In recent decades, the commodity paper segment has been under threat from overcapacity and declining demand in many areas. Subsequent low profitability has encouraged many manufacturers to look instead to the opportunities offered by specialty papers, which are of higher added value and can, in some cases, provide higher margins.
For many paper mills, this improved financial performance is a very tempting prospect. However, there are a number of risks involved when entering the specialty paper market. In this exclusive bulletin, Smithers Pira discusses the advantages and disadvantages for paper mills of investing in specialty papers, and the important factors you must consider before you enter the market.
Offer Value and Increase Revenue
Customers are willing to pay a premium if you are offering something of real value to them. Therefore, it is important to find a way to offer new features without increasing the price of raw materials, processing or marketing and wiping out the margin you stand to gain. Yes, there is added value for the customer, but is it sufficient to justify the costs to your company for bringing specialty paper to market?
In addition, this "added value" can be difficult and expensive to demonstrate. Marketing the product and developing a new image and brand to support it, compounded with lengthy qualification procedures for specialty paper results in some pretty large upfront costs. There are also regulatory concerns to meet, especially in terms of food contact.
These considerations will need to be weighed up carefully in order to avoid making a loss with your new specialty paper product, as well as creating disillusioned management and shareholders. Some customers will tolerate higher than average prices if they urgently need your product, although there is always the risk that others will opt for the lower-cost product if it is easily available.
Reconsidering your Brand Position
There are a number of technical, manufacturing and branding issues that need to be considered before entering the specialty paper industry. If you are a small or medium sized mill, specialty paper can allow for ongoing use of older and sometimes obsolete equipment that still has valuable capabilities, but is no longer suited to larger volume runs which are required for mass commodity products.
In a similar vein, there is much less competition from other producers who use this larger output machinery. These producers will be mainly concerned with maximising their volume output and will not have the ability to produce the shorter runs and flexibility required for specialty paper production. It isn't only machinery which may prevent the possibility of expanding into specialty papers. Many mills don't take into account working culture and the selling mind-set of sales teams, who may have been previously trained on a 'tonnes out of the door' approach.
Some value-added work will mean having short runs and creating bespoke products performance to meet the specific needs of one small customer. Tasks involved might include devising novel technical solutions, shipping small quantities of customised stock or processing new, untried or unusual raw materials to satisfy customers' environmental concerns. Each of these issues is a specialty in itself, and creates added costs for the manufacturer in question. Many mills may also need to rethink their brand's image or consider creating an internet presence in order to maximise the potential of specialty papers in a digital age. Taking into account these technical and marketing concerns, is your paper mill positioned correctly to invest in specialty papers?
The Smaller the Niche, the Smaller the Competition?
Specialty grades offer higher profitability compared with commodity products and a means of broadening product lines into niches. Exploring a low competition area means potentially improved risk spread and the potential to create a unique and innovative selling proposition. These emerging segments are often small but growing, driven mainly by new technology.
However, development within a less well-known area is a brave move and may prove a barrier to entry for less daring suppliers. In order to identify and fulfil a productive gap in the specialty paper sector it is essential to fully understand the marketplace. The market and end-users are far more diverse than in any other sector, usually expecting and welcoming paper suppliers to discuss needs and expectations as well as participate in product development at a deeper level.
These concerns should be balanced with the fact that fulfilling a niche creates a unique selling proposition which is original, too complex to copy, has unique features and can add additional functionality. Is your company positioned to take the risk?
Smithers Pira also produces a range of in-depth market reports containing exclusive five and ten year forecasts. The Future of Global Specialty Paper Markets to 2018 is available to purchase now.