The Paper Game and How to Win It

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The postal increases this year, along with the threat of another in early 2002, has thrust paper into the spotlight again. When postage goes up, paper selection and usage are reviewed for possible areas of savings, namely basis weight and book size.


Direct marketers everywhere are consulting with suppliers about how to contain costs that have been ratcheting upward for several years, even before the postal increase. Catalogers have been hard hit by a conspiracy of wage pressure, parcel delivery increases, e-commerce investments and printing and paper increases.


The postal rate charge averaged in the low double digits for most catalogers, a cost that hits hard on profits with no promise of service improvement. That is a bitter pill to swallow but one that can be made easier by understanding that paper, however bland a topic, has a disproportionate impact on the bottom line.


Paper accounts for more than 50 percent of the average cataloger's production budget. Next to postage, it is the biggest single item in the production of printed matter.


When prices go up, as they did for much of 1999 and 2000, direct marketers feel the pain. Paper increases usually come in bites of 5 percent to 6 percent ($2 to $3 per hundred pounds of weight) and, like postage increases, are not embraced with any degree of warmth or understanding.


Similar to gasoline and airline tickets, customers find it difficult to understand how prices can fluctuate so suddenly.


The industry is notorious, albeit wrongly accused to a large extent, for engineering huge price moves that inflict sudden and unexpected burdens on direct marketers.


Conspiracy theorists highlight the mother of all examples - such as the tight market of 1994 and 1995.


There are very few years in recent times when prices have risen more than 5 percent in any six-month period. However, there are many periods when prices have fallen by 5 percent or more. The early part of this year is a good example of that phenomenon.


An odd commodity with unique rules. Paper is technically considered a commodity similar to lumber, steel and oil. There are different quality gradations and price points for various products, and prices ebb and flow with supply-demand curves.


Yet paper mills, specifically American fine paper mills, have spent millions of dollars to brand their products and differentiate qualities such as brightness, whiteness, gloss and stiffness.


These are not commodities at all, but individual products and grade lines that boast both minute and dramatic qualitative differences.


Then there is the relationship factor and its impact on the sales process and pricing. Mills have fought the commoditization of their products by focusing on relationship sales and brand awareness.


Some of the big U.S. mills have massive sales forces, franchised distribution channels and print-ad budgets that make most designers envious.


Paper mills also send salespeople to call on designers, catalogers, paper merchants and printers to promote brand awareness and service excellence. Their goal is to build personal relationships and trust that will encourage customers to specify their mill's products.


They also hope that having a personal relationship with the customer will command a slight premium to the lowest spot price available. A mill sales representative may call on as many as a dozen paper merchant houses.


The consolidation of paper mills. It is important for catalogers to recognize how the recent flurry of consolidations has changed the mill landscape.


There has been more consolidation among paper mills in the past five years than in the previous 30. The consolidations create some dominant players in two key categories of coated papers, the primary substrate used in cataloging.


The top three producers in coated groundwood (which includes all No. 5 and No. 4) and coated freesheet (which includes all No. 3, No. 2 and No. 1) control about 60 percent of their respective markets. In specific niches such as coated rotogravure paper, the largest mill of all, International Paper, Purchase, NY, boasts 65 percent domestic market share.


The gap between "big mills" and "little mills" is growing as the acquirers continue to acquire. Even as this article is written, there are several deals brewing that could merge ever-larger rivals into megamills with dominant global positions.


The consolidations are being driven by the industry's need to realize efficiency and profitability in a historically unprofitable business. Most paper mills do not and have not returned the cost of capital for years. Wall Street's pressure to change this dubious distinction is incessant.


A byproduct of the consolidations is an aggressive rationalization of products and equipment.


Companies are shutting down machines, closing mills outright, selling noncore divisions and revamping product lines to focus on profitable market segments.


Recently two paper mills - Georgia Pacific's Kalamazoo, MI, mill and Lyons Falls Pulp and Paper in Lyons Falls, NY - were shut down permanently after years of losses. Customers were left stranded in search of replacements for those products.


Why does the consolidation trend matter to direct marketers?


The coy answer is it does not, but it does matter to the paper merchants and printers that service the direct marketing industry.


It is not the same paper world we have come to expect. There are no longer eight or 10 mills that make exactly the same grade of paper; rather, there are three or four in each category, and that number is shrinking fast.


Paper professionals are increasingly mindful of the quality of the mill that supplies the paper to their customers. Inefficient mills cannot afford to reinvest capital to improve products or services. A low price at a small, unprofitable mill eventually may turn out to be a low price at a mill that no longer makes paper.


Bottom-line rules for winning the game. Ultimately, if you are a direct marketer, you are in the paper business and must take some responsibility for understanding how the business operates.


The best prices and service are given to customers who exhibit traits of loyalty, commitment and planning. This is no different from any industry, but it is becoming more of an obligation than an option in a world of paper giants that control significant market shares and can afford to rewrite the rules.


A customer's dealings in the marketplace are often remembered and repeated by mill and merchant people alike, so be careful about how you go to market.


Jump-ball bidding for paper contracts, unlike bidding for art at Sotheby's, rarely generates the best price for a cataloger. Investigate the prospect of buying your own paper and building an identity for your company. There are paper experts - brokers - who will facilitate this process and help you source the best paper for the best price.


Mills prefer end-users to buy their own paper for two reasons: They hope to build a relationship that can lead to commitment and planning; and special pricing offers will not be broadcast all over the industry.


This often allows the mill more flexibility to save you money without compromising its other accounts.


The benefits of becoming educated about the paper business and understanding how to buy paper are more than worthwhile. Savings, security and industry insight are powerful tools for growing a business.


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