viewpoint Consumer electronics viewpoint and beyond The consumer electronics industry Stora Enso viewpoint 1/2014

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1 Stora Enso 1/2014 Consumer electronics and beyond Consumers of electronics products have become used to continuously expecting more. Demand shifts quickly, and new product launches and several mega-trends will impact the expected future of the electronics industry. Packaging grows in importance as it is gradually further integrated with both brand and product. As such packaging is so much more than just a box containing a product. This brings clarity to how a brand owner can use packaging to create a competitive advantage. The consumer electronics industry The consumer electronics industry covers a wide range of appliances used every day in communication, entertainment and for business purposes. From a packaging perspective the industry can be divided into two sub-segments: Small appliances: e.g. cell phones and accessories Large appliances: e.g. TVs and computers The industy consumes a significant amount of corrugated material and the volume is expected to grow at a rate of 6 % per year during the next 5 years (Smithers Pira: The future of Global Markets for Corrugated Board Packaging to 2017). On a global scale corrugated and carton materials make up 31 % of the total amount of materials used in packaging cross all industry segments and the distribution between materials is expected to stay at the same levels also in the future (Smithers Pira International). This will focus primarily on packaging aimed at protecting and transporting a product, i.e. secondary packaging. However, as there are commonalities with other types of packaging as well, several of the conclusions will be valid also to primary packaging. We will also address those aspects where packaging also has a purpose to communicate a message, create awareness or support differentiation.

2 Recycled fibre Virgin fibre Recycled CCM Virgin CCM Design Converting (incl. corrugation) Contract filling /packers Logistics providers Brand owner Logistics providers Wholesale Retail Warehouse Online Retail Consumer The consumer electronics packaging value chain The value chain dynamics (i.e. the power play between the different steps) continuously evolve over time. From a packaging perspective there are at least six developments that should receive specific attention: 1. The consumer is gradually becoming more powerful as a result of being better informed and the fact that the retail arena is very competitive. 2. Physical retailers are losers in the power balance as the market is still rather fragmented. This situation is likely to change when the market consolidates. 3. Online retail has grown substantially in many countries and it has gained a larger share of the wallet as well as consequently also increasing its power. 4. The importance of efficient and effective logistics has increased in the value chain. There are two reasons behind this development: i) as on-line sales grow, demand for logistics services increases, ii) as logistics and supply chain costs are a significant part of the total cost, well-managed logistics operations can generate considerable savings in the value chain. 5. The brand owner is the primary power house along the value chain, and will also benefit the most from the structure and appearance of packaging. 6. Consumer demand for more sustainable solutions combined with intensified regulatory requirements regarding extended producer responsibility will affect the whole value chain going forward. New legislative measures may include taking responsibility for used products and the subsequent management of waste with financial responsibility for such activities. Trends shaping 2016 and beyond In order to predict changes in the value chain beyond 2016 and how the value chain players can benefit from packaging, we will analyze the key trends in the market that will shape the future. We have selected the five major trends that we believe will play a significant role in shaping the future. These five key trends are: 1. Shorter development cycles and more new products: Driven by consumer behaviours and technological developments the speed of new product development has significantly increased. The number of available products and variants at any given point in time increases constantly. 2. Increased consumer power and competition: Peer opinion plays a more important role and competition between brands and models has increased making it even more important to use every opportunity to stand out from the crowd. 3. Increased awareness for sustainability issues: The trend towards environmental-consciousness is expected to continue as natural resources are depleted at an increasing rate and as waste becomes a bigger problem. According to one study 64 % of the population is actively looking for sustainable products (Smithers Pira: Future of sustainable packaging ). Regulatory demands also add extra fuel to this trend and will play an important role for brand owners. 4. Increased importance of visual appearance: Increasing competition among brands drives the need for packaging in assisting in brand-building and differentiation. When both traditional and online retailers have direct contact with the consumer, packaging becomes an important touch point between brand owners and the consumer. 5. Growth of e-commerce: Internet retailers have continued to gain share of sales and show double digit growth in many areas. They have already become an important sales channel and hold a considerable share of sales. According to Forrester s Online Retail forecast we can expect to see growth rates between 9 % and 18 % in Europe for the period , which will further increase the power of online retailers. The trend will drive demand for more secondary packaging as more products are individually shipped to the consumer. In addition, the trend will also shorten the time between a purchase and delivery as customers are unwilling to wait too long for orders. These trends will have implications for all the players in the value chain, though to different degrees. Note: CCM = Corrugated Case Material

