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36th Annual PRIMA Conference
May 11 - 13, 2005
Intercontinental Hotel, Hamburg, Germany
Marketing the Value of Paper
Are the fundamentals changing?
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A healthy attendance at this year´s PRIMA Conference matched last year´s delegate number of around 150, and they were well rewarded at the 2005 Conference in Hamburg, where attendees were treated to an eclectic range of interesting speeches, as well as excellent networking opportunities - some based around the Hanseatic city´s famous harbour.
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The programme was kicked off on Wednesday 11th May by a highly-enjoyable dinner on board the historical Rickmer Rickmers sailing boat, where old friends exchanging news and making new contacts turned a bright, late-spring harbour welcome into dusk and beyond in another classic PRIMA combination of business and pleasure.
On Thursday morning, the Conference itself was opened by PRIMA Chairman Frank Leerkotte, who introduced Senator Gunnar Uldall of Hamburg´s Ministry for Economic and Labour Affairs. Senator Uldall´s Welcome Address highlighted some of the well-known, not to mention several less well-known reasons for Hamburg´s pre-eminence as a city of culture and business (not least because many of Germany´s media businesses are clustered in the city).
Frank Leerkotte then introduced Christian Nienhaus, Managing Director of Axel Springer´s BILD Publishing Group, who gave the Keynote Address. Nienhaus addressed the question of new media trends, and while accepting that these will bring about some changes in the newspaper industry, he insisted that there are some things that will remain constant. While Bill Gates famously predicted the death of paper as a medium, Nienhaus disagreed, pointing out that paper remains the main carrier of information today. He went on to give a roundup of the achievements and strategies employed by the BILD group, including distributed national and international printing plants to reach readers in a range of locations, the introduction of compact-size newspapers, the extension of the BILD brand through line extensions and new merchandising initiatives, including use of the BILD.de website. He insisted that "we believe in the future of print" and that "paper is sexy!", while also calling for stable paper prices in the future and stating that he is happy with the quality of newsprint. He added that globalisation is not possible for newspapers themselves, but it is to some extent possible for newspaper concepts. Also, he is so far unconvinced by the concept of free newspapers, such as Metro.
Following Nienhaus´s speech, Christian Naydowski, Associate Vice President of R&D at Burgo, took up the reins to chair the first session - Views From The Market Place. He first introduced Sylvia Schmidt, Media Director for Daimler Chrysler at the Springer & Jacoby Media company and Tanja Roth, Global Advertising for Passenger Cars at Mercedes Benz & Maybach and Manager of Advertising at Daimler Chrysler in Germany. The subject of these presentations was Integrated Communication in the launch of the new Mercedes A Class. Smith showed that 66% of Mercedes-Benz Germany´s media spending goes on print media, and then illustrated the reasons for using a range of media for the launch, including newspapers, magazines, TV, radio, online and poster advertising. The advantages of newspapers include timing, regional reach and credibility, while magazines offer a range of advertising environments, a range of targeting options and emotional impact, but added that the internet is the current "rising star" among media channels, and as such, is also an important part of cross-media planning. Tanja Roth then illustrated the A Class launch campaign itself, and how the various media were combined and integrated in a launch that involved 24 European countries. The campaign included print on paper, TV, internet, exhibitions, product literature, point-of-sale advertising and many other media and actions - "if every communication instrument is speaking with the same language, you can create a lot more effort and awareness," she said. Highlights included eye-catching print advertising, which was combined with an entertaining TV campaign, a celebrity-based, multi-country tour in the A-Class and a privately-commissioned song from Christina Aguilera! She added that classical advertising (including print on paper) is still very much alive and it is not the case that all advertising is going online.
