Perini Journal, always attentive to the dynamics that influence the Tissue market, met with Roberto Berardi, since 2005 Chairman of the European Tissue Symposium (ETS), promoter and responsible for the Tissue Growth Task Force, the work group comprised of the marketing directors of the major European converting companies.
Maura Leonardi
PERINI JOURNAL: WHAT IS YOUR OPINION OF THE TISSUE MARKET AND THE CONVERTING INDUSTRY? WHAT DO YOU THINK ARE THE CRITICAL ELEMENTS AND THE CONSEQUENT ANSWER OF PRODUCTION COMPANIES?
ROBERTO BERARDI: In these last few years, fields such as Tissue (and also Detergents, Canned Foods, Snacks, etc.) have been strongly characterized by a phenomenon of polarization towards the extremes. The share of classical mainstream products – at the heart of the market – is weakening. This is due to the fact that some consumers prefer down-trading in these categories (that is, being satisfied with acceptable products that cost less), given the tendency of retailing to follow too closely the example of Hard Discounts in their excessively strong emphasis on lowest-price products. In other cases, for example England, retailers offer economical products, of course, but they also give space and promotional support to more innovative, higher-added-value products. The growth in value of the category, then, benefits. A good number of families, instead, practice up-trading, higher quality products.
In the USA, Georgia Pacific’s answer to these phenomena is “quilted” products that explicitly invite to the trade-up and other, no-frill products, strictly value-oriented (Angel soft). An analogous study carried out by the Boston Consulting Group in Italy shows that the same thing happens in this country, too, also for Tissue. Until 2004, tissue market growth in Europe was rather strong at around 3.5% in volume per year, with even higher levels for kitchen towel rolls. Particularly accentuated growths were found in France, Spain, Portugal, Ireland, and more modest growths in the Nordic countries, Germany and Italy. 2005 was a year of noticeable flattening in market growth, above all in the value segment, while 2006 was better, in particular in England, but also Italy and Spain started growing again. The kitchen towel category grew to around 4% (value) in 2006 in Italy, probably due to innovation efforts made by the market leaders.
In answer to the question “what should/must production companies do?” I can safely state that the answer to down-trading can be summed up in the formula “BLCR: Basic, Low Cost, Reliable”. The product must contain “only” those technical and functional elements that are important for savings-oriented consumers. Whoever has the lowest costs wins. Therefore, guarantee the necessary quality and then efficiency, efficiency, efficiency! For the up-trading segment, the secret formula is instead “DSPD: Demonstrably Superior and Pleasingly Different”. Products must offer technical, functional and even emotional advantages so as deserve a premium price. Obviously, for this segment the formula is: innovation and differentiation!
PJL: SINCE 2005 YOU ARE ACTIVELY INVOLVED IN THE ETS. TWO YEARS LATER, WHAT ARE THE ACTIVITIES THAT HAVE BEEN PUT INTO PRACTICE, THE OBJECTIVES ATTAINED AND THOSE STILL TO BE ACHIEVED?
RB: In the course of these last two years, the European Tissue Symposium has followed two fundamental streams of activities: one oriented towards regulatory and environmental aspects, the other towards market promotion. Reinhold Schadler is responsible for the first line, while the second falls under my direct responsibility. Since July 1st I have assumed the role of Chairman of ETS, with the task of also evaluating what actions within the realm of the association’s scopes and activities could be desirable in order to face the numerous changes taking place on a legislative and market level. Tissue companies representing about 90% of European production capacity are associated with the ETS; despite this fact, many companies – especially Italian ones – are still missing.
The group that oversees regulatory and environmental aspects has obtained important results, such as: the attainment of greater clarity on the REACH1 regulations for chemical products, also for the most relevant aspects of tissue, such as virgin and recycled fibers; the production and approval of guidelines for products that enter into brief contact with foodstuffs, work on forest certification that made ETS an extraordinary member of the PEFC2 and led it to partake in analogous discussions with the FSC; work on opportunities and risks represented by the use of energy from biomass.
The group I have presided, called Tissue Growth Task Force, sees the participation of the major European companies and has the scope of promoting demand growth and category differentiation by developing a better knowledge of the tissue categories by customers in 15 European countries. Three mailings have already been made to 500 major European customers, treating the categories of toilet tissue, handkerchiefs and, more recently, also kitchen towels and table napkins. The documentation sent illustrated specific examples of the innovations made on these products that in Europe and in the world have resulted in significant growth of the entire category or of the greater-added-value segments.
