Large office stores demand IT: the rapid growth of large office product stores like Staples has changed the rules for specialty paper producers. Opportunities and pitfalls abound.

Are specialty paper producer looking for growth in all the wrong places? They need only go out their doors and find the nearest large retail office store to find a growing addition to their customer base.

For specialty paper producers, the large office and small office/home office (SOHO) marketplace catered to by large retail office supply stores offers challenges and opportunities-a two-edged sword. On one side, it is a fast-growing, expanding marketplace. For companies with older, slower operating machines, these stores are logical places for selling their value-added or specialty papers. Manufacturing flexibility and process measurement control are key attributes necessary to make these assets profitable.

On the other side, the large retail stores demand that specialty paper producers have the information technology capabilities of bigger companies to exchange data and optimize internal business functions such as order management, scheduling, inventory management, and customer service. The SOHO marketplace seeks new, innovative products at low prices. Paper companies must be innovative because new technology is allowing SOHO customers to use specialty papers to produce anything from business cards to color product catalogs.

Dealings with large office supply stores such as Office Max, Staples, and Office Depot have never been more attractive to specialty paper manufacturers. This is clearly a growing marketplace. The number of retail stores is growing. The commercial and Internet business of these suppliers is also growing. The quantity and quality of paper sold in these stores is increasing.

Although the SOHO marketplace is growing, tension exists between paper suppliers and large retailers. These large retailers constantly exert cost pressures that dilute margins; mandate electronic exchange of purchasing, invoice, and service data; and dictate customer service levels to stay on a preferred supplier list. Specialty paper producers face a constant battle to maintain margin and profitability against commodity paper producers who have larger volumes and non-paper producers whose products have higher margins.

Following the principle of supply and demand, specialty paper manufacturers must devise the right product at the right price immediately. They must also deliver new products that meet the specialized demands of new technology sold in these stores, such as digital and inkjet printers, digital photography, and more. Consumers of specialty papers are becoming more sophisticated by wanting to know the difference between a 20-lb and 24-lb sheet, between matte and gloss, and between a laid and woven finish.

The challenge ahead for specialty paper manufacturers is determining whether the growing demand for their products offered by large retail office stores provides the higher margins necessary to produce innovative products and shorter runs. How do producers of specialty paper work with large, office retail stores to produce, sell, and market paper products? How does a paper producer sell its products in small quantities, at high quality, and within an "acceptable" price range?

THE POSITIVE SIDE

For specialty paper producers, the SOHO marketplace is growing. Stores such as Staples, Office Max, and Office Depot previously devoted a small part of their stores for white copier and printing paper. Now, they have aisles filled with many paper products ranging from copier papers to stationary to digital photographic printing paper.

The key for paper producers, as for any company, is to make and market products that fulfill the demands of SOHO customers.

"What we want to do is create products that meet the customer's needs," says Albert Arends, vice president, Smead Manufacturing Co., Hastings, Minnesota, USA.

The needs of SOHO customers are very simple. When these customers walk into the large office retail stores, they want products that answer one question. "Will this product make me more productive?" The answer usually comes in the form of new electronic technology that allows individuals to produce on their PCs and printers printed communications that were the domain of commercial printers. Good examples of this are digital photography and high resolution printing.

The advent of digital photography and the demand for high-quality photo printing have created a new market opportunity for specialty paper producers. Original equipment manufacturer relationships extend beyond the large printer manufacturers to Kodak, Fuji, and other photographic film and camera manufacturers. Additionally, large photo stores are purchasing paper to create their own store brand. Coated photo paper is an extremely high margin product relative to other paper grades. This high margin yields product requirements for quality, consistency, and performance that are greater than for any other printing paper.

Specialty manufacturers with the appropriate equipment can take advantage of the high quality printing market if they can meet the high demands of the retail market. The large number of distribution channels means that companies have greater potential volumes but must meet a wider range of customer service needs and work through merchants supplying smaller stores or regional markets.

Photo paper demands a high quality of uniformity and zero defects. This remains a challenge for most suppliers. A recent survey of photo papers on the shelves of retail stores revealed that many had some level of "orange peel," or surface patterning that produced mottle in solid areas. Coater drags and streaks were also fairly common, even in the high-end, one-side print products. One exception to this trend was a product made by Ilford Imaging. Their PRINTASIA line of photo paper had essentially no defects. The company currently lacks a print two-side product with the same print quality on each side.

