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Summary Session I
Different ways to profit from paper |
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The next session of the conference was entitled Different Ways To Profit From Paper, and was chaired by Bob Latham, Commercial Director of the Robert Horne Group, UK, part of PaperlinX. The first speaker that Latham invited to the podium was Outi Ervasti, Associate Principal of Pöyry Forest Industry Consulting, Finland, who presented a paper entitled Profit from Paper?
She began by showing some typical profit margins along the paper supply chain, which indicated that European papermakers and printers are suffering from low and even negative profits, while Brazilian pulp producers are enjoying the highest profit margins in the whole supply chain. Suppliers of chemicals and machinery and publishers, retailers and related consumer businesses have earnings somewhere in between the extremes.
Problems for the paper industry include the inability to pass on rising costs or to capture any increased revenues from the final market. The marketplace, cost base and paper industry asset base are all changing and there is competition from other media, she noted. Other changes include demand growth taking place outside of the mature markets, and she suggested that papermakers should work out how to be shapers of the high-growth markets. She also pointed out that the world´s paper markets are becoming increasingly regional, with buyers preferring local suppliers, making it harder for European suppliers to export, adding to Western Europe´s structural problems, although there are export opportunities in standardised products and fibre.
She also drew delegates´ attention to what she called Near Europe, meaning the Balkan states, Turkey and oil-producing countries, pointing out that the population of this region is as large as Europe´s and she argued that thought is required on how to market to the region, what presence could be required and how much should be invested there. She asked the question of Western European papermakers - should you invest at home and outpace domestic competitors with less-efficient machines, or go outside your comfort zone and take a risk on investing to build a presence in other markets?
In the Western European market, overcapacity and the regionalisation of export markets are making Western European papermakers vulnerable. While some companies have been restructuring, she said paper companies often do all they can and spend unnecessary money to keep uncompetitive mills operating, and she said perhaps the current low prices could promote more restructuring.
In addition, with increased competition from other media, the paper industry should collaborate with other parts of the supply chain on innovation, to avoid missing opportunities.
Ervasti also noted that there have been calls for even lower prices for printed products, but she pointed out that papermakers should not bear all the blame, as paper only takes up about 6% of magazine costs and 3% of book costs, according to a Finnish business model. However, if papermakers want to increase prices, they may need to invent something totally new, she argued. She asked Can you really make more profit unless you make something truly innovative in this business or will you stay a commodity producer? At the same time, she said that publishers and printers don´t care about technical and versatile paper products; they want standard papers, with more tailored service. She also noted that branding had not been used as powerfully in the paper industry as it has in others.
She concluded that profits are possible in both mature and developing markets, but that the right strategy is required to achieve them. Restructuring is needed, especially in Europe; papermakers need to pass on higher costs in the form of higher paper prices; they should not resist technical standardisation too much, but at the same time, they should look at innovation in co-operation with other parts of the paper network.
In the next presentation, Peter Berg, Practice Manager at McKinsey & Co. in Sweden, dealt with Customer Focus In Paper And Packaging.
Paper prices tend to decline over time (especially in value-added grades), while costs tend to rise. At the same time, company size and profits do not correlate. Operational excellence can indeed drive profits - but only excellence, not being merely good - it´s hard to be distinctive in terms of operations, he argued. He added that lean manufacturing can increase efficiency and allow competitive advantage, as can access to scarce upstream resources - e.g. pulp makers making the most money in the paper supply chain.
However, Berg´s main focus was on another strategy, i.e. competitive advantage through superior customer and value chain knowledge, strong innovation skills and a focus on solutions rather than on materials. This is now beginning to be seen in the industry, according to Berg, although how well producers really do understand their customers is variable, he said. At the moment, most producers focus on producing at low cost, implying that selling is perhaps of secondary importance. That is not to say that producers ignore customers´ wishes - indeed, Berg said producers sometimes try to fulfil too many of these wishes, reducing their own competitiveness as a result. He recommended that the producer develop an independent view of what constitutes value for the customer and perhaps also for other downstream links in the supply chain, to reduce costs. Going one step further, this approach could perhaps even help to boost revenues along the value chain. Instead of product forward thinking, McKinsey calls this a customer back approach.
