Pace of Change Rises in the North American Tissue Market

New technology. New products. New companies. New machines. New brands. The biggest changes in the North American market may be still to come.

Hugh O'Brian

Although the North American tissue market is often cited as being a mature one as far as consumption goes (Fig.1), it is still such a large market that it can create effects worldwide when changes occur. And change has certainly been occurring in North America in the past two years as mergers, acquisitions, spinoffs and bankruptcies have transformed, and are continuing to transform, the landscape of the business. By far the biggest change in recent years has been the stunning transformation that Georgia-Pacific undertook with the acquisition of Fort James in 2000. In July 2000 Georgia- Pacific and Fort James came to an agreement under which G-P would buy Fort James for around US $11 billion. Thus Fort James, which had only been formed in 1997 through the merger of Fort Howard and James River, disappeared. (The G-P story, including plans to spinoff the consumer and packaging business in a new company, is covered in more detail in our interview with president and CEO Pete Correll in this issue.)

AS A RESULT OF THE DEAL G-P MOVED INTO A VIRTUAL TIE WITH KIMBERLY-CLARK AS THE WORLD LEADER IN TISSUE CAPACITY with around 3.5 million tons per year (Fig. 2). It also made G-P by far the dominant player in the North American market with around 2.7 million tons of capacity, almost twice as much as K-C's 1.4 million tons and Procter & Gamble's 1.2 million tons (Fig. 3). As part of the Fort James agreement, to gain acceptance from the US Justice Department which oversees competition matters in the United States, G-P was forced to sell off a good chunk of its away-from-home business to reduce its dominance in that sector. The assets that G-P chose to sell were essentially the capacity that G-P had acquired in its 1999 deal with Chesapeake Corp. in which it took control of Chesapeake's tissue business.

SCA finally makes US move.

The buyer for the AFH capacity that G-P was forced to sell was, of course, SCA of Sweden. SCA had been looking to move into the US tissue market for several years and had been in the running to buy Wisconsin Tissue in 1999 but lost out to G-P at that time. However, the second time around SCA was able to get a big foot in the door in the US market by buying around 360,000 tons per year of AFH tissue capacity fromG-P in early 2001. The most important facilities involved were the big operations in Neenah, Wisconsin, which were formerly known as Wisconsin Tissue and include about 200,000 tons per year of tissue production and 270,000 tons of converting capacity.

Following the move into North America, SCA put Cohn Williams, the former president of SCA Packaging, in charge of its new SCA North America division including tissue, packaging and incontinence products. Williams is known as a hard-driving manager who moves quickly from one acquisition to the next. Following up on the G-P deal, SCA rapidly announced in late 2001 that it was buying Encore Paper, a producer of 78,000 tons per year of AFH grades. This raised SCA's North American capacity to about 440,000 tons per year.

WILLIAMS SAYS THAT THE INTEGRATION OF THE G-P PROPERTIES WITH ENCORE HAS GONE VERY WELL and that the tissue group is now an US $800 million business, with 20% of the AFH market. "The integration is essentially completed. Of course 2001 was not the ideal year to be doing this but we now feel that we are on relatively safe ground and are moving forward." SCA has a long term contract with G-P, which will supply 90,000 tpy of parent rolls to SCA for a period of six years. Williams agrees that the paper gap question needs to be addressed but he doesn't seem too worried about it. "We can buy some capacity, we may build something or we may just renew the contract. It's not a major problem."

So from having essentially no tissue producing capacity in North America in early 2001, by the end of that year SCA was up to the number 4 spot, trailing of course, G-P, K-C and P&G. In the AFH sector SCA now has a market share of 20%, making it number 3 there (Fig. 4). SCA will be very interesting to watch over the coming years to see if it can be as successful in the USA as it has been in Europe. It has already given indications that it intends to explore the possibility to move into the private label business for consumer tissue, an area that has been a key to its rapid growth and profitability in Europe. On this question Williams says that any entry into the consumer tissue market is a medium to longer term move that is not at the top of his agenda at this point. He does confirm however, that "if we go into consumer tissue it would almost certainly be private label."

American Tissue tumbles under debt

Another company that rose very rapidly in the North American tissue business over recent years is American Tissue. However, American Tissue's dramatic rise to the number 4 position in the US market proved to be too far too fast as the company collapsed in mid-2001 when it could not pay back loans that it had taken on to finance its massive acquisition spree. Among the companies that were taken down in the wake of American Tissue's collapse was Perry Koplik & Sons, the long established recovered fiber and pulp supplier that was said to be owed over US $25 million by American Tissue.