Heather McKinlay, Strategic Planning Director at WWAV Rapp Collins, then took the stage to examine The Future Of Direct Mail. Although direct mail is "the most hated industry in the UK" and increasing numbers of people are choosing not to receive direct mail, and while that can be negative in the short term, McKinlay believes that is a positive thing, because once those people have opted out, it will make it possible to contact only people who are open to being contacted, as well as saving costs. Recycling is also an issue that raises its head from time to time, and she suggested that it might be an idea to add recycling instructions to direct mail, of which currently only 13% is recycled. Overall though, she believes the increased debate about direct mail is positive, as there is now a more balanced view of direct mail, as well as an understanding that it is not just junk mail. Direct mail is "incredibly effective" because consumers do buy in response to direct mail: in 2004 in the UK, consumers spent £11 for every £1 invested in direct mail, and McKinlay believes figures are probably similar in other markets. One reason is that direct mail is so personalised, which is both a strength and a weakness, as consumers become irritated "if we get it wrong". High-volume mailings have often been worthwhile, even with low response rates, but those response rates are now falling, as consumers are no longer "mono-channel" and are now likely to go online and shop around. The days of high-volume direct-mail campaigns, she believes, are numbered. However, she is hopeful that other new channels, some of them paper-based (such as door drops), will have a positive future. She also believes the age of mass broadcast media is coming to an end, and hopes that direct mail - e.g. developing into relationship marketing, which has yielded extremely high response rates - might benefit from internet advertising prompting a move away from TV advertising. McKinlay does not believe that the internet will harm direct mail, instead possibly being an opportunity. Just sending people an email "doesn´t really work", but it can be very effective to combine an email with direct mail - it can increase return on investment and is actually increasing volumes of direct mail. Also, as internet-based and other interactive sales rise, demand for packaging and leaflets increases. Also, people will always like to receive a paper-based mailing with glossy pictures. McKinlay admitted that direct mail has suffered in the last few years, with large-volume campaigns falling away, but the business has come through the difficult period and there is good cause for optimism. However, she also pointed out that creativity will always be necessary and called on the paper industry to interact not only with advertising agencies´ production departments, but to forge contacts with strategic planners, account managers and creative departments, which actually make the decisions on whether to use direct mail and what kind of direct mail to use.
The next speaker was Kay Smith, Managing Director of Astron Corporate Solutions, who presented the intricacies and advantages of Print Management Solutions - a $13 billion market across Europe. After pointing out that Astron has recently been bought by print giant R.R. Donnelly, she noted that print management is NOT about having a number of printing presses, warehouses, trucks and providing a commodity service, but is rather about providing intelligent customer communications via whichever medium is most suitable. That could be print on paper (and it looks like it will be), but it could be on CD, the internet, direct mail, outdoor media etc. The starting point for customers is cost, and most of the costs of making a brochure are not actually related to printing the product. That is why print management must be a service that encompasses all of the elements in the process, with transparent costs, adding and demonstrating value at each stage, delivering innovation, savings, process and project efficiency, as well as control of the brand and the creative process. Demand for print management is growing and is being driven partly by the need for a pan-European solution, as well as customers need to bring the different functions of their business together. The word "print" may even fall away from the phrase "print management", she speculated.
Following Kay Smith´s presentation, Karl-Johan Lindborg, President and CEO of the MAP Merchant Group, UK, looked at the question "Is Paper Merchanting In Europe Changing?" In mature markets in the last 4 years, there has been slow or declining growth, and while growth is better in Eastern Europe, it is from a low base. Prints share of advertising is slipping slowly, but demand for bulk grades sold by merchants is still following total advertising expenditure and GDP growth. Merchants must serve the growing print management market illustrated by Kay Smith, printers are restructuring, office supply channels are entering the equation, print works are moving East and final customers are becoming much more demanding and more professionalism is required at all levels, Lindborg said. Paper merchants must accept blame for giving away service and not charging for it. There are overlapping structures, but also consolidation of mills and merchants, although perhaps not for much longer amongst paper merchants, he pointed out. With overcapacity and long-term declining prices, profitability is low. As such, pricing must reflect the cost of the service, but there is now some improvement, as pricing is beginning to be based on activity and fact rather than feeling. This knowledge of who does what in the chain also helps to identify overlapping structures, such as sales and warehousing. Efforts to eliminate duplication of work have historically had little success, but now systems are better and he believes this could be the time to make real progress. Looking to the future, demand is now recovering to levels seen in 2000, and the market share of woodfree sheets (i.e. what merchants sell) seems fairly stable, although merchants´ share of the A4 market is declining. There is a clear role for paper merchants, who add value (and should charge for it), and several sectors served by merchants are growing faster than GDP. As to the question of who should manage inventories, which are currently held by mills and distributors, and to a lesser extent, printers, he believes that merchants, who are in closest contact with the end customers, are best placed to manage these stocks. He also believes there is now a will to deal effectively with this question. Also, due to the need for economies of scale in a commodity sector, the trend is towards a few large pan-European merchants, and there will probably soon only remain three or four leading merchants in Europe, he predicted.