It is a potentially vast ad important area. The definition of further initiatives aimed at market promotion is part of the work that I am being called to do. We have already decided on an initiative in the AFH field aimed at diffusing to the market the advantages offered by paper hand towels with respect to alternatives such as hot air or cloth, also from a hygienic point of view.
This initiative will start in the Fall.
PJL: IN THE PRESENT CONTEXT, TISSUE PRODUCT DIFFERENTIATION AND VALORIZATION FROM SIMPLE COMMODITY TO NICHE PRODUCT ARE TAKING ON GREAT IMPORTANCE. WHAT OBSTACLES REMAIN THAT STILL DETERMINE A “CINDERELLA” CONDITION OF THESE PRODUCTS ON SUPERMARKET SHELVES?
RB: Tissue products can be a source of great satisfaction for producers and retailers, or they can become commodity products, with modest growth rates and even margins reduced to the bone. Whether they give one or the other result strongly depends on how they are managed. We can speak of “self-fulfilling prophecy. Hard Discounts are growing in many European countries.
They practice very restricted range strategy and structural costs reduced to the bone – and not just for tissue products. This strategy makes sense for them, given their structure and their basic choices, even though, if truth be told, we are increasingly noticing the presence of the major branded products also in Hard Discounts. The problem is that sometimes, even retailers that are rather far removed from the Hard Discounts copy their strategy, and this does not make much sense.
Those who shop at the Hard Discounts expect a limited choice in products; he or she goes there for the down-trading. But those who shop at a Supermarket expect a richer assortment with a display that correctly reflects “the decision tree” made by the consumer, clear indications on the shelf, well-presented innovative products, etc. In a Supermarket we also expect to see high quality products on promotion and highlighted. Instead, often, lowest-price items are highlighted, so one might as well go to the Hard Discount! It is therefore necessary that – for the different categories and for tissue in particular – producers and retailers collaborate to define the best segmentation on the shelves, the one that leads to the best category value (that often coincides with the best profit for the retailer). Also, it is important that innovations introduced on the market not be weighed down by excessive listing fees that end up reducing available resources to make consumers acquainted with these products.
At the risk of overly generalizing, I would say that Anglo-Saxon retailers (both in the USA and in the UK) more greatly support the take-off of innovative products, while in continental Europe, new products must often face bigger distribution obstacles. In any case, as mentioned in my first answer, for each of their items, production companies must ask themselves if their nature is “BLCR: Basic, Low-Cost, Reliable” or “DSPD: Demonstrably Superior and Pleasingly Different” and consequently behave coherently regarding all the elements of the marketing mix, including product quality, the look of the paper, packaging, communication, promotion.
PJL: ABOUT THE ENERGY ISSUE AND THE NEED TO FIND ALTERNATIVE SOURCES OF ENERGY, WHAT ARE THE FUTURE PROSPECTS FOR THE CONVERTING INDUSTRY IN YOUR OPINION? HOW CAN THE FIELD TACKLE THIS IMPORTANT PROBLEM? CAN RECYCLED PRODUCT CONSTITUTE AN ALTERNATIVE OR ARE COSTS STILL TO HIGH?
RB: Given the present and announced future petrol shortage, there is some risk that energy use from biomass, for example wood, will make it more expensive for other uses, such as paper production, for example.
Anyway, growing trees to burn them immediately is not really a smart thing. It is true that – differently from petrol – trees constitute a renewable energy source, but we can do better than to immediately discharge in the atmosphere through CO2 the carbon they have built up in the course of the years. It seems much more reasonable to use trees to produce wooden objects and paper products that actually become “warehouses” that hold the carbon within them (that will eventually become CO2) and therefore delay its release in the atmosphere. At the end of their useful life cycle, these fibers will also be burned, transforming them into useful energy and… alas, also CO2! And this is true for virgin fiber paper products as well as for those made with recycled fibers. Recycled, even though it has grown more expensive due to strong Chinese demand, today represents an alternative for certain product types. It cannot afford us the utmost softness or absorbency, but for certain applications it is perfect. To maximize the possibility of increasing the useful life of the fibers, we must maximize and optimize differentiated waste collection, successfully implemented in some areas of Europe and also in Italy but, unfortunately, still very lacking in others!
