015, Amazon partnered with Universal Pictures and Illumination Entertainment to ship orders in bright yellow delivery boxes featuring cartoon characters from the movie Minions. The boxes promoting the movie and a special Amazon U.R.L. dedicated to shopping for merchandise from the film. If a millennial is going to look at it and it's gonna be an Instagram moment then we need to be thinking about what can we do with the package to help foster that. At Amazon an engineering team is working on redesigning the cardboard box. In 2018, using computational engineering they began to test the stress and strains and vibration effects of packages as the moving trucks across the country. We've optimized the weight of the corrugate box and reduced the overall weight of our boxes by about 9 percent. And we've reduced the size of our box meaning making them fit better and our customers are seeing in some cases much of an 18 to 20 percent reduction in the weight of the recycled corrugate waste that they would have seen coming into their home. While items like clothing and diapers can ship in a plastic flexible mailer, electronics and easily damaged goods will still need the protection offered by a corrugated box. Despite headwinds in the economy and inroads from plastic mailers demand for cardboard boxes from Amazon continues to remain high. Even though Amazon is using some smaller boxes, the four companies that I mentioned have not been talking about less demand from Amazon they're talking about more demand from Amazon. And if it's smarter demand from Amazon I still think they're to get paid for that. With U.S. online retail sales expected to surpass a trillion dollars by 2025, double the amount it reached in 2018, the market for e-commerce packaging could increase rapidly in the coming years despite Amazon's effort to cut down its shipping footprint. E-commerce packaging which includes corrugated packaging as well as flexible packaging will grow at about 14 percent every year from 2017 through 2022 reaching almost $55 billion in 2022. That growth could deliver sizable returns for the cardboard box makers and we're likely to see even more boxes and plastic mailers piled outside of people's homes in the future.
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Channel: CNBC
Views: 1,976,106
Rating: 4.8480811 out of 5
Keywords: CNBC, business, news, finance stock, stock market, news channel, news station, breaking news, us news, world news, cable, cable news, finance news, money, money tips, financial news, Stock market news, stocks, classic footage, retro footage, Amazon, Amazon Shipping, Amazon Prime, Amazon free shipping, shipping boxes, AMZN, AMZN stock, AMZN price, Amazon stock, Jeff Bezos, Amazon customer service
Id: bYh1KTfydvU
Channel Id: undefined
Length: 15min 58sec (958 seconds)
Published: Tue Jul 09 2019
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