The final presentation in the session on "Views From The Market Place" was made by Martin Kingdon, Director General of Point Of Purchase Advertising International (POPAI), who dealt with the subject of Marketing At Retail. Balancing good and bad news, he claimed that point-of-purchase display is a "15 billion Euro opportunity" for paper and board products (packaging, advertising etc.), but that the brands and advertisers that use the paper and board products "don´t actually care about your products in any way", being more interested in the message than the medium. On the good news side, in the last 2-3 years, there has been a rise in sophistication of what and how to do business in stores, with brands beginning to think about more efficient use of in-store advertising, and this means they are spending more on it. Like McKinlay earlier, Kingdon also highlighted the declining power of TV advertising, due to the rise in TV channel choice, which is a plus for in-store advertising. The bad news includes the birth of digital screen advertising, which is highly-visible in terms of investment resulting in something tangible in store - in contrast, much money that is spent on paper and board materials aimed at stores never actually ends up on the shop floor "for various reasons." Tesco, ASDA and Sainsbury´s are beginning to move in the direction of screens, which will mean a reduction in traditional point of purchase materials. Still, Kingdon finished with some more good news, pointing out that not only is the point of purchase market growing in mature markets, but that developing markets also have a large growth potential.
Tero Kaleva, Vice President of Business Intelligence at M-real, chaired the next session, which was entitled "Turning Drivers Into Values".
The first speaker he introduced was Alison Kennedy, Production Director of the UK´s Egmont Books, whose presentation was on Value For The Society. The focus of this presentation was Corporate Responsibility, and particularly, sustainable forestry. Kennedy explained that her company uses five grades of paper classification, based on WWF pulp grades and consequently, ranks each paper grade largely on what is known about its pulp recipe. She pointed out that she is not simply looking for FSC paper (there´s not enough to supply her company), but while she recognises that there are other valid certification schemes, she will choose to focus her marketing on FSC, because consumers recognise it most. Kennedy explained that she called on her paper suppliers to reveal their pulp recipes to help with her company´s grading system, and she gave credit to those who were prepared to do this, as well as to those who were not, but who made a serious effort to find some other way of satisfying her request for information. Any papermaker that simply refused, for whatever reason, was downgraded on her supplier list, and Egmont Books is to launch a new range of products based on the deeper knowledge of the papers that it uses. She warned: "It´s me that´s asking through the supply chain for you to share your information today, but believe me, tomorrow it will be somebody else." She added that ISO 14001 is "old news" and that "we expect you to have that" and that she does not expect to pay a premium for papers that use the pulp in the most-sustainable category.
