Good morning. Thank you for inviting me to address you on this first day of Paper Week.
In thinking about today’s topic, “Packaging Value: Defining Success in Today’s Marketplace,” the first thing that struck me is that we all define success differently.
How do you define success? For many of us, it can be a combination of success in the workplace, success in home and family life, or even success in sports or other leisure activities.
For companies, it’s a little more difficult to define success, particularly in an industry like ours that has been very cyclical – with short peaks and deep valleys.
Wall Street looks at our industry and assigns a certain set of metrics to define our success. Our customers – and their customers – have a different set of criteria that relate to quality, price, service or value.
And we ourselves use metrics like market share, return on net assets and total shareholder return to define our success.
With all these definitions, it’s a daunting task to reach a point where we can say with conviction that we have indeed achieved success. Then once we achieve it, how do we maintain or grow our success?
American songwriter Irving Berlin, once said of success, “The toughest thing about success is that you’ve got to keep on being a success. Talent is only a starting point in this business. You’ve got to keep on working that talent.”
Certainly, we need to be continuously working the talent in our industry to be successful. And, we need to use our talent to push us along and make us successful day after day and year after year.
Three areas where I believe our talent should be working to positively impact our industry and make us successful are:
- One, improving our financial returns.
- Two, achieving efficient logistics.
- And three, addressing competitive threats, such as returnable plastic containers.
Let’s start with item one, our financial returns. Poor returns in the various paper markets have led some companies to exit the paper business while others have chosen to grow, mainly through acquisition. Worldwide consolidation is a fact. It’s happening in North America, South America, Asia and Europe – and I believe it’s a good thing.
The fragmentation of our industry has led to construction binges and over-capacity – at both the mill and converting levels – as well as other manufacturing and distribution inefficiencies that have threatened to hinder our success.
Fragmentation also makes it difficult to provide top-quality service to customers who increasingly require national or even global supply as they consolidate.
To help illustrate this point, all we need to do is take a look at Europe. Between 1974 and the end of 2000, the stock of Europe’s pulp and paper industry underperformed the overall European equity market by 914 percent!
And, despite several bouts of consolidation, Europe still has more than one thousand paper companies – many small or medium-sized family firms.
On the other hand, several large consolidations in Scandinavia’s paper industry have resulted in improved performance numbers.
For example, revenue in 2000 for the Scandinavians was nearly thirty-two billion dollars U.S., a figure that has doubled since 1996 and quadrupled since 1992. About 90 percent of the sales from this group are outside their home region.
How did they do this?
Consolidation was a key, along with favorable currency moves.
To mention two major consolidations:
- UPM and Kymmene, both of Finland, merged to become one of the world’s largest forest products companies – and then they bought German paper producer Haindl. UPM-Kymmene also has made purchases in the U.S. and Canada.
- Stora of Sweden and Enso of Finland merged and then purchased Consolidated Papers in the U.S.
The people at Stora-Enso say size does count. Size has allowed them to be more disciplined and focused on creating stable returns, while at the same time, giving them flexibility to sell non-core assets.
It’s for reasons like these that we at Weyerhaeuser have been an active participant in the consolidation of our industry in North America.
To paraphrase former CEO Jack Welch of GE, we’re taking control of our destiny before someone else does.
Of course, consolidation is occurring elsewhere in North America.
Over the past few years, we’ve seen International Paper acquire Union Camp, Federal Paperboard, and Champion … Georgia Pacific absorb Fort James ... Jefferson Smurfit combine with Stone Container … Mead and Westvaco join together … Temple-Inland capture Gaylord … and, of course, Weyerhaeuser has now combined with MacMillan Bloedel, Trus-Joist and Willamette Industries.
Another major driver of consolidation is the change in channels to the retail market – what we refer to as “big-box stores.
For many of us, some of the major players are large supermarket chains. Within the past two years, we’ve seen Albertson’s buy American Stores … Safeway purchase Dominick’s … and Kroger acquire Fred Meyer.