As for the converting industry, technology – and in particular electronic controls – can certainly enhance energy yield and therefore contribute to reducing consumption.
PJL: PRIVATE LABELS: A RISK OR AN OPPORTUNITY FOR TISSUE PRODUCING COMPANIES? AND FOR BRANDS, A CHALLENGE OR AN OBSTACLE?
RB: For Private Labels, too, an articulated vision is necessary, one that clearly positions each one in the up-trading or down-trading segment. In some fields such as convenience foods, for instance, retailers – especially in North America and England – have developed Premium PLs that are the absolute best available on that market, superior to the best national brands. A perfect example of this is the “President’s Choice” line that was born as private label of the Canadian retail chain Loblaw and is now sold also by other retailers. Another example is some Tesco Finest products. It may be difficult for tissue products to attain this level, given the enormous investments needed to produce TAD products, for example. But retailers can use their strength in terms of location and shelf management to promote high quality, differentiated PLs that distinguish them from other retailers who are not able to follow them on that turf. Together with these, perhaps with a complementary role, they can also feature “value” offers, oriented towards consumers practicing down-trading. I would say that, in Europe, Tesco is a teacher in this realm. I think we can safely say that for private labels, too, at least in stores of a certain size, the direction should be towards an articulated offer, one that entails at least two quality levels aimed at covering different market segments.
PJL: LET’S LOOK EAST: DO YOU THINK THE CHINESE PHENOMENON MAY POSE A THREAT FOR EUROPEAN COMPANIES (IN TERMS OF PRODUCTION AND TECHNOLOGY)?
RB: There is an important product exchange going on within Europe. On a global level, imports from extra-European countries are rather modest, as was demonstrated in the study on capacity and production that the ETS has been carrying out for the past three years. It is therefore very improbable that we will be inundated by Chinese finished tissue products, not only because China must in any case buy its raw materials elsewhere (by the way, it buys a lot of paper for recycling from Europe!), but above all because transport costs on this scale are exorbitantly high for very voluminous finished products having a relatively modest intrinsic value and limited incidence on personnel cost. Having said this, we must mention that there are some trials under way in the export to the USA of Chinese and Indonesian good quality products made on large, modern PMs. One possibility is that converting factories be established in the USA that use Asian parent reels, since it is more economical to transport reels instead of final product. However, the Chinese government is about to decide on a tax of 17% (that cannot be recovered through export) on the import of cellulose, because it seems that they are not interested in favoring a field that utilizes limited workmanship but that has important energy requirements.
PJL: EASTERN MARKETS: WHAT ARE THE DEVELOPMENT POSSIBILITIES?
RB: There is no doubt that European emerging countries are showing important growth rates in tissue. For example, the volume growth expectancy for the next few years in western European countries is not far from 3% per year (not bad, considering that other goods categories would be very pleased with this percentage), but the rate expected for western Europe is of around 7% per year. It is clear, therefore, that a substantial portion of future tissue investments will be coherently localized in these countries, to help them gradually bring their per capita consumption levels from the present figure of around 3 kg (with wide excursions with respect to this average) towards values more similar to those of western Europe, which are of around 15 kg per capita. If we want to take a quick look at markets such as China, in the last few years the growth rate in tissue has been of around 8% per year, and it is probable that it will maintain itself on this level for several years to come. This would be very logical considering the growing GDP rate and modest per capita consumption (about 2.8 kg) at the moment.
PJL: LOGISTICS AND TRANSPORT: WHAT IMPROVEMENTS?
RB: An important project that was recently implemented by the ETS is to try and diffuse the use of double pallets placed one on top of the other in Germany, too, as already happens in many other European countries. This would allow the available truck space to be better used. The savings that this solution will generate are currently being quantified, as well as the necessary investments that producers and retailers must make, in collaboration with two of the most important retail chains.
Benchmarking activities on transport costs carried out within the ETS can give an important contribution to optimization. These studies and also the other activities described above are carried out utilizing principally internal company resources, being careful to keep the organizational costs of the ETS and of external consultants low. For this reason, too, a wider participation in the ETS and in its activities also by medium or small-size companies is auspicable. I am sure that the benefits they can reap from this far exceed the modest association fee. •