Coated Groundwood Retrospective Industry Analysis 1988

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Coated Groundwood Retrospective Industry
Analysis 1988

• Matthew W. Ford
• College of Business
• Northern Kentucky University

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Coated Groundwood (CGW)

• NAICS code 322121 Paper Mills
• Google Finance
• Basic Materials gt Paper Paper Products
• Printing/Writing Paper gt Coated Paper gt Coated
  Groundwood (CGW)
• Geographic Scope North America

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CGW Cross Section
coating
base sheet
coating
base sheet long fiber (strength) short fiber
(smoothness, filler)
coating pigment adhesive (printability)
short fiber is ground wood- at least 10
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Market

• magazines (60)
• catalogues (10)
• coupons inserts (30)
• buyers publishers, some printers (30 total)
• U.S. (90), Canada, Mexico
• largest Time Inc (10 of industry sales)
• Hearst, Ziff Davis, McGraw Hill, Valassis,
  Fingerhut, Newsweek, Readers Digest, CondeNast,
  Meredith

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Basic Supply Chain
Inputs
Process
Outputs
Downstream
pulp pigment chemicals water energy
paper mill continuous process (hi volume, low
variety) equipment (specialized) labor
(unionized)
CGW rolls
printing distribution
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Industry Competitors
(TPY capacity, estimated from various sources)
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Industry Trends
All data estimated, various sources
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Industry Age

• First paper mill 1700s
• Top 3 competitors founded in 1890s
• Demand growth closely tied to GDP
• Mature phase of industry life cycle

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Related Institutions

• American Paper Institute (API)
• Key trade publications
• Pulp Paper
• Paper Trade Journal
• Paper Age

now known as American Forest Paper
Association (AFPA)
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F1 Rivalry

• 15 competitors
• CR4 55 CR9 90
• HI 1072
• 5 yr price/ton 975 950 910 880 850 (-13)
• 5 yr capacity 3875 3929 4137 4631 4900
  (27)
• Innovations ultra lightweight sheet, recycled
  fiber content
• Capex 10 of industry sales (avg all mfg 5)
• Capacity utilization (1983 100 1988 93)

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F2 Substitutes

• Existing Alternative paper grades
• coated free sheet (CFS) premium print
  quality
• supercalendared (SC) cheaper
• On horizon Digital
• desktop publishing via PC, small
  printers
• electronic media Web not on radar

Both industries early in life cycle growth
rates increasing
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F3 Seller Bargaining Power
Source company reports
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F3 Sellers (contd)

• Industry capex 10 annual revenues (380M)
• 3-4 paper machine equipment makers
• Large in-house engineering staffs (backward
  integration)
• 10 fiber suppliers backward integration into
  pulpmaking
• 2-3 suppliers for each key chemical
• Backward integration into energy (gt 50 self
  produced)

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F4 Buyer Bargaining Power

• 30 buyers
• CR4 lt 30
• Captive market for industry products
• Low cost for buyer to switch suppliers
• Industry standards for product, packaging,
  shipping
• Buyers purchase from multiple suppliers (3-4 at
  least)
• Buyers lack knowledge about industry (creative
  types)

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F5 Threat of Entry

• 1 domestic entry in last 10 yrs (Repap -
  Canadian)
• 4-5 European entrants last 10 yrs (5 share
  growing)
• 0 major mergers/acquisitions
• Large scale economies for new capacity (-20 unit
  cost)
• Little product differentiation (ad spending lt 1
  sales)
• Capex for new facility 350 million
• Open distribution channels
• Capacity utilization (1983 100 1988 93)

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F5 Threat of Entry (contd)
Equates to 91 learning rate
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F5 Threat of Entry (contd)

• EPA, DNR permitting, regulation, monitoring
• Interest rates falling (US 10 yr T bond 12?8)
• Euro government subsidies, tax breaks

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5 Forces Summary
Force Highlights Effect

F1 Intensity of Rivalry capacity 27 price/ton 12 modest concentration capex 10 of sales falling capacity utilization
F2 Threat of Substitutes digital substitutes desktop publishing, electronic media in introductory industry life cycle phase
F3 Supplier Bargaining Power large purchases of specialized equipment backward integration into equipment design, pulpmaking, energy o
F4 Buyer Bargaining Power 30 buyers, low CR4 narrow group of end markets low switching costs low buyer knowledge of industry o
F5 Threat of Entry capacity-related barriers, but significant entry Euro govt subsidies declining interest rates
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Conclusion

• How attractive is the
• CGW industry for
• sustainable profits
• post 1988?

By my assessment, this is a 3 minus industry
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Strategic Map 1988
High
Weyco
IP
Champion
Boise
Euro
Level of Diversification
Bowater
CZ
Niagara
Consolidated
Repap
Blandin
Low
Age of Capital Equipment
Old
New
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Strategic Map 2008
High
Bowater Abitibi
Domtar
UPM
Level of Diversification
Verso
NewPage
Low
Age of Capital Equipment
Old
New