Jan 17, 2006

Coated Paper Distribution Challenges Drive International Paper Out of Industry

International Paper has thrown in the towel on the coated paper business, and other manufacturers may soon follow. The IP move comes as dramatic shifts are occurring in the physical distribution and decision-making around coated paper products and traditional channel members challenge the status quo system.

Many advisors working with the industry have simplistically reduced the industry's challenges to the cost curve. "The highest cost producer is the first to go...so focus only on M&A activity designed to improve your relative position". If only fixing the coated paper business was that easy!

ith margins up and down the publishing chain tightening, printers, brokers, paper manufacturers, and merchants are all moving aggressively to capture and lock in paper positions with end-users.

Channel chaos has increased as a result: merchants are integrating more deeply into end-user paper acquisition processes at the expense of traditional printer reps; printers are striking back by leveraging house paper brands and purchasing power to capture a greater share of their print customers’ paper purchases.

Not surprisingly, this sustained level of channel chaos as well as heightened product commoditization pressures have opened the door to a wide range of price-oriented brokers – paper, printing, and catalog. While paper manufacturers work diligently to remain channel-neutral in these channel wars, their ability to maintain “spec’d-in” or “product-pull” positions with end-users (at attractive margins) is increasingly at risk.

It is our belief that this growing channel turmoil is likely the result of a natural polarization emerging in the marketplace around at least two distinct customer value propositions. For the "print job dependent” end-user, the printer (or print/catalog broker) acts as an “OEM” – paper is inextricably integrated into a finished product (print job) they are selling to end-users. In this situation the end-user wants to provide little or no input to paper selection. Manufacturers naturally tend to treat printers targeting this end-user segment as customers – “OEM customers”.

Another portion of the end-user marketplace, in contrast, looks to get significantly more involved in paper selection decisions, and rely on intermediaries to provide them with sophisticated services that lower the total costs of paper product acquisition. While the paper source may still be a printer, in this case the end-user has un-bundled the printing and paper purchase transactions. As a result, this unbundling creates opportunities for manufacturers or channel intermediaries – such as merchants and paper brokers – to compete with the printer for the paper portion of the business. Paper manufacturers tend to treat both the printers and merchants targeting these end-users as channel partners.

Then there are the myriad channel permutations that fall outside these two models: printer reps partnering on specific transactions with merchant reps (even when the printer rep is under corporate pressure to sell house brands); merchants providing paper buying services directly to large printers (because they offer more sophisticated integrated supply capabilities); independent brokers looking to provide parity end-user pricing with super-large printer “OEMs”; merchants buying up independent paper brokers and blurring the distinction between the two; large end-users working with multiple channels – both printers and merchants – to source paper; traditional “print job-dependent” end-users moving in favor of direct paper purchases; or other “print job-dependent” end-users moving away from large printers such as R.R. Donnelly to spec-in a merchant as paper source.

There are two important observations to be made here. Firstly, it is critical that manufacturers determine the size and attractiveness of the full range of distribution channel segments, and make proactive choices about which segments to target and through what channel system they will be reached. What portion of the end-user marketplace is “print job dependent” versus some other orientation? Which segments are growing or shrinking? What are the implications for ideal channel partners?

Secondly, when there is a discernible distinction between alternative value propositions, there will inevitably be a healthy level of channel competition – especially if end-users can be swayed to move from one orientation (say, “print job dependent”) to another (i.e., “paper involved”). On the other hand, when there is a lack of credible and perceived differentiation between alternative channel value propositions, channel members will increasingly offer unvalued services, perform redundant activities, and focus on aggressive price wars – all of which inevitably leads to undesirable levels of channel conflict”. Indeed, paper manufacturers are finding that up to 30-40% of their customer relationship time is spent arbitrating extensive channel conflicts.

Winners In this business will design and create a fact-based, market-focused channel system for reaching publishing and corporate end-users. They will develop strategies to address critical distribution channel issues such as:

How do publishing and corporate end-users segment with respect to their distribution channel needs?

What channel system value propositions will powerfully differentiate a manufacturer with attractive segments of this end-user marketplace?

What are the full range of activities required to deliver channel system value propositions to each segment? When should a company look to channel partners?

When channel partners are the optimal choice for performing activities, how should labor be divided between involved parties?

What types of channel partners are best suited to perform critical value-delivering activities? How should they be screened, managed, and compensated fairly for activities performed?

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