3 The effects on traditional retail Retailers seek ways to streamline their operations to stay competitive. Cost efficiencies will be very important in the competitive market. In Sweden, for example, some retailers have recently gone bankrupt and several larger retail chains have been forced to close their stores. Therefore, any suggestion of where packaging can support a cost reduction will be greatly appreciated by pressured retailers. Examples of the implications for packaging in this regard will include solutions improving store efficiency, e.g. in store friendly logistics solutions. The increased variety of products and shorter sales windows will also lead to a risk of obsolescence and will consequently require smarter and faster logistics solutions to mitigate these risks. In order to handle the threat of the growth of online channels, most retailers have introduced their own online channels, and these are likely to gain in importance. In addition the visual appearance of the store has increased in importance and packaging has, as a result, become an important sales and marketing tool. The effects on online retail Online sales show strong growth, being double digit in many countries, and will continue to take a larger share of total sales. The importance of packaging will increase with the growth of e-commerce, both as a transport package but also as a brand-carrier. Today, we see simple strong boxes aimed at protecting items while seeking low cost being used by online retailers. However, we can also see a trend whereby some retailers take advantage of the opportunity to use the box as a means to promote their brand, which is something that we believe will increase. Both today and in the future we will most likely have both types of options, dependent upon retailers and brand owners strategic choices. Current packaging solutions have the potential to further optimize online retail, but they have to be improved because of increasingly individualized delivery patterns and shorter delivery times. This will drive demand for flexible, adaptable and multipurpose packaging. Brand owners are also likely to develop new solutions that are optimized for the online channel (e.g. promotional products for online channels and packaging that can support a variety of products and combinations in a more efficient manner). The effects on logistics Effective and efficient logistics will be increasingly important both for physical stores, as well as for online sales. Logistics operations are confronted with rising complexity due to an increased variety in assortment, smaller delivery batch sizes and shorter delivery times. Packaging can maintain or even reduce logistics costs through improved stacking, the optimization of box filling/loading and weight reductions. To provide further benefits, flexibility will be key, for example, thorough multipurpose uses allowing the same package to support several cargo and product combinations. The increased importance of logistics in the overall value chain will also set higher requirements as to availability. This will be a driver for services such as just-intime deliveries, vendor-managed inventories, and other types of logistics solutions that allow brand owners to respond to demand in a quick and efficient manner. A well thought through and well managed supply chain can act as a source of competitive advantage in a dynamic and fast evolving environment. Flexibility and an ability to adapt to changes in demand will be of paramount importance in the future for both logistics players and packaging providers. Key success factors The trends and their impact on downstream value chain steps have implications for how a brand owner should act. The success will come from a focus on at least six dimensions. Consequently, packaging providers must ensure that these six dimensions are addressed to support brand owners. Optimize operations Reduce cost Enable basic functionality Key success factors for packaging Text in 2016 and beyond: Communicate the value of being sustainable Support brand value building Decrease time to market