As well as understanding the customer, Berg illustrated another strategy aspect, which is understanding the costs of the value chain. Besides mere paper price (say, e.g. 10% of the cost of producing a magazine), paper also influences costs because of the paper´s characteristics, weight, handling etc., and an understanding of all of these aspects aids the papermaker in understanding the costs of the value chain. This understanding can aid in reducing waste and complexity. For a range of reasons, some 11-25% of paper bought by printers does not end up as printed product, for example. By understanding the printer´s processes, he suggested a papermaker could streamline, standardise and focus its offering in line with the printer´s real needs, reducing waste both for the printer and for the mill - what he called a productivity partnership.
The more advanced partnership, boosting revenue, Berg called an innovation partnership, and this is more often seen in the packaging sector. Due to strong demand for new packaging solutions, with increasing emphasis on short lead times in development of these solutions and the need to capture consumers´ attention at the point of sale and to cut costs in the value chain, there are opportunities in integrating and simplifying the chain. This is slowly but surely happening, although it is not producers of packaging materials that are doing it, but packaging developers. As such, the packaging materials producer risks having someone else create the value and, for example, specify which board must be used.
In summarising, Berg noted that on the one hand, there is customer focus where you listen and adapt to customers´ explicit demands and/or where the main means of capturing value is by raising prices and/or where there are isolated commercial and operational improvements. His preferred option, however, is a customer focus where the supplier develops its own independent view of how to create value, to capture value through the ability to reduce complexity and waste along the entire value chain and where operational and commercial activities are closely linked, because they stem from the same customer opportunity.
Despite a lot of talk about such customer-focused concepts, they are slow in becoming reality in the paper industry, he said. This is partly because of a disconnect between sales and marketing and production within papermakers´ own organisations. It is also partly because of a lack of trust and transparency, and he cited the example of the Printing/Writing sector, where there is a long tradition of tough, price-focused negotiations, and he suggested this will probably have to change, although it will take time.
The next speaker in the session was Bernhard Ebel, Senior Partner at the Simon-Kucher consulting company, Germany, and his presentation dealt with Successful Price Management In The Paper Industry.
He said it is not logical to invest only in reducing costs and maximising sales volumes, without also investing in price management. While it seems that much less effort goes into price management, he argued that it is at least as rewarding to put the effort into pricing. He suggested that the paper industry is expert at delivering value to the customer, but not necessarily as well-qualified in generating counter-value at the sales end, at extracting the value created. In fact, he believes that price negotiations sometimes actually devalue paper products. In terms of priorities, paper companies should put profits before market share, he insisted. He believes there is room for improvement in paper sales, in terms of professionalism.
At paper companies, there are R&D and production processes, but he asked how many papermakers have a pricing process. Who is the guardian of profitability? he wondered. Often, that person does not exist, he said. Do all sales people know how much of the company´s profits are eaten up by lower prices?
He examined a pricing strategy aimed at optimising the Pricing Process, involving Pricing Strategy, Pricing Information, Price Setting, Price Implementation and Price Controlling. Such a Pricing Process can typically increase the return on sales by 1% to 2%, he said. Pricing Strategy involves deciding what goals are to be achieved through pricing (e.g. prices vs. volume, pricing differentiation) and communicating the pricing aims. Pricing Information includes deciding which data to use to set pricing, such as production costs, potential in individual customer segments, competitive position, analysis of orders won and lost. Price Setting deals with deciding on the optimal price level and the discount structure, etc. (Cost-based pricing is widespread in the paper industry, he said, but this approach usually fails to achieve optimal pricing. A much more complex approach is to calculate the economic value of a product´s benefits to the customer and base the price on that, but he argued that this is a far more profitable approach). Price Implementation covers communication, negotiation, discipline and incentivisation - he noted that incentives are often for achieving volumes, so it should be no surprise if prices are disappointing (he also mentioned using sales incentives based on price rather than volume). Price Controlling is about learning lessons and analysing what was achieved, why price targets were not met, etc.
He focused particularly on Pricing Information. Regarding competitive position, he suggested focusing on the criteria that buyers use when deciding to purchase and on knowing how the product is variously perceived (the same product can be seen differently in different countries or even in different departments of a customer´s organisation). Also a key measure in Pricing Information is reviewing exactly how existing pricing is structured - often there are large variations in discounts between customers of a similar size, but he said the paper industry typically has much less information on its pricing structure than on, e.g. production costs.
