Profitable Paper Products
By Joanna Cosgrove
No longer content being “just as good,” private label paper towels, napkins and tissues have upped the quality ante and are enjoying a profitable year for the effort.
Private label paper products have performed well in the past year, in light of rising fuel costs and tightened pressure from national brand suppliers. Private label facial tissue, toilet tissue and paper towel categories each posted modest profits, while private label napkins landed just short of breaking last year’s profit tally.
Two areas ripe with future growth opportunities are environmentally friendly products and improved package graphics. “Today’s consumer is much more educated about any negative environmental impact that retail products may create, and they are more committed to doing something to help,” says Andy Tocchet, vice president and general manager, Atlantic Packaging Products Limited, Scarborough, Ontario, also emphasizing the importance of quality packaging. “Package graphics need to match the appeal and lure of the national brands. The consumer needs to be able to see and feel that they have purchased a product at least equal to the more visually recognized paper products.”
On-package graphics aren’t the only aspects of private label paper products that are being spiffed up. “In the printed paper plate segment I do see a move toward more trendy designs where historically choices by the trade were very conservative,” adds John Schaefer, national sales manager, Aspen Products Inc., Kansas City, Mo.
|PAPER PRODUCTS PERFORMANCE |
|Category ||Dollar Sales (in millions) ||% Change Vs. Yr. Ago ||Dollar Share ||Unit Sales (in millions) ||% Change vs. Yr. Ago ||Avg. Price |
|Total private label||$172.2||13.9%||17.5%||141.3||7.2%||$1.22|
|Total private label||$460.0||0.6%||13.4%||216.1||-8.0%||$2.13|
|Source: Information Resources Inc. Total supermarket, drug and mass merchandiser sales for the 52 weeks ending April 16, 2006, excluding Wal-Mart|
Americans like to buy in bulk, and it’s another trend that private label paper product suppliers also are embracing. In fact, suppliers tab the increased acceptance of club packs as the reason behind shrinking unit sales. “The emergence of bulk packs has been a key growth area,” Tocchet says. “Specifically, consumer acceptance for products such as 24-roll and 32-roll bathroom tissue, and 12-roll paper towels has exceeded expectations in the private label paper category.”
Jim Wilsky, senior vice president, category development, Marketing Management Inc., Fort Worth, Texas, points to continued product quality improvements yielding softer, thicker and larger product enhancements as indicators that private label products in this category are no longer governed by the phrase “just as good as” when it comes to comparisons to the national brands. “Softer, thicker and bigger: private label programs are making great strides in three-ply additions,” he says. “Big sheet-counts, large club packs and new packaging callouts and design are aggressive in claims of quality and value. The constant, never-ending price promotions have eroded much of the national brand loyalties that used to exist, opening the door for private label even further.”
And even more specifically, many retailers have been experimenting with premium Through Air Dried (TAD) tissues and paper towels as a means to compete directly with the larger brands. “Standards of product quality and innovation are constantly being raised by the national brands,” comments Bruce Woodlief, director of marketing, Potlatch Corp. Consumer Products, Spokane, Wash. “Private label volume in ultra towels has more than doubled vs. a year ago. The growth in private label represents more than 50 percent of the total ultra towel segment growth (according to grocery data from Information Resources Inc., Chicago).”
“While the TAD products offer strong product performance, their price/value equation is struggling in the face of vast branded promotions,” says Derek Dafoe, director of marketing, consumer products division, Cascades Tissue Group, Kingsey Falls, Quebec. “Internal studies show that the consumer is looking for higher quality but at a fair price. Significantly, Bounty usage has not been directly affected by TAD private label offerings, which shows that retailers and suppliers have yet to design the ‘right program’ to build this segment of the category. We are showing that TAD private label programs are simply shifting the private label sales ring from one private label product to another, albeit at a lower profit level than the traditional paper product offerings.”
In addition, says Steve Sarafini, vice president, U.S. Alliance Paper, Edgewood, N.Y., there’s a growing element of alternate channel operators who are placing greater emphasis on developing their own label across all segments to enhance sales via products that will benchmark close to leading brands, but at a significantly lower selling price.
In addition to the aforementioned issues impacting the private label paper segment, there also is the major issue of quality perception — the ripple effect of which is far-reaching and easily muddied if retailers aren’t careful. “By both offering basically the same brands and packages they (traditional retailers and alternate channel accounts) have created confusion in the consumers mind as to what is a fair and reasonable price for an item,” says Sarafini. “Traditionals still hold to the high-low scenarios, whereas alternate channels opt for an everyday low price. The result is the destruction of brand loyalty.
“Private label technology today allows manufacturers the chance to offer far greater graphics, and improved product quality, yet rarely, if ever, do you see any mention of this on private label packaging,” he continues. “What’s actually happening is a narrowing of cost between private labels and branded, and here consumers will opt for the branded on the assumption it’s a better product.”