THE NEGATIVE SIDE

If a downside to the SOHO marketplace exists, it is the never-ending demand for innovation and change. The demands large office product stores place on a specialty paper producer regarding price and speed of delivery also cause problems.

For producers of specialty paper sufficiently fortunate to sell into the large retail office stores, the sales appear to be worth the risk. This is because the higher margins on these specialty products, the larger quantities of commodity products sold, and me impressive growth of the SOHO marketplace come at a time when most paper companies are struggling simply to survive.

All these positives aside, the large retail office stores are relentless in demanding that paper companies meet their specifications of paper attributes, packaging, and quantity. The retailers also require paper mills to sell their products at the prices of the store or not have their products sold at all.

New product development is the lifeblood of paper companies serving specialty markets. It is also a great challenge because of the overhead involved. Supplying the large retailer has the great advantage of higher volumes that allow longer production runs. This also means that paper producers must make products for specific stores or specific seasonal promotions. In short, specialty paper producers must be many different things to many different customers and market segments.

MARKET OVERVIEW

With all the talk about the risks and difficulties that specialty paper producers encounter in dealing with large retail office stores, the upside far outweighs the downside.

In a struggling marketplace sales of' printing and writing papers to retail, catalog, commercial, and email outlets is growing between 5%-10% per year, according to industry experts. Simultaneously, specialty paper producers are working with these stores to produce papers that their customers want for high-end operations such as in-house magazines, external catalogs, and even four-color advertisements.

In marketing their products to consumers through various retail and outlet stores, specialty paper producers market "brand names" not company names. They are proud of producing Astro-Brites, Brite-Hues, and other colored papers. Consumers may not know the manufacturers, but they do know the brand.

Specialty paper manufacturers face an increasingly competitive future with large office retail stores demanding more innovative products at lower prices. They can meet the demands of these customers. Innovations in equipment allow mills to make product changes without sacrifices in quality. Although mills want long runs, they also believe in customer service. Paper companies are much more adept at talking with their customers and devising high margin, value-added products that meet customer needs.

Specialty paper producers fight a continuous pricing battle with their large customers serving the SOHO market, but they are also eager to take the lead in discussing innovative changes. For the large retail office store, having the right product for the right customer at the right time is their motto. It is the same motto adopted by specialty paper producers.

IN THIS ARTICLE YOU WILL LEARN:

* The now growth market of large retail office stores.

* The challenges facing specialty producers selling to large retail stores.

* How specialty paper producers market and sell their products to the large retail office stores.

ADDITIONAL RESOURCES

* For more information on Staples and the Staples Paper Procurement Policy, go to www.staples.com.

* For articles and news on specialty paper, go to www.tappi.org and enter "Specialty Paper" in the search engine. Choose "entire site."

RELATED ARTICLE: Staples' environmental paper procurement policy changes the rules of the game, promotes sustainability.

Although all large retail office product stores have very specific characteristics and attributes they expect from their suppliers of paper products, only one--Staples--has a written environmental paper procurement policy. Produced with the input of stakeholders as diverse as paper companies and Greenpeace, this policy gives teeth to the overall environmental sustainability policy of the company.

"We have made a strong commitment to environmental stewardship from the time our first store opened in Brighton, Massachusetts, USA, and our paper procurement policy is another example of this commitment," said Mark Buckley, vice president of environmental affairs, Staples Inc. He added that the company currently sells more than 2,100 recycled products in its stores and recycled more than 27,000 lbs. of corrugated, printing, and writing papers in its internal operations in 2002.

Staples practices what it preaches by using a high percentage of post-consumer waste products in its internal operations and in its store sales. "By the end of this year, we intend to be using only post-consumer waste paper products in our internal operations," says Buckley.

In its stores, Staples has a policy that favors paper with post-consumer waste. Simultaneously, it does not want to sell products that the customer will not use. "We do not want to disappoint the customer with inferior products because this would be taking five steps backward in terms of customer service," says Buckley.

What is the reaction of paper suppliers to Staples paper procurement policy? "Overall, the response has been very positive," says Buckley. "There are some papers out there where there clearly is great difficulty in using post-consumer waste, but the technology is improving dramatically."

Jerome A. Koncel is a freelance writer who has covered the pulp and paper industry for more than 15 years most recently with American Papermaker and PIMA's North American Papermaker. Contact him by phone at [phone] or by email at: [e-mail].

Ted McDermott is a member of the TAPI Editorial Board and the PIMA Information Technology Specialist Group. He is an e-business/technology analyst and consultant based in Palatine, Illinois, USA. He can be reached at [phone] or by email at: [e-mail].