Store closures, idling factories, energy and raw material shortages and rising costs… The chain of events set off by Russia’s invasion of Ukraine is causing shockwaves throughout the luxury market. Is the packaging supply chain at risk of becoming a quagmire?
The urgent issues facing the luxury ecosystem resulting from the health pandemic – namely logistics, sourcing and rising energy costs – are being heavily compounded by the current conflict in Ukraine. While more regional as compared to the global impact of Covid-19, industry analysts concur that the war will have far-reaching effects on the industry, well beyond Ukraine and Russia. “The conflict (...) further increases the risks to the global supply chain, which is already in a situation of extreme uncertainty and tension,” confirms French consultancy KYU Associés. Indeed, interruptions in rail freight between China and Europe (routes that have become increasingly favored over the past two years) are set to cause havoc in the supply chain, while air and maritime transport costs will escalate.
Each day since Russia's invasion of Ukraine on February 24th has brought news from the luxury front as companies began shuttering their retail presence in Russia. Hermès and Cartier were the first to announce that they were temporarily pulling out of Russia by closing their retail stores. Chanel, LVMH and Kering followed suit. L’Oréal announced on March 8th that it was closing its owned stores and directly operated department-store counters in the country in addition to its branded e-commerce sites. While these moves communicate opposition to the invasion (with those companies not taking action risking a backlash from their consumers), an additional reasoning is ensuring supply: as the conflict deepens, exporting goods to Russia is becoming increasingly difficult, if not impossible. Shiseido Group announced on March 9th that it is suspending all exports to Russia from Europe, the unique hub supplying the group's products to the country.
This chain of events is putting certain pressure on suppliers. A US-based beauty packaging group with an industrial site in Russia told Luxe Packaging Insight that it was manufacturing as of early this week, but for how long? “We have sufficient raw materials to maintain production for the next few weeks, but as we cannot move supply through Belarus or Ukraine, I can’t speak for what will happen in the short-term.”
There has been little mention of factory closures from major packaging groups thus far, with a few exceptions: French glassmaker Verallia announced on February 28th that it was closing its Zorya glassworks in western Ukraine; the site represents just €50m of the group’s €2.5bn annual turnover and exports half of its production, the remaining half goes to the local market. Its two furnaces will remain lit for the meantime. On March 2nd, Finnish paperboard manufacturer Stora Enso announced it was closing its three packaging plants and two sawmills in Russia as well as stopping all import and export transactions in the country, which accounts for 3% of the group’s sales.
Wood sourcing on the line
Wood-based packaging is the most impacted for now due to European suppliers’ dependence on timber from the region. According to the European Federation of Wooden Pallet & Packaging Manufacturers (FEFPEB), Ukraine is a key source of sawn softwood timber for Western European markets. “The severe slowdown in the Ukrainian economy and halted production will have a serious and direct impact on countries including the biggest importers of softwood: Hungary, Italy and Germany. Across Europe we will see growing competition for more limited wood supplies and an upwards pressure on prices,” said the FEFPEB in a statement. The trade sanctions against Russia, a major exporter of spruce and pine, and Belarus will “significantly impact Europe as well,” added the Federation, warning that the industry should also be prepared to face rising energy costs.
The price of metals is also seeing significant increases in reaction to the war, Russia and Ukraine being among the leading exporters to Europe: “The sanctions against Russia will lead to higher prices for aluminum, copper and platinum, which will have to be sourced elsewhere,” notes KYU Associés.
The energy conundrum
Escalating energy costs are looming large in Europe in light of the conflict. “The energy issue was already crucial mid-2021 both in terms of cost and securing supply, but we are now facing an extreme situation. We don’t know if tomorrow we’ll have enough energy for our manufacturing needs or if the price will allow us to maintain acceptable levels of production,” remarks the executive of a major beauty packaging group. “The current increase in prices, or potential reduction in volumes supplied by Russia in retaliation for the economic sanctions imposed by Europe and the US could lead some companies to stop their activity due to their inability to defer additional costs or a lack of available resources,” adds KYU Associés.
How will this crisis situation evolve in the foreseeable future? “We’ve reached a maximum level of uncertainty; our clients are asking us about our ability to ensure supply, but they have little to no visibility on their orders. We are all mired in uncertainty,” adds the packaging executive. “While from a market standpoint, consumer demand is taking off in North America and in Asia, Europe is another question entirely. We’ll have to wait and see.”
The impact of the war in Ukraine on packaging suppliers will be one of the issues addressed in Luxe Packaging Insight’s Webinar on Tuesday March 15th: Beauty Packaging & Producing Closer to Consumer Markets. Register here.