4 1. Enable basic functionality Basic functionality is about meeting agreed upon requirements and having the necessary capabilities to qualify for the order. In consumer electronics the main role of packaging is to protect valuable contents during transportation. To deliver basic functionality at the correct level the following areas should be considered: Secure consistent performance Meet requirements Supply required service Consistency is a must in several dimensions, i.e. surface design, structural capabilities, printing performance, runability and quality of final product. Delivery consistency must also be aligned cross border and plants. Products are designed to meet specific customer requirements optimizing durability and firmness for protection and transportations High reliability and exact deliveries supported by both flexible and fast responses in case of production disturbances. 2. Optimize operations Packaging suppliers are not restricted to delivering merely the packaging, and they need to assist in enabling customers operations to run more smoothly. By providing an array of operational services, packaging providers can assist in optimizing the supply chain. Reliable and flexible inbound logistics Packaging suppliers can increase the reliability of their supplies and responsiveness towards brand owners by providing justin-time (JIT) logistics set-up with short call-off times, vendor managed inventories (VMI) ensuring availability, and establishing electronic data interchange (EDI) to exchange data in an automatic, swift and correct manner. Flexibility and speed are of the essence in managing fluctuations in demand in an effective way. Disturbance free production Brand owners production lines must be kept running as there are high costs associated with production disturbances and unplanned stops. Packaging suppliers can assist with optimizing packing lines to enable the efficient and flexible production of variety in products. In addition, contingency planning for managing peak seasons in a satisfactory manner is also key. In co-operation with machine developers and brand owners, improvements can be achieved by focusing on the productivity of packing and critical parts of the process, thus preventing down-time or jam-ups in a more proactive manner. Fast and reliable outbound logistics Packaging suppliers play a key role in assisting brand owners as well as in creating a smooth outbound logistics operation. This is primarily done by a fast and reliable packaging system that enables quciker deliveries to end customers. Packaging supplier can also in the case of outbound logistics maintain or even reduced logistics costs through improved stacking, the optimization of box filling/loading and weight reductions. 3. Reduce cost It will be increasingly important for packaging to help decrease cost, both in terms of the packaging itself but also in terms of the surrounding cost elements. Cost innovations will arise according to three key steps; Solution: an innovation that redefines the packaging solution in order to reduce costs is one of the most important activities for a packaging provider. This type of cost innovation emphasizes on the problems that packaging needs to solve and looks at the issues from a holistic point of view. A typical example is the integration of primary and secondary packaging into one. Process: an innovation that optimizes how the box is used. This type of innovation looks at how the package is used and what can be changed in the usage to reduce cost. Examples include redesigning packages to fit more packages on the same pallet, i.e. loading optimization Features: an innovation that focuses on improving the actual packaging functionality. This is the area from which most cost innovations currently arise. Examples include light weighting or rightsizing the package. Creating cost innovation in 3 steps: Solution Look beyond the box to find solutions that meet the requirements Process Improve how the box is used Features Improve what is already there

5 4. Increase brand value Packaging design will be increasingly important from a marketing and sales perspective. Manufacturers of consumer electronics strive to produce new products which also makes it important for packages to help support the brand image. Graphic design and visual impact play important roles in packaging in helping consumers recognize and remember brands in a competitive environment. A classical marketing framework recognized at most universities is the 4P model including; Product, Place, Price and Promotion. An area that is often added in service marketing is People. This is also an area of central importance in the consumer electronics industry, as many of these products are sold with the help of sales representatives in traditional retail. To further develop this model, Packaging also needs to be included, as Packaging plays a key role in attracting attention and providing information to both sales representatives as well as consumers when a sales representative is not available. Packaging People Promotion Price Place Product So in short, the key areas that packaging will assist brand owners with are: 1. Influencing the perceived brand value 2. Creating brand awareness 3. Influencing the consumer at the point of sales 4. Providing information in a retail store when a sales person is not available 5. Differentiating products, e.g. economy vs. premium 6. Conveying a green image with a renewable and recyclable product 7. Protecting, so both the content and the box looks good when they arrive

6 5. Decrease time to market Being first on the market with a new product can be the difference between success and failure for a brand owner. This makes the ability to turn an idea into a useable packing solution for the client s operations within a short time key for a packaging supplier. Therefore, brand owners will need to look for performance in three areas: Packaging long term R&D Smart packaging R&D with a compact yet adaptable base of raw materials and tight feedback loops for new raw materials as means to shorten development time New product (packaging) development Capabilities to respond with design suggestions and drawings in a short time, in order to be able to rapidly develop and test a new solution in brand owner operations Customer interaction A flexible and dedicated team to help bring new packaging designs to the market 6. Communicate the value of being sustainable Sustainability considerations will be a key product attribute influencing shoppers decisions. Consumers attitudes towards the environment have changed and this trend will continue as natural resources are depleted and waste becomes a bigger problem. In 2016 and beyond sustainability will be a considerable issue, and not just something one says. Packaging providers of corrugated materials can contribute to this as corrugated is: Made from fibre where the origin can be traced Renewable material Recyclable material Helping fulfill EU targets with extended producer responsibility for re-use and the recycling of waste Packaging suppliers will reinforce efforts to find solutions that can reduce the usage of tape and Styrofoam components. Solutions like the ones used for small appliances where styrofoam is replaced by protection made of corrugated and tape is replaced by a packaging built-in lock are expected to grow in importance.