A further challenge was issued by Mark W. Connelly, Managing Director and Senior Equity Analyst at Credit Suisse First Boston, USA, whose presentation was entitled "Investors Are Not Happy." Connelly noted that the paper industry has a poor record of giving value to shareholders, with a lot more value actually going to customers. He believes investors and papermakers themselves have paid the price for a lack of analytical rigour and intellectual honesty in the paper industry, not in terms of the product and service, but in terms of the economics. The industry´s problem is not a lack of operational talent or adequate product or flexibility or listening to customers, but at the most senior level. When paper companies, which usually don´t make much profit, do make profits, the first thing they do is pay off their debt and reinvest the rest, probably buying another company that mostly doesn´t make profits. Connelly said the industry should be congratulated for its technical and service accomplishments, but argued that the industry doesn´t get paid for it. CEOs, he insisted, either have to stop their company delivering something that it´s not getting paid for or change the business model. He explained that there´s no conflict between creating value for the customer, for the supplier and for the investor - value for the customer is necessary, but it doesn´t necessarily lead to success. Consolidation won´t fix the problem, because the problem is not caused by fragmentation. Per capita consumption is falling in the USA and Connelly thinks that´s going to happen in Western Europe too, and he doesn´t expect the higher growth in Eastern Europe to be enough to compensate. But a declining industry can still make profits, although investors don´t expect the paper industry to fix its problem and achieve reliable profits. He also criticised the recent Western European investment in unnecessary containerboard capacity. Further pressure will come, he predicted, from financial buyers, which have been buying papermakers for only a fraction of what papermakers themselves have paid to buy other papermakers. Because those financial buyers quickly replace their purchase cash with debt, the industry is losing value and he expects more of this to happen in Western Europe in the next couple of years. He also predicts that investors will get interested in those financial buyers, because they do what investors have been asking existing paper-industry CEOs to do: "Make some money and give it to me!" The last thing the financial buyers do is re-invest. If you have a mediocre business, you do not put money into it; you try to take money out of it. "Everybody accuses Wall Street and financial buyers of thinking too short term. We´re not thinking short term, we´re thinking probability." Investors expect this industry to continue to fail. And if you fail enough, financial buyers will continue to buy the assets. What´s really bad about that is you´re going to be . . . watching those financial buyers make a hell of a lot of money that you should have been making before."
The next speaker was Gertrude Eder, Managing Director of Brigl & Bergmeister, whose topic was Value For The Producer. Citing Oscar Wilde, she began by saying, "Many people know the price of a thing, but not its value." Her thesis was that it is possible to be profitable by using marketing. First, there must be value for the market/consumer, which can be translated into value for the producer, the ultimate goal being to improve market capitalisation, i.e. to create value for the owners. On the marketing side, she mentioned PaperPlus, a new Brussels-based non-profit association in which Brigl & Bergmeister is one of three members focusing on label papers and flexible packaging grades. The association aims to raise awareness of the value of papers to producers and users of labels. A detailed look at Brigl & Bergmeister´s business showed how the company aims to create value for the market in terms of making high-quality label papers, and she added that breweries also like a good price, reliable delivery and good service, while label printers need good runnability for printing speed, cutting suitability and other quality parameters, and that the paper must also perform at the point of sale. Communicating these benefits of meeting these needs is key, and Brigl & Bergmeister takes a holistic approach, Eder explained. It aims to reach several stakeholder groups to try to understand them and to help them understand each other. To sum up, Brigl & Bergmeister´s aim is to offer value to the customer to create value for itself, and over the past 8 years, this strategy has resulted in large growth in both volume and market share, as well as almost tripling profits.
To close the first day, Georg Hirsch, Leader of Supply Chain Management at Mondi Packaging in Austria and Joachim Klein, Senior Manager, Accenture in Germany, teamed up to consider The Value Creation Equilibrium. They believe that it is only possible to operate profitably in the paper industry by focusing on certain rules and standards, as well as combining certain disciplines that are already working.
The industry has traditionally been asset heavy with a production push, but more recently, there has been more customer and supply chain focus and more of a demand pull - but how does one manage increasing customer requirements to be profitable? The Mondi example combines some production-push commodity businesses with more demand driven business, and it is necessary to balance customer needs and the papermaker´s own assets. But the other side is offering the customer the right quantity of the right product with the right quality at the right price at the right time. This would make smaller inventories possible. A better understanding of a mill´s marginal profitability would also help to decide what price to put on individual orders or whether to turn an order down. And an understanding of the mill and the customer would be to the benefit of both parties, not least in terms of reducing inventories at both locations, and improving transparency and the ability to plan production and logistics. In fact, a complete understanding of the supply chain and the real customer needs will create this equilibrium that creates profitability, the speakers argued.
