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Coated Groundwood Retrospective Industry Analysis 1988

Coated Groundwood Retrospective Industry Analysis 1988. Matthew W. Ford College of Business Northern Kentucky University. Coated Groundwood (CGW). NAICS code 322121 Paper Mills Google Finance: Basic Materials > Paper & Paper Products

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Coated Groundwood Retrospective Industry Analysis 1988

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  1. Coated Groundwood Retrospective Industry Analysis 1988 Matthew W. Ford College of Business Northern Kentucky University

  2. Coated Groundwood (CGW) NAICS code322121 Paper Mills Google Finance: Basic Materials > Paper & Paper Products Printing/Writing Paper > Coated Paper > Coated Groundwood (CGW) Geographic Scope: North America CGW Industry Analysis

  3. 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% CGW Industry Analysis

  4. 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, Reader’s Digest, CondeNast, Meredith CGW Industry Analysis

  5. 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 printingdistribution CGW Industry Analysis

  6. Industry Competitors (TPY capacity, estimated from various sources) CGW Industry Analysis

  7. Industry Trends All data estimated, various sources CGW Industry Analysis

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

  9. Related Institutions • American Paper Institute (API)* • Key trade publications: Pulp & Paper Paper Trade Journal Paper Age * now known as American Forest & Paper Association (AFPA) CGW Industry Analysis

  10. 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%) CGW Industry Analysis

  11. 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 CGW Industry Analysis

  12. F3 Seller Bargaining Power Source: company reports CGW Industry Analysis

  13. F3 Sellers (cont’d) • 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 (> 50% self produced) CGW Industry Analysis

  14. F4 Buyer Bargaining Power • 30+ buyers • CR4 < 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) CGW Industry Analysis

  15. 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 < 1% sales) • Capex for new facility: $350 million • ‘Open’ distribution channels • Capacity utilization (1983: 100% 1988: 93%) CGW Industry Analysis

  16. F5 Threat of Entry (cont’d) Equates to ~ 91% learning rate CGW Industry Analysis

  17. F5 Threat of Entry (cont’d) • EPA, DNR permitting, regulation, monitoring • Interest rates falling (US 10 yr T bond: 12%8%) • Euro government subsidies, tax breaks CGW Industry Analysis

  18. 5 Forces Summary CGW Industry Analysis

  19. Conclusion How attractive is the CGW industry for sustainable profits post 1988? By my assessment, this is a ‘3 minus’ industry CGW Industry Analysis

  20. Strategic Map 1988 High Weyco IP Boise Champion Euro Level of Diversification Bowater CZ Niagara Consolidated Repap Blandin Low Age of Capital Equipment Old New CGW Industry Analysis

  21. Strategic Map 2008 High Bowater Abitibi Domtar UPM Level of Diversification Verso NewPage Low Age of Capital Equipment Old New CGW Industry Analysis

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