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Graphic-paper producers: Boosting resilience amid the COVID-19 crisis
Article by Abhinav Goel, Felix Grünewald, Oskar Lingqvist, and Gregory Vainberg
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A recent survey released by the consulting firm McKinsey shows that four proven actions can help graphic-paper producers rebound despite the market declines that have been accelerated by the COVID-19 pandemic.
Global graphic-paper markets have been declining significantly over the past decade. eveloped countries have experienced the strongest decline, at approximately to percent per year hibit . eveloping countries graphic paper consumption surpassed demand from developed countries in . o ever, consumption there, too, had started to ane in , albeit at the slo er pace of appro imately to percent a year.
he decline in demand for graphic paper has been especially noticeable in developed countries, here there has been a clear correlation bet een reducing paper consumption and economic advancement, driven by digiti ation. he similar effects e are no seeing in developing countries can be e plained in part by the relatively larger share of digitally savvy younger people in such mar ets. eneration born comprises true digital natives and already ma es up percent of Bra il s population today, for instance.
Exhibit 1: Graphic-paper demand has been declining globally for a decade—and even longer in developed economies.
THE COVID-19 CRISIS HAS ACCELERATED THE DECLINE OF GRAPHIC-PAPER DEMAND
he crisis has been a mi ed bag for paper and pac aging players. n one hand, some companies have benefited from an increase in grocery shopping and pantry loading of essentials, such as toilet paper. n the other hand, graphic paper producers have suffered significant volume drops hese declines are driven by the fact that the pandemic has introduced ne factors but also acce-
lerated some of the previously e isting trends that ere already driving graphic paper reduction
■ Office printing. here has been a decline in office printing because of the rise in remote or ing. The associated absence of corporate grade printers and s itch to digital meetings has drastically reduced office paper consumption. hat has been compounded by a tight grip ept on nonessential spend items including stationery and office supplies among organi ations that are reopening offices.
■ Advertising. here has been an absolute reduction in advertising because of lo er discretionary spend or tight spend control by companies and a significant shift to online advertising ith more targeted audience communication.
■ Media consumption. A shift to digital and online consumption of media ne spapers, maga ines, and boo s has been accompanied by an accelerated increase in the availability and consumption of e boo s, podcasts, and audioboo s.
■ Mail volume and forms. he rise of e communication, a further acceleration of e invoicing, and a s itch to e forms driven by the closure of offices and retail outlets manifested in, for e ample, the rise of online only ban accounts have led to a decline in mail volume and forms. he decline of transactional paper uses has also been driven by governmental efforts to advance digital adoption.
■ Digital learning. he e pansion of digital learning, ith many schools and universities moving to ard online courses, has been accelerated by the pandemic driven rollout of digital solutions, hich have become lifelines for the continuation of learning.
here is, nevertheless, some light at the end of the tunnel for graphic paper producers in the potential recovery of discretionary spend after loc do n. hat could increase businesses illingness to spend, and see individuals turning bac to printouts in business conte ts, as ell as paper based media consumption. o big challenges remain for the industry, ho ever. he first is that the crisis is accelerating structural changes that are stic y for e ample, readers ho have s itched to digital maga ines seldom return to print copies . econd, trends such as or ing from home and providing digital first education that ere once forecasted to happen over a timeline of five to ten years have been condensed into a period of months and they ill li ely be sustained.
HOW GRAPHIC-PAPER COMPANIES CAN WEATHER THE STORM: FOUR PROVEN ACTIONS
e can already see the effects of loc do n on graphic paper demand by loo ing at mar et indicators. demand for graphic paper grades plummeted to percent, year on year, from April to une prices for ood free paper in urope fell to percent in uly compared ith ecember .
o eather the current storm, e anticipate that graphic paper companies ill need to consider four actions. trategically revie ing their asset portfolios and mar et e posure, relentlessly focusing on cost and cash, driving commercial e cellence, and e ploring diversification opportunities is an approach that could allo players to improve their resilience hibit .
Exhibit 2: Graphic-paper players can act upon strategic, cost, and commercial levers while exploring diversification.
1. Strategic review
nder the current circumstances, graphic paper companies ill need to revie their strategies from three angles. onsideration of footprint consolidation in case of multiple assets , end customer segment participation, and level of value chain participation is a good first step in determining the best strategy moving for ard.
ootprint consolidation is a relevant strategic choice for players ith multiple assets in the same graphic paper grade. Ad usting capacity in light of falling demand may help the competitiveness of the remaining assets and secure financial stability. egment participation revie for e ample, of involvement in pac aging, paperboard, container-
board, envelopes, and so on ill be critical to maintain sufficient volume stability during head inds. n past years, numerous mills around the orld have been converted from graphic paper production to other grades, such as food pac aging, coated free sheet, and containerboard and that trend is set to stay. ome of the conversions ill re uire significant capital investment, and they may re uire footprint rationali ation for funding.
Exhibit 3: Successful strategies differ according to the size of the graphic-paper company. Source: McKinsey analysis
2. Relentless focus on cost and cash
he ma ority of graphic paper companies have eathered the storm considerably ell so far by reducing budgets, decreasing capital e penditures, and implementing ero based approaches to indirect spend and organi ation si e. urthermore, establishing strict spend control to ers and launching competitive sourcing for large cost items such as furnish, chemicals, pac aging, and so on are ey. sing analytical tools to drive process controls and asset performance has been proven to elevate operational performance and reduce costs further.
e have seen multiple instances in hich digital and analytical tools have improved process parameters yield, material consumption, and output ithin raft mills digester and bleach assets hile also reducing overall do ntime and improving yield across all production lines. hat approach could deliver an added benefit of to percent throughput uplift across a mill and reduce conversion costs by to percent ithin three to five months.
3. Commercial excellence to create value for customers
o ensure strict controls on margin lea age hile maintaining appropriate loading of paper assets, companies need to shore up their governance on commercial decisions. n the short term, that means focusing on optimi ing product and customer mi to ma imi e profitability and enforcing pricing discipline to ma imi e average price.
As mar ets remain volatile, graphic paper players also need to remain active in searching for opportunities for geographic and product portfolio e pansion opportunities. t is important that mills keep close tabs on their average prices achievable via e ports versus domestic customers. As home mar ets dry up, stimulating volume and pricing competition, mills might consider strengthening their relationships ith distributors and bro ers to access international mar ets and protect their order boo s and to be able to cover fi ed costs.
4. Exploration of adjacent value pockets to find market niches, conversions, and specialties
roduct diversification presents another avenue for graphic paper companies to consider as they see a more lasting solution to protecting their businesses. or instance, they can e plore ad acent product niches to utili e e isting assets ith little or no investment. As an e ample, offset roll ma ers might e plore opportunities in in et and release papers. Additionally, ith minor capital infusion, companies can participate in ad acent niches, such as envelopes, paperboards, and so on. hat ill help bridge order boo gaps over the near term until the mar et recovers.
e believe that graphic paper companies can rebound amid the crisis. espite the trends in demand decline accelerated by the crisis, they can thrive by carefully e ecuting on the plan outlined in this article, creating value for shareholders. he po er of the strategy has been demonstrated by a paper mill used it to achieve an improvement in B margin of to percent.
Abhinav Goel is an associate partner in McKinsey’s Cleveland office, Felix Grünewald is a consultant in the Zurich office, Oskar Lingqvist is a senior partner in the Stockholm office, and Gregory Vainberg is a senior partner in the Montreal office.
This article is a shortened version of the «Graphic-paper producers: Boosting resilience amid the COVID-19 crises» article published by McKinsey on 18 Sep 2020.
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