The opening session on Friday morning was chaired by Martin Glass, Managing Director of paper industry consulting company, EMGE & Co. Glass first introduced Professor Andrea Boltho, a Fellow and Tutor at Magdalene College, Oxford University, who looked at the question "Where Is The World Economy Going?" The speech combined high energy, quick humour and economic insight with a fairly broad scope. Although global GDP growth is expected to slow down this year, Boltho´s forecast slide actually showed a slight improvement in growth in 2006 and again in 2007. He pointed out that although rising oil prices historically coincide with falling economic growth, at the moment, they are not correlating (economic growth strengthened from 2001-2004, during which time oil prices were increasing). A feature of the next few years will be the rise of China as the dominant importer (and also a major exporter), and he later pointed out that any revaluation of the Chinese Yuan would favour economies in other developing nations. In line with other predictions, he said the US current account balance could mean a further drop in the value of the dollar. He also noted, however, that the fall in the value (since 2002) has not actually been too steep when measured against all currencies, although it has depreciated furthest against the Euro. There are lots of problems in Europe, according to Boltho. Examples he cited included very weak domestic demand in Germany (he believes the improvement during the first quarter of 2005 was a flash in the pan), which he speculated could spread to France and other markets, as well as poor competitiveness in Italy.
Ilkka Kuusisto, Associate Principal of Jaakko Pöyry Consulting Shanghai examined The Impact Of China On Global Pulp & Paper Markets. While China has traditionally accounted for about one third of Asian paper and board demand, it is now getting close to half of the Asian total, he explained. Also, unlike other markets, demand growth in China is not slowing as volumes increase, indeed it is actually accelerating, and has been at more than +10% per annum since the new millennium. And yet, with Chinese capacity rising rapidly - most of the world´s capacity investments are in Asia and most of those are in China - the question is whether world markets will be flooded with paper from China? Taking the example of coated woodfrees, the country has replaced most of what it formerly imported with domestic tonnage and China´s coated paper exports are rising rapidly. A side effect of this is that Korean producers which used to sell in China have turned to the US market instead. (Kuusisto later pointed out that if Chinese paper consumption falters, there will be a significant increase in exports from China). A major issue linked to the country´s high production growth is that China will soon have to increase its wastepaper recovery rates, Kuusisto said. China is not the best place to make kraft woodpulp, instead importing from low-cost producing countries, he noted. Also, the country is already importing about as much recovered paper as it can from Europe and it is unlikely to be able to import a lot more from other sources either. Between 1999 and 2004, the country added 16 million tonnes of paper and board capacity - it now has some of the biggest and best paper machines in the world, Kuusisto pointed out - requiring an additional 15 million tonnes of fibre per annum, two thirds of which was recovered fibre. The high volumes that China consumes make it a big enough buyer to affect market prices.
Michael Clark, Vice President of M-real Consumer Packaging, UK, took a look at Global Dynamics and Forecasts in the Packaging business. In forecasting, he pointed out the need to take account not of factors such as GDP, TMO, etc., but to take a look at the customers of packaging companies. He noted that over perhaps half a century, a range of different forecasting options have entered common use, but argued that "traditional forecasting models do not provide answers to the problems we face." Moving onto market development, he explained that the highest cartonboard demand growth is expected in Asia, which has already become the largest regional market, although the quality of the cartonboard consumed is generally lower than in North America or Western Europe. He explained that a major influence on demand has been the rise in urban per capita spending in China. One illustration he mentioned was that there were no supermarkets in China at all before 1990. In contrast, between 2001-2004, a single group opened an average of 138 new supermarkets every week - in Shanghai alone! Another driver that Clark noted was the move by global and regional brand owners to Asia. He also illustrated the higher growth rates in Eastern Europe than Western Europe, concluding that the packaging world is moving East. With packaging end users now close to building supply relationships with new partners in Eastern Europe and Asia, he believes the existing core business of Western European carton makers is under threat from the move away from existing supply chains. More generally, he examined the dynamics of the paperboard packaging chain, including the end of inflation, the growth of brand owners, global/glocal solutions for global/local brand owners, brand integrity, the battle for purchasing power, service, skills moving East, sustainability, R&D and understanding partnerships. He concluded that we should look to our customers and at dynamics for answers, adding that new solutions demand new ways of working and new attitudes. Summarising his outlook, he believed the next few years will not be better than 2004, that the Chinese market will make for a bumpy ride (although there will still be market niches in China), that the USA will not bail Europe out and that the dollar/Euro gap is unlikely to close. He finished by adding "Don´t listen to me - talk to your customers and your customers´ customers."
