Global or Local: Does Mill Location Make a Difference?

IIRO KORIA, FISHER INTERNATIONAL
In my years working in various sales and marketing functions in the European pulp and paper industry, I’ve always wondered if the geographical location of the producing mill makes a difference in adding or reducing revenue/profits and market share to the producing company. How do the sales and marketing people see this insight impacting their daily jobs? Can Business Intelligence (BI) help them put this into practical use?

We tend to know our customers far better than we know our competition, whether directly or indirectly. Understanding direct and indirect competition will help us better address customers’ unserved needs, thus allowing us to better serve the market. Understanding the implications of the physical locations in comparison to the market can give producers and suppliers insights to inform their sales and marketing initiatives.

The geographical location of the mill may be less important for bulky mass products such as pulp, newsprint, and other paper products because these are shipped in larger quantities, which offsets the costs of distribution. The advances made in logistical solutions throughout the years have brought cost-effective ways to operate in markets that are, relatively speaking, far away.

 

However, the impact of the physical location of the producing paper mill can be significant for commodity products, such as graphic printing and writing papers, when there has been an oversupply for a long time and market pricing has been under pressure, providing low profit margins to the producers. Specialty paper producers and packaging papers usually fall someplace in between these two.

We can look at various paper products within the pulp and paper industry, but for this example, let’s focus on the coated freesheet paper producers in Europe.

DIRECT TO THE CUSTOMER
It is a fact that the coated freesheet paper market has declined during the past years due to substitution from electronic media, oversupply, changes in consumption patterns, and many recent paper machine conversions around the world. Many companies have seen their profit margins decrease to levels at which they have been forced to consider whether to continue focusing in this business area or to develop new products to try to differentiate themselves from the competition. Some have had partial success, but others were forced out of the market. We can see in Figure 1 that the general trend in capacity between 2007 and 2018 has been negative.

 

Product differentiation among coated freesheet products has almost disappeared with investments in past years and improvements in quality, which have led to easy product substitution from one supplier to another. In other words, the paper customer or printer has had an easy time changing from one quality or supplier to another without the need to make significant adjustments to their own production processes.

These facts have contributed to the trend in coated freesheet papers in Europe toward finding new business models, while the old trend had been toward a direct relationship between the paper manufacturer and the end customer. The main driving factor for this development has been the decreasing profit margins of coated freesheet papers during the past 10-15 years.

Traditionally, a large portion of coated freesheet paper, especially in sheets, has been serviced through merchants in Europe. In some countries this has been over 70 percent and in others, far less. The trend has been that paper manufacturers themselves have looked at different strategies for dealing directly with their customers (for instance, printers), taking over many of the paper merchants’ primary functions.

These functions include physical warehousing, deliveries, small quantity availability, marketing, and credit control/invoicing to the local customer base. The trend has gone toward higher service levels, including quick deliveries—for example, within one week maximum—and small, single order sizes. The decrease in demand has been accompanied by a diminishing number of prints per object, meaning that larger printed runs such as for catalogs, magazines, and other printed materials have decreased, or in many cases have disappeared altogether. Changing consumer patterns and the evolution of electronic media have had a significant impact on this trend.

We can ask ourselves once more whether the issue of being “local” has an advantage in serving the customers in each separate market. What if we are considering buying or merging with another coated freesheet mill? Will the mill location have an impact?

LOCATION, LOCATION
Let’s start with location. Where is our main competition located? Have we really understood where all the mills producing similar qualities are, and which could be a threat to us? How close are they to our customer base?

Looking at various competitive mill sites in Figure 2 and their physical location, we can find out whether or not these mills are located along the main transport routes. If they are, there is a high probability that they have a far better leverage in finding transportation solutions more quickly and at a more competitive cost. Today’s customers do require a high degree of (logistical) service—everything from flexible deliveries to a problem-free flow of materials to satisfy their needs. This also applies to any claims where goods must be delivered back to the respective mills.

Perhaps the most important questions to answer are:
• Where are our customers located?
• Where are our direct and indirect competitors located?
• What logistical resources do we have?
• What level of service are we prepared to give?
• How much flexibility do we have to absorb the various costs?