As pricing is such an important profit driver, he advocated improved price management, the use of value-based pricing whenever possible and a change of attitude away from market share and towards profits.
Continuing the session, Ulbe Jelluma, Director of Frysk, Belgium, a consultancy on b2b communcation, gave a presentation entitled Winning Advertisers For Print.
Over the years, Jelluma noted, advertisers have moved the focus of their message and the media used to carry it. In the 1960s, they basically announced products in newspapers and magazines, while the same announcement messages moved their focus to television in the 1970s. The emphasis changed to mass marketing in the 1980s, again focused on television. There was another change in the 1990s, with the development of one-to-one marketing via direct mail and customer relationship marketing. In the new millennium, advertisers are looking for interactivity via the internet and other new media.
Having said that, he noted that reaching and winning consumers and creating an experience related to a brand are still key issues, and he argued that print can help with that. He noted that the brand experience approach is aimed at combating the problem of getting and holding consumers´ attention, and that this is being communicated via a range of media segments - consumers can no longer be reached effectively just by one mass medium, such as television. However, this requires increased investment and therefore the effectiveness of the expenditure needs to be measured - the advertisers increasingly require accountability in the form of measurable responses to advertising. That is one of the reasons for using the medium of the internet, he explained.
From the consumer´s perspective, there is an overload of information and media channels, and as a result, they are picking and choosing what they like best. This means they have become less predictable, so it is now a lot harder to communicate with consumers. They are even creating their own media content (in magazines and blogs). As such, the power in the advertiser/consumer relationship has shifted towards consumers, because they are seeking out what they want and even creating the content themselves, not just being advertised at in a confrontational way. He also noted that in this context, younger consumers are becoming less paper-literate.
However, based on the examples of the Amazon.com and eBay internet businesses, the Internet is not effective enough to talk to their consumers. So these companies are producing printed catalogues to announce the services available on their websites. Furthermore, advertisers that are looking to communicate a "brand experience" increasingly want to communicate this experience on all media to which their consumers might be exposed.
Looking specifically at advertising and promotional expenditure on the internet, a survey by The Economist of European CEOs showed that while a rising proportion of CEOs expect to add new budget for spending on the internet in the next two years, the proportion of CEOs who expect to shift some budget from off-line to on-line advertising is actually likely to decline.
Other expectations for the next two years include mixed news for the paper sector. On the upside, the survey showed that a majority of CEOs expect spending to increase on direct mail and magazines, but to decrease on printed classified advertising and on the Yellow Pages directory. Spending expectations for newspaper advertising are split almost down the middle, with perhaps a slim majority expecting to increase their spending. Good news for paper is that a combined-media approach is believed to multiply brand recognition levels. Also, consumers have a unique trust of printed media. More challenging news for paper is that the on-line medium is expected to determine the planning of major advertising campaigns and that mobile initiatives are expected to become more mainstream. While the internet is hot and print is not, Jelluma suggested that there is a need to re-establish the value of print, especially to young people. He gave an example of a German company delivering a tailor-made printed newspaper to the home, combining the flexibility of the internet with the functionality of paper. He also suggested that the e-newspaper currently being tested in Belgium is no real danger to printed newspapers in its current version. However, it is another sign that the number of media is increasing.
The printed media cannot ignore these developments; they need to react, and they need to act now, he argued. Advertisers are currently doing well and advertising spending is rising, so there is momentum right now, he pointed out. Also, large advertisers are changing their media planning strategies, re-allocating budget away from television (where advertising "clutter" is high) to other media.
This action has begun, he noted. Cepifine & Cepiprint´s well-supported "Print Sells" campaign is aimed at promoting the use of print throughout Europe, and will be launched in September this year. Sappi, meanwhile, launched its Life With Print campaign three years ago, aimed at a similar target group as the Print Sells campaign: media planning and buying decision-makers. Life With Print uses booklets about direct mail, brochures and catalogues - all explaining the benefits of printed media in combination with other media. Sappi also created the Sappi Print Media Efficiency Award together with EFFIE, the global organisation that honours effective advertising campaigns, to highlight campaigns that won an EFFIE Award while spending at least 40% of the budget on print media.