All had grown through an increasingly high-paced series of acquisitions of generally smaller and older tissue mills. By late 2001 the company was forced to declare bankruptcy and some of the mills were closed where as others, which were deemed to be at least temporarily profitable, were kept open for a short time under the operation of a court appointed administrator.

IN RECENT MONTHS, SOME OF THE FORMER ALL ASSETS HAVE BEEN BOUGHT BY OTHER COMPANIES. In April, Fraser Paper's parent company Brascan agreed to pay US $30 million for all's facilities in Berlin and Gorham, N.H. These included the company's pulp mill in Berlin, a tissue mill in Gorham, a hydroelectric facility and landfill.

The Canadian producer Cascades also purchased some ATI assets. In May it bought a tissue mill in New York, a tissue machine located in a Boise mill in Oregon, and two converting facilities, located in New York and California. The paper machines have an annual capacity of 110,000 tpy.

K-C continues to invest in UCTAD

To be sure two of the leading names in the US tissue business, Kimberly-Clark and Procter & Gamble, have remained rather untouched by the M&A activity that has affected so many other companies.

Kimberly-Clark has continued to invest heavily in its proprietary uncreped through-air dried (UCTAD) tissue technology with the startup of three new machines in 2001, two of them in the USA and one in Italy. K-C has been using this technology since 1998 when it was first introduced on the Kleenex Cottonelle bath tissue brand. The process offers several major advantages including higher strength, softness and absorbency, while at the same time using less fiber which of course leads to costs savings.

K-C HAS INDICATED THAT IT PLANS TO USE THE NEW UCTAD CAPACITY FROM THE NEW MACHINES to support continued growth of its Scott towels and Cottonelle bath tissue in the US, Scottex bath tissue in Europe and Scottfold hand towels in both the US and Europe.

Another product that K-C has pushed heavily in the past year is its new Cottonelle Fresh roll wipes. Pegged as the "first major toilet paper innovation since 1890" this product is a pre-moistened toilet tissue in a roll format which is reported to offer greater comfort for the user. When Launched, K-C estimated that the rollwipes would bring in US $150 million of sales during the first year, with total sales for pre-moistened tissue projected to exceed US $500 million by 2007.

THE ROLLWIPES WERE FIRST INTRODUCED IN TRIALS IN THE SOUTHEAST USA IN EARLY 2001 but the success of those trials does not seem to have met K-C's expectations. The company initially said it would launch the product in the Southeast and the Northeast during 2001 but it is clear that the trials were restricted to the Southeast. In early 2002 it said it would make a decision at mid-year about expanding beyond that region but it is not at present clear if that has been done or not.

Marketing costs for the launch of Rollwipes during the year were reported to be over US $40 million and K-C said that it had spent a total of over US $100 million on R&D and marketing to bring the product to market. At this stage it appears that the results have been far less impressive than K-C had originally hoped.

P&G looks at pre-moistened as well

Nonetheless, K-C's move into the pre-moistened roll sector with Rollwipes prompted a swift reaction from archrival Procter &Gamble, which announced in May 2001 that it had bought Moist Mates, a small maker of what is said to be 'America's first moist bath tissue on a roll.' Using a brand-extension strategy, P&G quickly changed the name of the Moist Mates product to Charmin Fresh Mates, capitalizing on the brand equity of Charmin.

P&G SAYS THAT IT HAS BEEN LOOKING AT MOIST BATH TISSUE TECHNOLOGIES FOR SOME TIME and that this acquisition enabled it to quickly enter the marketplace with the first moist tissue on a roll ever marketed in the US. Moist Mates already had a terrific product concept, says Wayne Randall, global franchise manager for Charmin. We took their product and upgraded it to improve the dispensing. Now well add our branding know-how, sales and distribution capability, and in-depth understanding of the consumer. In other P&G news over the last year, a new 70,000 tpy TAD PM was added at its Mehoopany, Pennsylvania, mill with startup taking place in the latter part of 2001. The company has also been active with its program to license TAD technology for smaller machines through an agreement with Italian tissue PM maker Toschi. As of mid 2002 the first machine using this technology had not yet been sold but it appears that it is only a matter of time before the first unit is delivered.

OF COURSE THE TAD TECHNOLOGY IS ACTUALLY QUITE OLD, with the first units introduced in the 1960s. With the decision to license the TAD technology for smaller machines, one would have to assume that P&G has moved on to other, more advanced technology for making its super soft Bounty and Charmin brands.

Potlatch aims at private label consumer market Potlatch, which is a rather small producer with annual capacity of around 135,000 tpy, seems as though it will be a player to watch in the coming years. With its concentration on private label consumer tissue, and its tentative plan to add a new tissue machine in Las Vegas, the company may well add a different dimension to the US tissue market.