7 Adding extra value Does it all boil down to mastering the six key success factors and showing successful examples in order to be successful in 2016 and beyond? We believe that this will only be the baseline for being successful. We believe that success for a brand owner does not come from supplying a brown box, instead coming from proactive solutions. The first step to adding value beyond a simple box is to deliver proactively. Just having the capabilities to do things will not be enough to become a successful packaging supplier. The six success factors highlight what will be important, but to really add value packaging suppliers must also work on how they deliver. A packaging supplier will need to be able to proactively suggest innovative improvements based on insights and expertize. That is, a packaging supplier must become much more active and constantly strive to challenge current solutions in order to find new and better solutions suitable for tomorrow s needs. Brand owners will increasingly rely on their packaging suppliers to help them in relation to the six dimensions as well as expecting them to bring innovations and benefits to the table, rather than responding to a request for purchasing. To really take it to the next level, packaging suppliers will need to better respond to customers needs, not ony with products but also with solutions. Suppliers will need to challenge themselves and look at brand owners holistic challenges to find a solution that looks beyond optimizing primary, secondary or tertiary packaging and providing only one type of material. A solution includes several components, e.g. exterior & inner packaging, accessories, services, etc. Packaging suppliers will need to use the full width of the fibre based portfolio or even look to other materials to solve problems and rather than just supplying a box. Cost innovation case One good example in the consumer electronics industry is the re-design of TV boxes for a global TV manufacturer: Before -40% After Through innovation Stora Enso Packaging Solutions and the customer changed the layout of their boxes and managed to obtain a decrease of material consumption of the boxes by 40 %. The main changes that were introduced involved the layout of the package being changed from a horizontal to a vertical design. In addition to the reduced cost the new layout also led to a larger printable area that could be used as a marketing tool. The change did not create any unexpected costs associated with change enabling them to fully benefit from the improvement. Moving beyond the baseline Holistic solution Understand the big picture to deliver performance: Develop interior and exterior solution Find synergies between primary, secondary and tertiary packaging Use the full width of the fiber based portfolio and even consider multi-material knowledge Proactive To further excel packaging companies must: Proactively suggest innovative improvements based on insights and expertize Actively challenge the status quo, push new ideas and find new technologies that will help customers in their business Key success factors Optimize operations Reduce cost Enable basic functionality Support brand value building Key success factors for packaging Text in 2016 and beyond: Decrease time Communicate to market the value of being sustainable The six key success factors form the base of a satisfying customer needs: These areas show what will be important for brand owners, but to take the next step in adding value packaging suppliers must also work on how they deliver the six areas

8 Contacts Hannu Alalauri Senior Vice President Stora Enso Renewable Packaging, Packaging Solutions Stora Enso Oyj Executive summary Björn Thunström Vice President Marketing & Customer Loyalty Stora Enso Renewable Packaging, Packaging Solutions Viktoria Dubova Marketing Manager Stora Enso Renewable Packaging, Packaging Solutions Moving forward the consumer electronics industry will be shaped by five key trends that will have substantial implications on packaging. These trends are: 1. Faster development cycles and more new product 2. Increased consumer power and competition 3. Increased awareness for sustainability issues 4. Increased importance of visual appearance 5. Growth of e-commerce The five major trends, shaping 2016 and beyond, highlight six key success factors for packaging. The basic need to ensure reliable high quality that is tailored to its requirements. Brand owners do not just need a box, they need a reliable and high performance packaging operation. There will be a need for innovation in packaging solutions, processes and features to reduce cost for brand owners. Packaging design will be increasingly important from a marketing and sales perspective. Being first with a new product can be the difference for success increasing the importance of time to market. Sustainability considerations increasingly influencing shopper decisions such that, as awareness grows, the value must be better communicated. These areas show what will be important for brand owners, but to take the next step in adding value packaging suppliers must also work on how they deliver. To further excel, packaging companies must proactively suggest innovative solutions based on insights and expertise. So what is Stora Enso Renewable Packaging offering to meet these requirements in going forward? We focus on proactively suggesting innovative packaging solutions for our customers to enable less weight, less waste, less unused space, and less impact on the environment. We re happy to provide our global packaging expertise to support our customers to strengthen their brands with attractive design that stands out on the shelves, innovative constructions and materials for optimum performance and lower cost. We strive to minimize our impact on the environment and actively work to help our customers create sustainable resource efficiency. We do this by using renewable raw materials as well as our own recycling organizations to take care of our customers recycling needs.