I know this one well, since I was on the board of Fred Meyer and now am on the board of Kroger. I guess you could say I got acquired!
Our customers are combining too. Iowa Beef Packers bought Food Brands before Tyson Foods bought it … Pepsi-Cola bought Quaker Oats … Gillette bought Duracell. And the beat goes on!
Why are there so many mergers among our customer base?
Because their customers – our ultimate customers – want:
- Product availability and selection.
- Damage-free goods.
- Choice of features.
- Ease of payment.
- No stock-outs.
- Continuity of quality.
- In a word, value.
The channel to the retail customer for virtually every business my company is engaged in is consolidating into two tiers. On one hand, we have the giant commodity suppliers and on the other, we have the regional or niche players.
The mid-tier operator is almost gone. And, in this race to give the customer ever greater value, the competition has really gone global!
Consequently, what do our packaging customers want?
- Consistent quality and supply over a wide geographic basis, often to international destinations.
- The strongest boxes possible for the least fiber input.
- Specific qualities for their boxes, often including eye-catching graphics.
- Simplified procure-to-pay systems that are convenient and lower their costs.
- Vendor-managed inventories.
- In a word, value – just like their customers.
Many of these demands translate into the need to create greater efficiencies in supply-chain logistics – the second factor impacting our future success.
Speed to market is not just a catch phrase. It means taking costs and time out of the supply equation.
It means generating a continuous flow and replenishment of product from suppliers onto the retail shelf.
That in turn requires suppliers to modify their back-office activities to provide quicker turnaround in materials they supply, which in our case is packaging.
An example of highly efficient supply-chain logistics at work is Wal-Mart. Wal-Mart recently became the world’s largest company with two-hundred-eighteen billion dollars in annual sales.
The company employs more than 1.3 million associates in nearly thirty-five hundred stores in the U.S. and more than eleven hundred stores internationally. More than one hundred million customers visit Wal-Mart stores each week.
Part of the secret of their success is supply-chain management and a focus on logistics. Make sure it’s in the store when the customer needs it and make sure that the chain for getting it there is continuously getting shorter and simpler.
One way that Wal-Mart manages logistics is in their use of cash-register data. Wal-Mart’s register data is immediately downloaded to their suppliers and immediately triggers a replenishment order.
One of Weyerhaeuser’s customers recently told us they get 400 inventory turns a year from Wal-Mart. Think of it, that’s more than one turn a day off of Wal-Mart shelves. Think of the logistics coordination between every player in that supply chain.
As packaging suppliers, we need to be thinking about how this affects us.
One of the failures of the dot.coms – or “dot.bombs” – is that many of them maintained an auction, or traditional, bid-process mentality without focusing on or even considering the reduction of system costs. Those that have survived – today’s innovators – are those that focus on shortening the supply chain.
In our industry, we’ve recognized the need to increase speed to market, shorten the supply chain and provide added value in several ways.
Forest Express, our industry sponsored website, uses models that aren’t just auction sites, but rather a simplification of the supply chain through better use of information.
In the future, such applications will evolve even further, creating integrated information systems that allow retailers to place the full responsibility of managing supply and inventory on their suppliers.
Whether it’s register data at Wal-Mart or information gathered through Forest Express, the implications for business are that there will need to be:
- More continuous flow of product.
- Reduction of working capital from both a receivables and inventory standpoint.
- Better use of transportation through cube and/or weight utilization and freight-lane optimization.
In short, our industry must work in real time.
Third on my list today is our ability to address competitive threats.
At no other time in our industry’s history have all our varied products been under more direct threat from competing materials as they are today. As companies consolidate and begin to build better models of supply-chain logistics, they are also assessing what type of packaging they use.
It used to be that we only worked with the manufacturer of a product to help determine the best form of packaging for their products.
We were charged with creating a package that performed well from the time the product entered it to the time it left the manufacturer’s site. Today, the manufacturer is not the only one deciding what form of packaging his product will be delivered in.