Jelluma was followed by Monique Bollen, Marketing Director, PaperlinX Europe, The Netherlands, and she delivered a presentation arguing that Brands Need To Deliver More Value To Owners And Customers.
Focusing on brands in commodity papers, she questioned whether the large sums of money spent on brand promotion is turned into a lasting financial advantage. Most of the investment (she estimated around Euro 70 million in 2005) went on sales promotion and relationship marketing events. She argued that sales promotion does not build brands that can command a small premium, as there is always something on promotion - it is like a continuous happy hour at the bar. For the amount of money spent on brand promotion, brands should do more than maintain market share, delivering more value to their owners and customers. Even the leading paper brands are dissolving into commodities, with only price separating one from the other, she said.
For the owners, successful brands should make more profit than unbranded products, and besides commanding a price premium, they should enhance operational efficiency, create customer loyalty and help to motivate employees. For the customers, brands should offer clarity of choice, premium services associated with premium brands and basic services with basic brands, as well as reassuring the customer by offering a consistent experience of using the brand time after time.
In reality, however, Bollen argued that the paper industry is not a great believer in brands. The one or two genuine brands are the exceptions that prove the rule that the paper industry is not convinced of the importance, value or potential of brands. Few commodity papers command a price premium. And regarding operational efficiency, although there has been a reduction in the number of brands on the market, she pointed out that there are still more than 100 different brands of coated paper in European customer warehouses, which is a cause of inefficiency.
Based on interviews, she concluded that paper salespeople are not always clear about the most important brand that they sell, what the differences are between the many brands they sell or how to form a compelling argument once the customer mentions price.
She wonders whether customers really care about paper brands. Customers value clarity of choice, but a recent audit showed that PaperlinX sold more than 120 coated woodfree paper brands worldwide, with one merchant alone stocking more than 10. She believes that salespeople must have difficulty in explaining that portfolio to a customer and wondered how customers can choose a brand, other than on price. Making product portfolios clearer would help customers to choose the right paper more easily and quickly, she argued.
Looking at service, she noted that the same level of service is offered whether a customer buys a premium or budget brand of paper, with differentiation tending only to relate to product quality, and as product qualities do not differ greatly, then it must come down to price. She insisted that customers in all markets value the premium service associated with buying premium products, and understand that bargain prices mean no-frills service levels.
In terms of reassurance, she questioned how consistent paper brands have been in product range, relative price level, product performance and relative service levels over the past 15 years. And yet, 90% of the time, if a customer has a repeated positive experience, they will order the same paper again.
Although paper buyers may claim to have no loyalty to any particular paper brand, Bollen argued that their behaviour proves that they actually do. PaperlinX, she added, believes firmly in the value that strong brands can deliver to the industry. But before investing in a brand, she said it must meet 4 criteria: 1) full-hearted, long-term support and commitment from the manufacturer; 2) a large market potential - to make economies of scale possible; 3) the ability to play a specific role in the product portfolio and address specific customer needs, and 4) to be immediately profitable. This requires a combination of all elements of the marketing mix, not just price, she said. For the sales force, there is an even greater challenge - a mind shift from selling pallets of paper to selling value, and this will take time, because it means a fundamental cultural change, she believes.
In the tough business climate expected in future, operational excellence will be vital to survive, but to prosper will require weapons that are able to outperform the competition, adapt to the future and win the support of papermakers and customers - weapons like brands.
The next speaker at the podium was Christian Naydowski, Vice President, Innovations & New Opportunities, Voith Paper Holding, Germany, whose presentation concerning Technology and Innovation began a new session.
He began by noting that there have been many ideas down the years for creating value in the paper chain, such as restructuring ownership or product portfolios globally, as well as focusing on operational excellence, etc. So he wondered what contribution a company like Voith can make? He said there is a need to aim for technology that goes far beyond current operational excellence, which requires R&D and a will to innovate. Creating value in ways other than operational excellence requires new thinking for engineers and technicians, he added. Today´s machinery supplier is challenged to identify long-term trends and then define the next step up in technology, requiring visionary and creative people, as well as technical equipment.
