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Paper Guru

Paper Guru

By Jack Miller

About Jack

Jack Miller is founder and Principal Consultant at Market-Intell LLC, offering Need to Know™ market intelligence in paper, print and packaging. Previously, he was senior consultant, North America, with Pira International.

Known as the Paper Guru, Jack is the former director of Market Intelligence with Domtar, where he also held positions as regional sales manager, territory sales manager and product manager. He has presented at On Demand, RISI’s Global Outlook, PRIMIR, SustainCom World and at various IntertechPira conferences. Jack has written for Printing Impressions, Canadian Printer, Paper 360, PaperTree Letter and Package Printing, along with publishing a monthly e-newsletter, MarketIntellibits.

He holds a Bachelor of Arts degree in Economics from The College of the Holy Cross and has done graduate studies in Statistics and Finance.


Mega Merchant Merger

This week International Paper announced that it is in talks with Unisource regarding a proposed merger of xpedx, International Paper's distribution business, and Unisource. The proposed new company would be an independent, publicly traded corporation. Unisource and xpedx are the two largest paper merchants in North America.

So what will this mean?

Understandably, xpedx and Unisource did not respond to my requests for interviews. So, here is my view.

According to one estimate, the two merchants account for about $10 billion in combined revenue. Market-Intell estimates that of this, about $7 billion is paper, with the balance being graphic arts supplies, packaging and facility supplies. This gives the two companies a combined share of about 30 percent of the U.S. paper merchant business.

Certainly, a merger like this would create efficiencies in logistics and service, and allow cost reduction and synergies. This will give the new company the capability to provide better service, reduce prices, or increase profit margins. Given that profit margins are thin—xpedx profits in 2012 were only 1.1 percent of sales—it is reasonable to expect that the new company will focus on improving margins.

There is also the question of whether this consolidation will lead to less competition and higher prices. However, the experience on the mill side suggests that this is not enough concentration to affect prices and prices will remain competitive.

What is likely is that there would be some realignment of supply arrangements, driven both by printers and by the new company. Some printers concentrate their business with a small number of merchants, and if they have a high concentration with Unisource and xpedx, they may want to switch some of their business to another merchant. Similarly, the new merchant company may not want too much exposure with any one printer, and may realign its customer mix. At the same time, commission-based merchant sales reps have significant influence over some pieces of business, and if there is sales force duplication, some reps may move on and take business with them.

These factors, plus the distraction that xpedx and Unisource will experience as they go through the merger, suggests that this will be a short-term positive for the remaining merchants. Unless the new company can effectively exploit its synergies, this short-term plus may become a long term plus.

Possibly more significant, this may be the beginning of a final stage in the evolution of paper merchant distribution. In the 1990’s consolidation was the rule, and mills rushed to acquire merchants. In 1991, IP acquired Leslie Paper and Dillon Paper, and later added numerous other independent merchants, creating a national presence with ResourceNet. IP changed the ResourceNet name to xpedx in 1998. Other merchants were also mill-owned: Mead’s Zellerbach Division (Zellerbach was acquired by IP in 1998), and Champion International’s Nationwide Paper Division (Champion was acquired by IP in 2000).

Unisource has its mill history as well. Unisource was spun off from Alco Standard in 1996 following the acquisition of numerous independent merchants. Great Northern’s Butler Paper Division was acquired by Georgia Pacific in 1990 and sold to Unisource in 1993. In 1999, Unisource was acquired by GP, but in 2002 GP sold 60 percent of Unisource to Bain Capital.

Limited distribution and close alliances between mills and merchants have long been the norm, whether the merchants were mill-owned, or whether the merchants had virtual "franchises." In any case, mills would only have a small number of stocking merchants in each market.

Meanwhile, Domtar was a modest-sized paper manufacturer, aligned with smaller, independent merchants rather than Unisource or xpedx. But these independents were being swallowed by Unisource and xpedx, and Domtar was vulnerable. In 2000, Domtar acquired one of these independent paper merchants, Ris Paper (now Ariva). Now, following the acquisition of four mills from GP and the fine paper business of Weyerhaeuser, Domtar is a giant in the uncoated freesheet sector, and has a strong position with the merchant giants, xpedx and Unisource, as well as with Ariva and the independent merchants. If xpedx and Unisource merge as an independent company, Ariva will be the only remaining mill-owned merchant.

With consolidation on the mill side and the merchant side, mills will of necessity deal with just about every major paper merchant, and vice versa. This could signal the end of the "franchise" relationships and it may also be the beginning of the end for mills owning merchants.

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