Ideally, if our customers are located in a region or area within 200-300 km from the mill site, then the cost to provide a high level of service for logistics and handling is, relatively speaking, probably reasonable and far less costly. As we all know, in most cases this is not the situation, and considerable effort must be made to build up a logistic and service system at a reasonable, affordable cost to the supplying mill or company. Usually we do know our customer base reasonably well, especially their location.

Printing and writing market customers in Europe are concentrated in a few main areas in Central Europe, being mainly around the large cosmopolitan regions. We can also find paper mills, especially in Southern or Central Europe, that are more successful in selling to their local markets compared to similar mills from Northern Europe.

The next questions for us to answer are: what are the logistical resources available, and what level of service is required? This, of course, is different with each customer and their needs. But the development of recent years has been toward a high quality of delivery and service, which made the logistical issues even more challenging to all suppliers.

All in all, we must ask ourselves whether it makes sense to deliver from a faraway location or not. Is it better to stay local to maximize sales and profit? Some companies with several mills serve strategically different regions or markets due to this fact.

Looking at the cost curve of the various coated freesheet mills in Europe, we can say that the low-cost mills are in a better position to deliver to places further away, meaning that they can absorb higher logistical expenses in their total product mix. Mills with a high cost base, however, cannot absorb expensive logistical costs for very long before starting to lose profit margins—or even, as in some cases in the past, selling at a loss. Understanding this more clearly from the marketing and sales perspective may prompt mills to focus efforts onto being more local instead of global.

As we know, market pricing modeling must consider many contributing factors. Smaller- and medium-sized mills have relatively little influence on what the pricing structure is at a given time. Therefore, perhaps one important aspect is to analyze the cost structure of the industry and compare it to ours. High cost manufacturers have more difficulty absorbing higher logistical costs. In these cases, one can assume that their focus would be more on regional markets. On the other hand, lower cost manufacturers can expand beyond their traditional regional or local markets.

UNDERSTANDING OUR COMPETITION
Are there also other factors hindering our sales and marketing efforts overall? Do the sales and marketing people fully understand their competition? Too often I have heard the phrase “It’s impossible for us to sell there.”

Yes, sometimes that is true, but I believe that in the majority of the cases one has not had the right tools or correct information to defend such a statement. This applies both to market size and development, as well as fully understanding our competition and our competitiveness in general.

In many cases, we lack information about our competitors and their capabilities, and often tend to believe certain market data that are sometimes based solely on subjective information. When talking with customers, we typically discuss only issues relating to the products we are selling and we seldom offer objective leadership thoughts and information about markets, products, and competition.

One way to understand our competition is to understand their production and manufacturing capabilities together with their physical location and their viability compared to the rest of the industry. Does the competition have certain technological advantages that make them better? Is there a threat from indirect competition that we are not aware of? Where are the potential threats located?

Of course, there is no 100 percent sure way of finding out all the information. But having a good general overview will help us understand them better and improve our understanding of our own business.

With a stronger understanding of our competition, the products that threaten us, and the physical location of the mill, we might conclude that there is hardly any differentiation between them and us. Could there still be something that could give us an advantage?

Yes, there is. Understanding the viability of each mill as a competitor would give us the tools to make better long-term marketing and sales strategies. A near location of a mill that has poor viability does not guarantee that it will be successful in the future. By using FisherSolve Next Viability Benchmarks, we can produce a comparison chart that shows all the main coated freesheet mills in Europe and their viability ranking in 2018 (Figure 3).

Looking at the viability comparison, location, and cost curve of the various coated freesheet mills, producers can develop the best possible strategies for where to sell, and to which markets and customers to focus the mill’s efforts on.

So, to answer my original question about whether geographical location has an impact… the answer is both yes and no. Perhaps the better question is: Do we understand the business well enough to make the right decisions for today and for the future?

Iiro Koria is senior researcher, Fisher International. With deep expertise in the pulp and paper industry, Fisher is helping businesses better position themselves for long-term growth. Call +1 203.854.5390 or email info@fisheri.com.