abhishreshthaa
Abhijeet S
International Paper Company (NYSE: IP) makes paper and packaging products. The company's top paper brand is Hammermill, and printing paper represented 46% of the company's 2009 operating income.[1] 78% of of net sales in 2009 came within the United States. [2]
In July 2005, the company consolidated its operations to focus on three platform businesses: Uncoated Papers, Industrial Packaging, and Consumer Packaging [3]. The Uncoated Papers business handles the production of printing and writing paper, while the Industrial Packaging business produces containerboard used to make boxes, and the Consumer Packaging business produces cardboard used in the packaging of consumer goods ranging from food to cosmetics. The company sold its entire forest products segment in 2006 (this segment represented 11% of net sales in 2005[4]). In 2009, the company only owned 200,000 acres of forest, and the segment represented less than 1% of the company's sales and earnings.
In 2009, IP was tested by the weakening demand of paper products as a result of the struggling global economy. During tough economic times companies look to save money by any means possible, and one of those ways is to decrease the amount of paper used on a day to day basis. Additionally, high levels of white-collar unemployment also decreases the demand for paper products. When the demand for paper or goods that come packaged in containerboard decrease, International Paper's bottom line is negatively affected. In 2009, International Paper suffered from lower sales volume in all of its product categories, but benefited from lower raw materials, energy, freight costs, (all of which had negative effects on the company in previous years) and alternative fuel mixture credits.
Contents
1 Company Overview
1.1 Product Segments[1]
1.1.1 Industrial Packaging (38% of net sales, 32% of operating profit)
1.1.2 Printing Papers (24% of net sales, 46% of operating profit)
1.1.3 Consumer Packaging (13% of net sales, 18% of operating profit)
1.1.4 Distribution (28% of net sales, 2% of operating profit)
1.1.5 Forest Products (<1% of net sales, <1% of operating profit)
1.1.6 Specialty Businesses and Other (0% of net sales, 0% of operating profit)
1.2 International Paper’s Transformation Plan
1.3 Alternative Fuel Mixture Credits
2 Business Growth
2.1 FY 2009 (ended December 31, 2009)[13]
2.2 Q1 2010 (ended March 31, 2010)[14]
3 Trends and Forces
3.1 Rising Commodities and Energy Prices are Forcing International Paper to Make Difficult Choices
3.2 Environmental Regulations and Liabilities
3.3 A Slow Economy Means Less Demand for International Paper’s Products
3.4 Electronics Decreasing Global Paper Demand?
4 Competitors
5 References
Company Overview
Product Segments[1]
International Paper divides its sales into six different product segments
Industrial Packaging (38% of net sales, 32% of operating profit)
The company is the largest manufacturer of containerboard in the United States as it producing 10 million tons annually. About 70% of the containerboard is converted by the company into corrugated boxes (heavy cardboard) and other types of packaging. In 2009, net sales in the Industrial Packaging segment were up 16% to $8.9 billion compared to sales in 2008. Operating profit in 2009 nearly doubled for the year reaching $761 million. The segment benefited from lower wood, energy, and freight costs for the year. Net sales in North America have nearly doubled since 2007, reaching $7.6 billion, whereas sales in Europe have fallen 11% to $980 million during the same period.
Printing Papers (24% of net sales, 46% of operating profit)
The company is one of the world’s leading producers of printing and writing paper. In 2009, net sales in the segment fell 17% to $5.7 billion compared to sales in 2008; however, operating profits for the year were nearly double compared to the previous year at $1.1 billion. The segment benefited from improved manufacturing operations, lower raw materials, energy, and freight costs, and higher sales volume in Brazil, but was hampered by lower sales volume in North America and Europe due to lower consumer demand. This segment also benefited from $884 million in alternative fuel mixture credits.
The company sells two primary products in this segment:
Uncoated Papers: this type of paper is used in copiers and printers and can be transformed into brochures, pamphlets, cards, and books. The company sells this kind of paper under brand names such as Hammermill, Springhill, Williamsburg, and Postmark.
Market Pulp: is used to make printing, writing, and specialty paper as well as towel, tissue, and filtration products.
Consumer Packaging (13% of net sales, 18% of operating profit)
International Paper also makes high quality coated paperboard which is used in packaging everyday products such as food, cosmetics, and pharmaceuticals. The paperboard is also sold in commercial printing for cards, books, and lottery tickets under the brand Carolina. The company sells paperboard under the brands Everest, Fortress, and Starcote. In 2009, net sales of the segment decreased 4% but operating profits increased significantly from $17 million in 2008 to $433 million. The segment benefited from higher sale prices and lower operation costs, but the real gain in operating profits came from $330 million in alternative fuel mixture credits. Sales volume were higher in Europe and Asia but lower in North America.
