7 Key Numbers for Calculating Food Packaging ROI
Created on 08.04
Calculating the ROI of food packaging changes requires tracking these 7 key numbers across your operations:
1. Packaging Material Cost per Unit:
- What: The direct cost of all packaging components (film, tray, label, carton, tape, etc.) for one finished product unit.
- Why: The most obvious cost driver. Reductions here directly improve margins, but must be balanced against performance.
- Calculation: (Total Cost of Primary + Secondary + Tertiary Packaging Materials) / Number of Finished Units Produced
2. Production Line Efficiency (Units/Minute or Cost/Labor Hour):
- What: How packaging affects your production speed (e.g., line speed, changeover times, downtime due to jams).
- Why: New packaging might run slower, require more adjustments, or cause more stoppages, significantly impacting output and labor costs.
- Calculation: Track Average Line Speed (units/hour) before and after change. Calculate Labor Cost per Unit = (Line Labor Cost per Hour) / (Units Produced per Hour)
3. Product Damage/Shrinkage Rate (%):
- What: The percentage of product lost due to damage during filling, sealing, handling, storage, or transit caused by packaging failure.
- Why: Poor protection leads to direct product loss (cost of goods sold) and potential customer credits/returns. Better packaging reduces this waste.
- Calculation: (Value of Damaged/Shrinkaged Product during Period) / (Total Value of Product Produced during Period) * 100%
4. Shelf Life Extension / Spoilage Reduction (% or Days):
- What: The increase in product shelf life (days) or reduction in spoilage rate (%) achieved by improved packaging (e.g., better barrier, modified atmosphere).
- Why: Extending shelf life reduces waste at distribution, retail, and consumer levels, saving significant product value and disposal costs. It can also expand distribution reach.
- Calculation: Compare Average Shelf Life or Spoilage Rate (%) before and after the packaging change under controlled or real-world conditions.
5. Warehouse & Transportation Costs per Unit:
- What: Costs associated with storing and shipping the packaged product (pallet space, cubic footage charges, freight costs).
- Why: More efficient packaging (lighter, smaller footprint, better pallet stability, higher pallet count) reduces storage needs and freight costs, which are major expenses.
- Calculation: (Total Warehousing Costs + Total Transportation Costs for Shipments) / Number of Units Shipped. Compare Pallets Shipped or Cubic Feet/Truckload before/after.
6. Sales Lift / Velocity Impact (% Change):
- What: The change in sales volume or velocity (units sold per period) attributable to the new packaging (improved shelf appeal, convenience, portion size, brand perception).
- Why: Packaging is a marketing tool. Attractive, functional packaging can drive consumer purchase decisions and repeat buys, directly increasing revenue.
- Calculation: Conduct controlled A/B Tests (same product, different packs in similar stores/markets) and track % Change in Sales Volume/Velocity. Use Scan Data analysis.
7. Sustainability & Compliance Costs / Savings:
- What: Costs (or savings) related to environmental regulations, fees (EPR schemes), disposal costs (landfill/incineration), recycled content premiums, and potential consumer goodwill/brand value.
- Why: Growing regulatory pressure (plastic taxes, EPR fees) and consumer demand make sustainable packaging financially material. Savings come from lower fees, reduced material use, and potential premium pricing/brand loyalty.
- Calculation: Track Compliance Fees (EPR) per Unit, Disposal Costs per Unit, Recycled Content Premiums. Estimate impact of Brand Perception on sales or margin if possible.
Putting it Together for ROI:
1. Calculate Annual Savings/Benefits: Include costs of new packaging design, tooling (molds, dies), line modifications, inventory write-offs, and marketing for the new pack.
2. Calculate Annual Savings/Benefits: Quantify the impact using the 7 key numbers:
- Reduced Material Cost per Unit * Annual Volume
- Value of Increased Production Output (faster line, less downtime)
- Value of Reduced Damage/Shrinkage
- Value of Reduced Spoilage (longer shelf life)
- Reduced Warehousing & Transportation Costs
- Increased Sales Revenue (from Sales Lift)
- Reduced Compliance Fees / Disposal Costs / Potential Brand Value Uplift
3. Calculate ROI: ROI (%) = [(Total Annual Savings/Benefits - Total Annual Costs of New Packaging*) / Total Investment] * 100
- *Remember to include the ongoing material cost of the new packaging itself in annual costs for the comparison.
4. Calculate Payback Period: Payback Period (Years) = Total Investment / (Total Annual Savings/Benefits - Total Annual Costs of New Packaging*)
Critical Considerations:
- Baseline is Key: You need accurate "before" data for all 7 metrics to measure the true impact.
- Trade-offs: Optimizing one number (e.g., material cost) might negatively impact others (e.g., damage rate, line speed).
- Holistic View: Consider the entire lifecycle cost (cradle-to-grave/cradle-to-cradle).
- Intangibles: Factor in harder-to-quantify benefits like improved food safety, brand reputation, or consumer satisfaction where possible.
By meticulously tracking these 7 key numbers, you can move beyond gut feeling and make data-driven decisions about your food packaging investments.
Ray
Ferrill
Evelyn