Sarafini asserts that until retailers move away from the theory that private label needs to be 20 to 25 percent lower cost, and start thinking of how they can actually convey that their private label is actually better than the branded counterparts, penetration will be somewhat stagnant. “There are some who are beginning to think along these lines, but in so doing, still expect inbound costs to be lower. They have to accept the fact that a better product will cost more,” he says. “Part of this mindset is driven by the fact that in 1993 about 91 cents of every food dollar was spent in traditional outlets. In 2003 that number dropped to about 59 cents and is expected to go below fifty cents by the year 2008. If foot traffic is migrating to alternate channels the answer doesn’t lie in margin, it has to come from profits derived from regaining sales. The traditional retailer must get shoppers back in their stores, and they must find ways to make their private label products more salable. The answer lies in quality.”
|Category Share — Top 3 |
|Category ||Dollar Sales |
|Kleenex Facial Tissue||$426.4||43.4%|
|Private Label Facial Tissue||$172.2||17.5%|
|Puffs Plus Facial Tissue||$103.2||10.5%|
|Scott Toilet Tissue||$558.1||16.3%|
|Kleenex Cottonelle Toilet Tissue||$461.5||13.5%|
|Private Label Toilet Tissue||$460.0||13.4%|
|Private Label Paper Napkins||$144.6||33.0%|
|Mardi Gras Paper Napkins||$50.2||11.5%|
|Vanity Fair Paper Napkins||$49.0||11.1%|
|Bounty Paper Towels||$869.1||39.9%|
|Private Label Paper Towels||$401.2||18.4%|
|Brawny Paper Towels||$241.1||11.1%|
|Source: Information Resources Inc., Chicago. Total food, drug and mass merchandiser (excluding Wal-Mart) for 52 weeks ending April 16, 2006. |
One aspect acting in favor of private label has been the ability of private label manufacturers to react more quickly to changes in the marketplace. “Our ability to redesign current, or introduce new products has enabled our customers to maintain a strong market presence in the paper category, and successfully build their private label program,” Tocchet says. “(Conversely), the national brands are not sitting still, and have initiated strong and effective marketing campaigns. Their strategy of reducing sheet sizes and sheet counts has been one of the key factors in affecting private label market share.”
Dafoe suggests retailers focus their efforts on what truly matters: satisfying their consumer. “Too many of today’s retailers are blindly supporting branded features that simply lower the shelf price of products and push the consumer away from their private label programs,” he says. “Today’s consumers are looking for quality and price. While this can be done short term with lower-priced branded products, we all know that this is a short-term approach, and more significantly, it actually hurts today’s retailer”
He concludes by challenging retailers to be innovative and responsive with their private label offerings — it’s a gesture that will resonate with consumers and can ultimately add value and profitability to the bottom line.
The Energy Impact
As if margins weren’t already tight for private label manufacturers, rising fuel costs — a factor impacting all market categories — continue to pick away at the bottom line.
“Fuel prices have significantly affected the paper segment,” says Andy Tocchet, vice president and general manager, Atlantic Packaging Products Limited, Scarborough, Ontario. “Energy, transportation and packaging costs, to name but a few, all have skyrocketed. Consumers are getting used to paying more for such things as their heating costs, or filling up their cars, but have been unwilling to accept higher prices for paper products on the retail shelf. In turn, our retail customers have been reluctant or unwilling to accept any increases. Suffice to say, margins have eroded. Unfortunately, there doesn’t appear to be any short- or mid-term relief, or reduction of these costs.”
Escalating oil and petrochemical costs are directly affecting costs associated with the poly used for wrapping, and more importantly matters related to shipping. “Whether it is for outbound goods or in-bound raw materials — it’s getting to a point that it’s almost impossible to create a sound annual budget,” says Steve Sarafini, vice president, U.S. Alliance Paper, Edgewood, N.Y. “This can be clearly seen by the constant changes in sheet counts and product costs, which are all being impacted by the constant escalation in fuel costs.”
Derek Dafoe, director of marketing, consumer products division, Cascades Tissue Group, Kingsey Falls, Quebec, also laments the negative impact of rising energy costs. But although he expects the trend to continue, he believes it will ultimately be to the detriment of national brands. “The direct result will be continued pressure on both suppliers and retailers to eliminate costs to maintain competitive price points,” he says. “Of course with private label products typically holding an on-shelf price advantage vs. their branded brothers, we believe that private label penetration will continue to increase as consumers look for ways to spread their smaller disposable incomes across their shopping needs. It’s important that private label suppliers keep up the quality improvements we have made as a way to reward these ‘new’ private label consumers and convince them that by buying private label they are not making a sacrifice.”
He adds that a side effect to the increased cost structure will be the continued pressure put on converter-only operations. “These non-integrated suppliers must purchase their raw material resources on the open market, and while many can rely on short-term contract pricing to artificially maintain their price positions, with continued cost increases the converters will be directly impacted and lose their ability to compete with larger integrated suppliers,” he says. “By controlling the complete product supply cycle, integrated suppliers can absorb more cost pressure then our smaller converter-only cousins.”