John Maine, Vice President, Printing & Writing Papers, RISI, presented a World Printing & Writing Paper Market Outlook. The outlook for paper demand shows a decelerating trend from a robust 2004, he said, with growth for all grades set to be slower this year than last, and yet slower again in 2006, before strengthening again in 2007. In volume terms, the two Printing & Writing Paper markets with the largest demand growth in 2005-2007 will be Western Europe and China and this will also be true for Coated Woodfrees and Coated Mechanicals (with virtually no growth at all expected in North American Coated Mechanical paper demand), according to forecasts presented by Maine. Volume growth will be more evenly spread in Uncoated Woodfrees, with China leading the way, but Maine was concerned that Western Europe could follow the North American example and become a declining market, although North America should return to growth in the 2005-2007 period, according to his forecast. In the Uncoated Mechanical sector, volume growth will come overwhelmingly from North America and Western Europe, according to Maines forecasts. World Printing & Writing Paper capacity growth will be focused on China over the forecast period, and global capacity is expected to grow by more than demand both this year and next year for all four headline Printing & Writing grades, according to the forecast. Still, publishing markets should remain "incredibly tight" in 2005 due to the strike at UPM´s Miramichi mill in Canada, with US imports of European LWC expected to grow strongly in 2005, to fill the supply gap left by the idle Miramichi capacity. In contrast, in the Coated Woodfree sector, the USA he been importing more from Asia than from Europe since 2003, and this is expected to continue. Finally, Maine predicted that average profitability for US Printing & Writing mills would improve strongly in 2005 and 2006, peaking at around 10% before falling again, while average profitability at European mills would recover only gradually and remain below 5% over the next three years.
The final session of this year´s PRIMA conference was an Executive Panel Discussion chaired and moderated by Amec Forest Industry Consulting´s Roman Hohol and featuring, from the paper industry, Girolamo Marchi, CEO of the Burgo Marchi group and Juha Vettenranta, Vice President, Marketing & Sales for Stora Enso Graphic Papers, UK, as well as Marie Hélène Draber, Deputy CSO of Wolters Kluwer France, and Niklas Wilke, Senior Manager of PriceWaterhouseCoopers in Germany.
The panel debated a very wide range of subjects, including:
- Have the fundamentals of this business changed?
- Why are newspaper and magazine circulations declining?
- What changes are there in the publishing business?
- Are you worried about attracting younger readers?
- How is the market share of print media developing?
- Are consumer attitudes to printed media changing?
- Can paper companies play a role in helping media companies deal with these challenges?
- Is it a fundamental problem with paper company management, that we give away value for nothing? How do we change that without upsetting the customers?
- . . . and more!
Following this session, Frank Leerkotte closed the Conference proper, and many of the delegates chose to follow their lunch with a trip to Axel Springer´s printing works at Ahrensburg or to Nexpress Kodak´s plant in Kiel. PRIMA then shuttled the visitors to the airport in time to catch their flights from a sunny Hamburg back home for the weekend.
For their generous contributions to help make another successful PRIMA Conference possible, sincere thanks must go to the Main Partner of PRIMA 2005, Eka Chemicals, to the Gold Partner, Accenture, and to the other Partners, Jaakko Pöyry Consulting, The Igepa Group and Amec Forest Industry Consulting.
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Attentive audience
Keynote speaker Christian Nienhaus
Open dialogue: Dr. Girolamo Marchi
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