Kruger takes a long-term outlook for steady growth in consumer products

Perini Journal recently visited with Kruger, a major Canadian Pulp and Paper company which, in addition to being a major player in tissue, is also one of the world’s largest publication papers suppliers.

Hugh O’Brian

If you visit the Head Office of Kruger Inc. in Montreal, in the conference room you will see numerous awards and trophies from its customers. These are related mostly to the company’s long history in the printing and publishing business.

Kruger is one of the world’s leading publication papers producers and, as an impressive reference, has been involved with USA Today since the very start of that publication in 1982. In fact, Kruger was a driving force in developing the brighter, smoother newsprint sheet that the publisher Gannett needed in order to be able to launch the world’s first color daily newspaper. Kruger today is a major supplier to numerous leading publications in the North American newspaper business, including USA Today, The Wall Street Journal and the Washington Post, among many others.

Kruger was originally started by Joseph Kruger I, a successful American paper merchant from New York who moved to Montreal in the early part of the 20th Century. In the 1950’s, it was his son Gene H. Kruger who built the company into a major producer of publication papers. Most often this was done by buying old paper mills that were not very profitable and turning them around.

The first example of this was the purchase of the Bromptonville mill in Quebec in the 1950’s. This was truly a distress situation as the mill had been shut down by the previous owner. Kruger came in as the buyer and proceeded to build up the asset so that it eventually had three paper machines. It is today an ultramodern, world-class newsprint mill. It was a similar situation with the company’s Trois-Rivières mill in Quebec. It was going to be shut down if no buyer could be found. Kruger bought it and has subsequently modernized it with new paper machines and coaters.

A more recent example of Kruger’s investments in a world class paper capacity is the Wayagamack mill. The C$500 million PM 4 lightweight coated magazine paper line that started up in 2004 is widely considered to be among the most modern and productive machines in the world.

All of these examples, says Donald Cayouette, Executive Vice-President Operations at Kruger, are typical of the Kruger model: buying distressed assets, turning them around, generating cash which is then reinvested to raise profitability even further, and once again modernizing the assets until you have a world-class operation. The fact that Kruger is a privately-owned group gives it the luxury of a long-term outlook that public companies usually don’t have.

SOUTH AMERICA FIRST FOR TISSUE. The company got into the tissue business in a rather roundabout manner. In the 1950’s, Gene H. Kruger was vacationing in South America, more specifically in Venezuela, and through social connections came into contact with a major distributor of consumer goods to retailers. He then asked this company if they would be interested in some sort of a joint venture to enter the tissue production business in Venezuela. This was not part of the Kruger Inc. operation but was then, and still is today, instead considered to be part of the Kruger family interests.

So from the start, the tissue operation in Venezuela worked well and not long afterwards a second operation was started in Colombia, in 1960. Both the Colombian and Venezuelan operations included both paper machines and converting. Today those mills have a combined capacity of about 150,000 tons per year.

Part of the business in South America also involved the sale of parent rolls to converters in the European Economic Community. As the EEC was then taking shape and becoming a more important body, there was some concern that the shipments might be in danger of facing high tariffs or other barriers that would make it a less viable business for Kruger.

Therefore, in an attempt to protect this business and expand internationally, Kruger decided to enter the UK market in the 1990’s. It bought several mills and converting plants including Disley, Trafford Park, Bolton and Penygroes. At this point, Kruger was still dominated by the production of publication papers with smaller operations in tissue, containerboard and sawmills.

TOUGH YEARS, NEW STRATEGY. During the period of 1991-1992, the publication papers business was going through a very difficult time, with the newsprint industry in particular facing enormous overcapacity. Something like 12 new newsprint machines had started up in North America during that time. Mr. Cayouette says that this was the only time in the history of the company that it had a loss for the year.

Joseph Kruger II, who had taken over leadership of the company in the 1980’s from his elderly father, was very supportive and engaged in helping to find solutions in the difficult times. Donald J. Cayouette, who joined Kruger from CIP in 1989, agrees that it was a very challenging time. “The difficult experience made us realize that our reliance on publications papers was perhaps a bit too high.” Therefore, a major strategy review was started and based on this, Kruger decided to place its efforts in two major areas: the first was the Forest and Wood products division, and the second was the tissue business.

SCOTT PAPER CANADA ACQUIRED. “So when we were starting to look at how we might grow in the tissue sector,” says Don Cayouette, “we were presented with the possibility of buying Scott Paper Canada, which Kimberly-Clark was forced to sell. K-C had merged with Scott and for competition reasons, Scott Paper had to be divested. So we bid on the properties and the business and we won the auction.”

“This was a very big step for us for several reasons. First of all it was a very expensive acquisition and we were not buying just one mill or plant but instead we were purchasing an entire company, which was in very good shape. Furthermore, this was a completely different business as it was consumer products, where we had little experience before except for the small tissue operations in South America and the UK. Also it was brands and it was dealing with retailers where we had no prior experience.”

But this was where Kruger wanted to grow and, when the acquisition was made in 1997, Kruger was all of a sudden a major player in the Canadian tissue business with something like 30% market share.

THE ULTIMATE BRANDING CHALLENGE! One of the biggest challenges that Kruger faced in the acquisition of Scott Paper Canada concerned the use of brand names.