In fact, he has less and less power to make that decision.
Retailers and consumers are playing a greater role in dictating their packaging needs.
Their desire to create efficiencies has opened the door for competing materials like returnable plastic containers or RPCs. Providers of RPCs have gone directly to retailers to promote themselves as a better solution for the supply chain.
The RPCs’ biggest success to date has been Wal-Mart. Wal-Mart entered the grocery business in 1988 and has rapidly ascended to the number one position among grocery retailers.
In January, Supermarket News annual ranking of grocery store chains reported Wal-Mart Supercenter’s grocery sales at fifty-seven billion dollars!
Much of Wal-Mart’s success in the grocery business has come from their ability to move away from traditional grocery-store operating principles. Their reputation as an innovator in merchandising, and supply-and-distribution chain management has been validated by changes in their store design and operations.
And, as a director of a Wal-Mart competitor, I can assure you with certainty that everything Wal-Mart does is closely scrutinized by the industry.
Today, Wal-Mart is at the forefront of specifying that produce – and to a lesser extent – meat products be packaged in returnable plastic containers. They believe that RPCs offer reduced labor in their stores and distribution centers, reduced shrink or damage, more aesthetically appealing display-ready options and, ultimately, fresher product.
What began as a pilot program in Winterhaven, Florida, has turned into a full-fledged RPC program in Wal-Mart’s produce operations. We need to respond, and have responded, by showing Wal-Mart and others in the grocery business that corrugated packaging can provide the same perceived benefits as RPCs.
And it’s not just our packaging businesses that are under attack.
On the lumber side of our business, steel is a threat as an alternative framing material for buildings, homes and offices. One leading provider of international business-planning data predicts that non-wood materials will make significant gains in residential construction in the next decade, and projects a 15 percent share of the market going to metals and plastics.
Finally, let’s not forget our raw-materials base. The use of trees to make anything is under the microscope like never before. Environmental pressure from celebrities to “green” organizations is forcing consumers, retailers, builders and other large buyers to consider alternatives to wood.
But before the outlook becomes too bleak, it’s critical to note that we do have initiatives aimed at turning away these threats.
In 1994, the Fibre Box Association created the Corrugated Packaging Council to begin promoting the recyclability and performance attributes of corrugated packaging. Over time, the organization has evolved to become the voice of the corrugated and containerboard industry in responding to, and meeting head on, the challenges of competing materials.
The organization behind the effort has grown to include: a CEO Task Team on Crate and Pallet at the American Forest & Paper Association, an AF&PA/FBA Competing Materials Steering Committee, and other working committees. Most recently, a comprehensive competing-materials plan has been drafted and funded through an assessment of AF&PA’s containerboard group.
The nearly three million dollar plan includes initiatives aimed directly at turning back the penetration of our markets by competing materials. Leading these efforts is a newly hired Executive Director who will spearhead implementation of the plan as the Corrugated Packaging Alliance.
On the wood side of the business, the Wood Promotion Network and the Sustainable Foresty Initiative have been designed to work hand-in-hand at promoting the messages that our forests are abundant and well-managed, and that wood is a superior building material.
These programs and others in our industry will help meet the challenge of competing materials, but their success depends on your support.
In fact, your support in improving the financial returns of our companies, your drive to play an active role in efficient logistics, and your passion for addressing competitive threats are what will define our future success.
As talented people you’ll need to work to:
- Create companies with scale and global presence through consolidation. All in order to serve the consolidating channels to the retail market. And if your choice is to remain in the niche or regional markets, the story is the same.
- We all must focus our companies’ efforts on the supply chain.
- Build flexible and efficient IT structures.
- And be innovative in dealing with competitive materials as individual companies and through industry cooperative efforts.
We must all take responsibility for defining our companies’ success and making that success so consistent across the industry that there is only one definition for it.
That definition is a satisfactory return for the people – public shareholders, private business owners or our own employees – who own our businesses.
Thank you.