AS AN INDICATION OF ITS FOCUS ON TISSUE, THE COMPANY RECENTLY EXITED THE COATED PRINTING PAPERS MARKET, selling the Cloquet, Minnesota, coated paper mill to Sappi of South Africa for US $480 million.

Potlatch chairman and CEO Pendleton Siegel said that the sale of the company's coated printing papers assets are part of a strategic realignment to increase shareholder value by focusing on businesses with greatest potential for growth.

It is clear that tissue will get a lot of attention. Continues Siegel: "Our private-label consumer tissue business has performed well in recent years and has continued to benefit from our strategy of providing high-quality products to our customers, which are large retail store chains. During the 1990s we modernized and expanded our tissue operations in Lewiston, added a new converting plant in Las Vegas and just last year leased an additional converting facility near Chicago to supply our customers as they move into mid-western and eastern markets. We expect to continue to grow with our private label tissue customers and we expect our consumer tissue business will be a primary growth engine in the coming decade."

IT IS COMMON KNOWLEDGE THAT POTLATCH IS PLANNING TO ADD A NEW TISSUE PM AT ITS NORTH LAS VEGAS CONVERTING OPERATIONS, with most observers speculating that it will be a TAD machine. The project has taken some time to get off the ground with the financing reported to be a stumbling block. As of June of this year Potlatch was not willing to confirm that the project is going ahead. Corporate Communications Director Mike Sullivan said that "we have not completed any agreement for expansion of our North Las Vegas facility. At this time, we have nothing to announce and can provide no information regarding such an expansion at this time. We are optimistic that expansion plans for North Las Vegas will ultimately be possible."

IT SEEMS RATHER LIKELY THAT POTLATCH WILL GO WITH TAD and this would mean it will be the first TAD machine in the US aimed at the private Label market. How this will affect the US tissue market remains to be seen but one would have to assume that the makers of branded TAD tissue grades, as well as other suppliers to the private label market, will be watching these developments very closely as they have the potential to shake up the market.

Private Labels: The battleground for the future?

The private label area is one which may well see increased activity in the US consumer tissue market in the coming years. As is well known, brands have played a much more dominant role in the US compared to Europe, where private labels or retailer brands are much stronger. As per capita consumption is higher in the USA and brands command higher prices, the total value of the US market is much higher than Europe as well (Fig. 5). In general figures, it is estimated that in the USA brands have about 80% of the consumer tissue market while private labels have 20% (Fig. 6). In Europe the figure, while varying greatly from country to country is on the order of 50-50, with different sources reporting different numbers.


-The diversity of countries and languages which makes branding more complicated;

-Abundance of suppliers in Europe, especially Italy, who are willing to make private label tissue

-Lower per capita use of tissue as well as the relatively recent arrival of tissue products in general, especially the higher qualities that are associated with brands;

-Higher price consciousness in Europe, coupled with lower quality requirements;

-Relatively higher concentration of retailers, giving them the power to push their own brands in the market.

ANOTHER ITEM WHICH HAS CONTRIBUTED TO THE DOMINANCE OF BRANDS IN THE US MARKET is the fact that, until recently, TAD technology has been held mainly by K-C and P&G, and both are heavily committed to brands. Thus the higher quality tissue has been directed into the branded products, meaning the quality- conscious consumers had to buy brands to get the softest tissue.

Recent data from the US market, however, seem to show that the share for private label products for consumers is in fact moving up slowly but surely. EU Consulting estimates that private label tissue products have grown from about 21% to 22% of the market since 1997. While this is not dramatic, it is certainly an important change in a market where brands have always been so dominant.


-The possible move by Potlatch into private label TAD tissue

-How strongly SCA moves into private label consumer tissue

-Growing strength of retailers such as WalMart, who may begin to put even more emphasis on their own retailer brands.

SCA HAS RECENTLY MADE IT CLEAR THAT IT SEES THE PRIVATE LABEL CONSUMER SECTOR AS A GROWTH AREA IN THE US, hoping to replicate the success it has had in Europe. It has said that it believes that private labels will continue to take share from brands as big chains focus more on their own retailer brands. SCA also acknowledges that it is very expensive, and risky, to try to build their own brands. Thus it is trying to bring its experience from Europe to the USA market. Of course, this is easier said than done but it will be interesting to see what moves SCA makes in this area.

ALL IN ALL IT LOOKS AS THOUGH THE NORTH AMERICAN TISSUE MARKET WILL BE GETTING LIVELIER OVER THE COMING YEARS. Tissue is today one of the only sectors within the paper industry where the US producers continue to lead the world, as technological development in many other grades such as newsprint, SC, coated grades and boxboard is now led by the Europeans. Thus it will be interesting to see if the US producers can maintain, or even increase, their leadership in the world tissue business.

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