He noted that technology has changed vastly since the average papermaker last decided to build a paper machine, with the development of computers, the advent of mobile phones and the internet, etc. The life-span of a paper machine is measured in decades, but business models and the technologies related to them change constantly and are interdependent for the creation of value, explained Naydowski. If the average paper machine is currently 18 or more years old, he asked what will happen by the year 2024 (18 years from now)? What business models and what technology will be in operation? He argued that there are already new business models on the horizon, requiring new technologies. For example, some 20 years ago, a new business model was to build PCC supply units on-site and more recently, another new business model was business outsourcing.
Looking hypothetically ahead, he speculated whether one new business model could be to combine papermaking, printing and publishing at one location? What new technology would be required? The value-creating principles of economy of scale are now reaching the printing industry, and there will soon be a new structure of printing house, Naydowski predicted. Europe´s largest offset printer has already reached critical mass in paper usage, printing some 400,000 tpa of paper per year, and others will follow, requiring innovations and new technologies. In such a new business model, perhaps high energy costs might be an initial focus, he speculated, to avoid using energy for packaging and mass transportation of reels. In addition, reduced paper wastage could result from close co-operation with the paper machine, he said. There would be no need for a marketing or sales force or for technical services on the paper side. Data from the paper machine could determine pre-print area settings, fibre sourcing and coating could relate to the printing needs. It could also reduce waste in the paper mill. Savings and knowhow could increase steadily, and price vulnerability could fall. The paper machine would have to be developed for this, and a higher net profit could result, he said. With new sensors and mathematical models, the printer could have information he has never dreamt of, and Naydowski pointed out that these models have already been developed and are merely awaiting application.
This is a vision, Naydowski admitted, but he added that a vision of the future works best when you create and shape it yourself. An R&D concept for innovations can yield time savings, which means profit and he pointed out that Voith´s management has opted to lead, not to follow, and to do this together with partners, because co-operation with the best partners makes for even more speed. He listed some of Voith´s partners: BASF, Cargill, Omya, Siemens, as well as integrated operations like fibre lab, etc. So, he explained, Voith can carry out the complete paper mill process trials to test visions with partners under real production conditions. Voith´s new Paper Technical Centre in Heidenheim was inaugurated on 11 May 2006, and Naydowski claimed the equipment is unique on Earth, enabling the customers and researchers of Voith and its partners to test any equipment.
The final presentation of the session was delivered by Yvette Blume, Project Manager at logistics management consultancy TransCare, Germany, and she discussed Liberalisation Of Railways And Effects On The European Paper Industry.
As of this year, European Union countries are obliged to allow third parties to transport goods on their networks, she explained. The aims of this were to open the market to new operators, to ensure choice so that quality and price develop along market lines, to separate infrastructure and transportation - allowing competition, to re-allocate infrastructure and charges to help rail keep its competitive edge and to facilitate pan-European inter-operativity.
Looking at third-party access to the European rail network, in reality, some countries have made more progress than others, she said. Related to this, rail transport usage varies immensely from country to country.
This is relevant to the paper industry, because of value opportunities and potential cost savings, not to mention the environmental benefits from transporting products by rail, Blume argued.
Cost savings could come from setting up a paper-industry specific rail network, which would not only help with appropriate equipment and technology, but would also give the paper industry a stronger price-negotiating position with the rail companies, Blume said. Sub-optimised and un-bundled transport is wasting money in the paper industry and there is the potential to transport paper at prices well below the price of truck transport, even over shorter distances, she argued.
Setting up a network would require that paper companies demand what they want, she pointed out. They would have to get offers from multiple railway companies of various sizes, co-ordinate volumes to achieve economies of scale, calculate cost transparently to determine financial viability, discuss and budget for the necessary special equipment.
She added that further opportunities are offered by intelligent logistics concepts. Although complicated to set up, these can offer benefits of using rail including direct delivery onto the production line, reliable delivery times and flexible loading and unloading times, loading manufactured product direct onto the rail wagons and no need for special packaging for transport by truck on motorways.
Although there are issues to be resolved relating to rail liberalisation in Europe, Blume argued that intelligent integration of rail transport could offer significant savings for the paper industry. She claimed that potential cost savings from setting up a paper-specific network could be up to 30%, while intelligent logistics concepts could save up to 10%.
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