The two biggest brands which Scott had in Canada were the Cottonelle bathroom tissue and ScotTowels products. As part of the deal with K-C, Kruger got the right to use the names for a maximum of 10 years. However, under the terms of the contract, as soon as Kruger started introducing new names to replace the old Scott names, it had 3 years before the Scott names could be used by Kimberly-Clark again in the Canadian market. It chose Cashmere as the new name for Cottonelle and SpongeTowels as the new name for ScotTowels.

Kruger decided to start the transition exactly three years before the end of the 10 year maximum time.

“So in July 2004, we started including the new Cashmere and SpongeTowels names and logos in a very small size on the packages. Eventually the names got bigger on the packaging, while the old names got smaller.”

“At the same time we increased our marketing budgets and spending on advertising and promotion as we wanted to build up the existing brands to start the transition from a very strong position. We wanted to get the consumer very involved in the transition process. We expect Cottonelle/Cashmere, long the leading brand in Canada, to be in a strongest market position ever in June 2007 when the old Scott names are completely phased out. We are convinced that starting from a strong market share is the best way to be successful.”

Also as part of the transition process, Kruger has upgraded the product quality through the use of embossing and it also softened the sheet quite a bit. Thus the product quality is higher now than when transition began. Kruger made enormous efforts to involve the consumer in the transition and says that the effort of involving the consumer and upgrading the quality has been very successful, with the new brand names having a very high recognition in the market. Of course, the proof of the pudding will be in July 2007 if K-C comes back with the old brand names.

At the same time Kruger is losing the brands, it also will lose the right to use the Scott Paper Canada name as the company name. Therefore, after a very long process involving numerous alternatives, the new company name will simply be Kruger Products Limited.

Kruger also expanded into the US tissue market several years ago when it purchased the Memphis mill from American Tissue. The reason for this, says Donald Cayouette, is that it was clear that the retailers were becoming more North American rather than simply Canadian or American. To be able to serve them on either side of the border, it made sense to have production on both sides as well. So now the general idea is that the tissue mills in Eastern Canada will serve Eastern Canada and the Eastern US, while the mill in British Columbia serves the Western Canada and Western US region and the Memphis now serves the Southern US.

WHITE CLOUD AND WAL-MART. A major business for Kruger is the production of White Cloud bathroom tissue under an exclusive license for Wal-Mart. In a strange sequence of events Procter & Gamble discontinued its White Cloud brand in 1993 and another company staked claim and ultimately licensed the brand to Wal-Mart as a premium private-label for bathroom tissue and diapers. Donald Cayouette explains some of the details.

“The White Cloud name was acquired by a small company called Paper Partners in Florida. They got a big contract with Wal-Mart and therefore needed a manufacturer to help them meet their supply requirements. None of the branded producers in the US wanted to help them so this led to a partnership with us whereby we designed a product that would be profitable for the retailer at the same time as it was very popular with the consumer.”

Ultimately the relation with Paper Partners did not work out, so in 2001 Kruger bought the brand and the rights to use the White Cloud name on any of its tissue products, meaning bathroom tissue, kitchen, facial, etc. Today, the White Cloud brand is a very important part of Kruger’s tissue business and its relation with Wal-Mart. Comments Donald Cayouette: “We deal with them directly now and I think both sides are happy with the arrangement”.

FOCUS ON BRANDS AND PREMIUM SECTOR. The company today is focusing mainly on premium products and brand names but also does make some private label because they clearly want to participate in that sector. This is important in serving retailers who want both private label and brands.

As far as the sectors served, about 70% of Kruger’s tissue is for the consumer market and about 30% goes to Away-From-Home customers. In the consumer sector, most of its products are in the premium end of the market. It also uses a high recycled fiber content (RCF) which is somewhat unusual for the premium grades but this is due to the use of the SRC process that Scott Paper developed allowing the use of 50% or even 60% RCF. Total tissue capacity of today is about 600,000 tons per year from 7 mills.

CROSSROADS FOR HIGH QUALITY. As far as the future, Kruger wants to continue to grow its tissue business and is presently looking at ways to add new capacity in North America. Of course, a complicating factor these days is the currency situation between the US and Canada, where the Canadian dollar has strengthened enormously in recent years.

Donald Cayouette says that with respect to quality the company is at a crossroads as it considers the new capacity. It has looked at adding a new TAD machine and it already produces TAD on an old machine at its Hull mill in Quebec. It is also looking very closely at the new STT and ATMOS processes that are being offered as a middle road between conventional and TAD. An added factor in the equation is the fact that Kruger is trying to use as much RCF as possible and even using up to 100% RCF for some of its TAD. It wants to make sure that whatever process it chooses, it will be able to use a high percentage of RCF.

HAPPY WITH CONSUMER PRODUCTS. While the move into tissue and consumer products was a big one, it certainly has worked out well. So well, in fact, that Kruger is interested in possibly expanding further in consumer products.

It took a rather curious step in that direction recently in buying a Quebec-based bottler and importer of wine and spirits which had been previously partly owned by the provincial government of Quebec.

Loyalty seems to be a very important aspect of the Kruger business as well. During our visit, the 91 year-old former Chairman and President, Stuart Hermon came walking by, looking fit and ready for business. Apparently he comes to the office most days of the week. While it was not clear, to me at least, what his exact role is in the company today, I am sure he, as well as the numerous other Kruger employees, are looking forward to the next challenge to keep Kruger growing well into the future. •

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