Distribution (28% of net sales, 2% of operating profit)
The company’s North American merchant distribution business xpedx provides distribution services and products to markets such as commercial printers, building services, and manufacturers. The business operates out of 122 warehouse locations and 130 retail stores in the U.S., Canada, and Mexico. The segment’s 2009 net sales and operating profit were down 18% and 51% respectively due to weak economic conditions.
Forest Products (<1% of net sales, <1% of operating profit)
As part of the company’s transformation plan, the company sold 5.6 million acres of forestland in 2006[5] . At the end of 2009, the company owned approximately 200,000 acres of forestland in the United States. The remaining forestland is managed as a portfolio which represents properties that are likely to be sold to investors and other buyers.
Specialty Businesses and Other (0% of net sales, 0% of operating profit)
This segment previously included the Arizona Chemical business, which was sold in the first quarter of 2007[6].
International Paper’s Transformation Plan
On July 19, 2005, International Paper announced that it would be establishing a three-part business transformation plan to improve returns, strengthen the balance sheet, and return cash to shareholders. The main strategy of the plan was to consolidate business and focus on two key platform businesses: uncoated papers and industrial and consumer packaging (which includes the distribution business xpedx). The company felt that it had a solid global foundation in the uncoated paper market, as it was the world leader in uncoated paper production at 6.6 million tons annually, and saw opportunities for growth in packaging. In 2004, these businesses accounted for more than 70% of the company’s net sales. Another part of the plan dealt with profit improvements, which included resizing to a smaller asset base, using a more profitable mix, and implementing a U.S. mill realignment to cut costs [7].
In accordance to the transformation plan, the company divested away from several of its businesses. In 2006, the company sold 5.6 million acres of forestland, virtually selling off its Forest Products segment (at the end of 2009, the company owned just 200,000 acres). In 2007, the company completed the sales of its Beverage Packing operations[8], its Kraft Papers business [9], its Arizona Chemical business, and most of its remaining Wood Products segment. The sales of these businesses were in line with the consolidation and cost cutting measures the company had planned to do. As a result of these divestitures, the company's Forest Products and Specialty Business segments essentially dissipated as combined they represented less than 1% of the company's sales and profits in 2009.
Additionally, the company switched rolls as it went from major seller to a major buyer. In March 2008, the company purchased the containerboard, packaging, and recycling operations of Weyerhaeuser Company (WY), one of its biggest competitors[10]. The purchase was directly in line with the company’s goal to expand its industrial and consumer packaging divisions. The purchase included 9 containerboard mills and 72 packaging factories. In April 2010, the company announced that it was going to buy SCA's packaging business in Asia for $200 million. The company hopes to strengthen its packaging business and making it more competitive in Asia by adding 13 corrugated box plants to its 12 already existing plants in the region.[11]
Alternative Fuel Mixture Credits
Part of the US Internal Revenue Code provides a tax credit for companies that use alternative fuel mixtures to produce energy to operate their businesses which is equal to $0.50 per gallon of alternative fuel contained in the mixture. In January 2009, International Paper was approved as an alternative fuel mixer. In 2009, the company received $2.1 billion in the tax rebate.[12]
Business Growth
FY 2009 (ended December 31, 2009)[13]
Net income rose to $663 million compared to a net loss of $1.3 billion the previous year. Earnings included $1.4 billion of alternative fuel mixture credits. The company's bottom line increased because of growth in the company's Industrial Packaging, Printing Papers and Consumer Packaging segments. These segments benefited from lower raw material, energy, and freight costs, which were offset by lower sales volume as a result of weak consumer demand in the struggling economy.
Net sales fell 6% to $23,366 billion from $24,829 billion in 2008.
Long-term debt was reduced by $3.1 billion and cash balances increased by $800 million.
The company closed some of its mill operations in North America, leading to millions of tons of downtime. The company hopes to benefit in the long-run from higher operating rates, and lower fixed and payroll costs.
Q1 2010 (ended March 31, 2010)[14]
International Paper incurred a net loss of $162 million for the quarter compared to a gain of $257 in the previous year's quarter. The company attributes the loss to a significant increase in fiber costs (fiber is used to make the company's products) and charges due to selling one its mills.
Net revenue rose 2.5% to $5.81 billion from $5.67 billion a year earlier. The company said that strong results in its European businesses helped offset higher costs in North America.
