Paper Jam

It's not just magazine publishers crying the blues over the weak U.S. economy, which inspired advertisers to cut ad page placements 9.3 percent in 2001, and 10.4 percent this year, according to a recent report from market researcher Nielsen/NetRatings.Magazine publishers have responded by tightening ad/edit ratios, decreasing trim sizes, and going with lighter basis weights. Cataloguers have also cut back, shifting promotions to the Internet and other electronic media, while pruning mail lists and slashing page counts. Corporations outside the publishing industry have also pulled back, trimming the number of brochures and other printed matter produced annually.It all adds up to a major reduction in paper consumption in 2002-and paper manufacturers aren't optimistic the trend will reverse significantly anytime soon."When the economy isn't doing well, the paper market doesn't do well," says Barry Polsky, spokesperson for the American Forest and Paper Association (AF&PA) in Washington, D.C. "Publication papers are particularly sensitive to economic swings. Time, Newsweek; their advertising is down, because the economy was in the tank."STRONG DOLLAR, WEAK MARKETA bad economy and reduced consumption weren't the only issues challenging paper manufacturers this year. The strength of the U.S. dollar paved the way for foreign paper producers to discount their products domestically, while driving up prices of American-made papers overseas."Exports to Europe [have been dropping] considerably over the last three to four years," Polsky says. "The U.S. dollar was overvalued. Publishers [were] able to buy product more cheaply from overseas suppliers, [and that] hurt U.S. producers."Paper producers have had to rethink their business practices to survive in this climate, says Normand Lecours, VP of sales with Domtar of Montreal. "It's not business as usual," he says. "To offset the struggling economy, we've reduced our number of offerings, and focused a lot on service."Domtar also focuses more on supply optimization, increasing inventories of paper grades customers use frequently, while cutting less popular SKUs. The company is also working to help customers publishing on text, cover and writing paper to cut supply costs by moving to lower priced, high-quality opaque stocks.PROACTIVE, NOT REACTIVEPaper manufacturers who launched expansions during the boom economy's final days have been hit hard by sagging market conditions. Rather than pull back, some of the industry's vendors have redoubled expansion efforts in anticipation of a robust economy down the road. Paper mills and distributors are merging to pool resources, increase efficiencies, reduce redundancies, and expand product offerings-all of which can provide significant competitive advantages in a down market."[We're seeing] a lot of consolidation, because large paper producers are looking to enter new markets," says Polsky of the AF&PA. "Rather than investing in new capacity, it's more cost-effective to absorb the capabilities of other companies."Chuck DeWitt, product chief of the coated grades for Smart Papers, in Hamilton, Ohio, agrees: "Globalization is a major trend. There have been additions to capacity in Indonesia, China, India, and parts of Europe. The companies that remain are very large, and very competitive."UPM-Kymmene, a publications paper manufacturer based in Helsinki, made a number of acquisitions over the past two years to increase market share, and expand capacity to better serve what was then a fast-growing market for coated grades no. 4 and 5.Then the dot-com bubble burst, the World Trade Center towers were attacked, and the cooling U.S. economy skid into recession. Compounding these problems, the U.S. Postal Service jacked up postal rates, putting the squeeze on direct marketers and catalogue sellers, a crucial customer segment for UPM-Kymmene.Rather than backpedal, the company responded by revisiting its business practices, boosting service levels, and helping clients substitute lower-cost grades."We've expanded dramatically [through] acquisitions, where we invested $2 billion," says Douglas McArthur, UPM-Kymmene's senior VP of marketing in Chicago. "To see the market collapse was quite a concern. We've been working harder with customers, and aggressively promoting alternative grades."The company also rapidly developed and put into production a new paper with lower basis weights, an effective counter-measure for customers coming to grips with the significant postal rates increase."Even though we and our customers dealt with a particularly flat year, we'll continue to invest in new products and expand our sales force, so we can be ready when the market turnaround arrives," McArthur says.BIGGER, BADDER, BETTERReady, that is, to compete against other new-generation giants. The mega-merger of Mead and Westvaco into MeadWestvaco in February exemplifies how mid-level players can be transformed into industry Goliaths overnight.The combined MeadWestvaco company zoomed to the #2 spot among makers of coated paper in North America, displacing Stora Enso of Wisconsin Rapids, Wis. MeadWestvaco's combined annual revenue: $8 billion, and just 50 production capacity tons shy of International Paper, the industry's leading coated paper producer.But bigger isn't always better. Savvy manufacturers are moving in to serve customers left in the lurch by big M&A deals, and vendors who went belly up. Case in point: Smart Papers, a premium paper maker born of the M&A trend. When International Paper bought Champion for $7.3 billion in February 2001, it subsequently sold Champion's premium paper mill, establishing the independent Smart Papers in the process.When paper maker Curtis Fine Papers shut the doors to its Richmond, Va., mill that produced King James cast coated papers this year, Smart Papers moved in with its "Krome Kote" cast coated line. The company aggressively hunted down customers orphaned by the closing of the King James mill, focusing on providing superior, yet comparably priced products, increased grade lines (such as triple-coated or cast-coated ultra-glossy for brochures), and upgraded customer service."The shrinking marketplace presents unique opportunities for us, and lets us focus on products that fill a gap," says Smart Papers' DeWitt. "We try to lead, not follow our rivals."Likewise, manufacturer Domtar expanded its customer base by acquiring four paper mills from Atlanta-based manufacturer Georgia-Pacific this year. VP of sales Lecours says the company's acquisition phase has provided a positive mix of new products and new customers, even in this ultra-competitive environment.The proof: The company sold out it's entire production inventory of uncoated and coated papers in 2002, an astonishing success company officials credit, in part, to their unwillingness to cower in the face of a formidable market.If there is a lesson to be learned here, it's an old one: When the going gets tough, the tough get going. Clearly successful vendors such as Domtar, Smart Papers, UPM-Kymmene, and MeadWestvaco got tough in the face of a daunting recession and shrinking market, and are now reaping the benefits of their aggressive stance.-Warren Chiara

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