The company reported that the cost issue peaked in March and then moderated for the rest of the quarter. It expects better results in the next quarter.
Trends and Forces
Rising Commodities and Energy Prices are Forcing International Paper to Make Difficult Choices
Higher production costs due to high raw materials and energy costs have already forced the company to shut down several of its facilities, such as its beverage packing operations and Arizona Chemical plant. Additionally, in Q1 2010, higher fiber costs caused the operating profits in all of the company's segments to fall as revenue margins declined.[15] The ability to obtain raw materials such as wood fiber, caustic soda, and polyethylene at favorable prices is an essential part of the company’s success. Higher commodities prices translate into high production costs for the company, which forces the company to either raise the prices of its products by placing the burden on the consumer or to take the burden itself by absorbing the higher costs and decreasing profit margins.
The company also faces the issue of increasing price of energy adds to production costs. Production plants and its machines are powered by oil and natural gas. Higher energy costs translates into higher production costs and once again the company is forced to either pass the burden to consumers by raising prices or take the burden itself and suffer decreasing profit margins. After an initial spike in energy prices in 2008, prices decreased somewhat in 2009. Despite lower sales volume in some of its category, International Paper benefited from the lower energy costs and its bottom line improved[13]
Environmental Regulations and Liabilities
In 2009, the company spent $15 million on projects with aims to control pollution releases into the air and water.[16] International Paper is forced to adhere to many federal, state, provincial, foreign, and local environmental regulations. To make sure that these regulations aren’t violated, the company must implement policies and invest in more efficient technology to ensure they are emitting below pollution emission standards; this process can be very costly to the company. In addition, if the company fails to meet all environmental regulations, they face hefty fines. Such examples of environmental regulations are the EPA’s Cluster Rule [17] for water discharges and its Maximum Achievable Control Technology (MACT)[18] standards.
A Slow Economy Means Less Demand for International Paper’s Products
International Paper is dependent on consumers and businesses buying typical goods, especially durable goods. A slowing economy spells trouble for International Paper. As consumers cut back on spending [19], it leads to a decrease in demand of goods. As the demand for these goods drops, International Paper’s customers order less corrugated containers because fewer items are being shipped out. Fewer sales lead to less revenue and negative effects the company's bottom line. For example, because American consumers are spending less money and are less willing to get car repairs due to the slumping economy [20], fewer automotive parts are being ordered by repair shops. Fewer parts means a decrease in demand for IP's corrugated packaging. Other related demand is for Industrial Packaging products, which is closely correlated with non-durable industrial goods production, as well as with demand for processed foods.
Additionally, a weak economy means lower employment levels in many industries. The demand for printing paper is related to white collar employment levels, so as unemployment increases, the demand for printing paper decreases. In April 2010, the white collar unemployment rate was 10.2%.[21]
As a result of lower product demand, International Paper suffered from lower sales volume in most of its product categories in FY 2009.
Electronics Decreasing Global Paper Demand?
A good chunk of International Paper’s revenue comes from the sale of ordinary printing and writing paper. But as the world becomes friendlier to technological change, the global demand for paper has taken a slight hit. Paper consumption per person grew annually in the 1980's and 90's, but has plateaued and fallen in the 2000's; consumption per person in the world's richest countries fell by 6% from 2000 to 2005. [22] For International Paper, this simply means that there is less revenue to earn in the paper market. The United States is already seeing some affects of this technological switch-over. Major newspapers such as the Chicago Tribune and L.A. Times are cutting hundreds of staff positions because they simply can’t afford to pay their employees with the declining demand for paper newspapers [23]. The United Postal service has continually increased the price of sending first-class mail as a result of steady quarterly losses[24]. Although the demand for paper is still very high and the average person still consumes more than 500 pounds of paper annually, [22] people are starting to make the switch-over to electronics which is starting to bring those consumption numbers down; in a shrinking paper market, International Paper has less opportunity for growth.
One reason why some people have switched to electronics over print is because they believe that it is better for the environment--using less paper means having to cut down fewer trees. In order to prevent this trend from growing, International Paper launched a website http://www.internationalpaper.com/apps/d2e/down2earthonline/index.html which provides information on the differences between the paper and electronics industry.[25]
Competitors
Because the Paper & Paper Products Industry has few barriers to entry and many competitors, the company faces competition from both big companies with a diversified line of products and other smaller narrowly-focused companies.
The company’s paper making competitors are:
Domtar (UFS) - Domater is the largest (by production capacity) maker of uncoated freesheet paper in North America and the second largest in the world; making it IP's top competitor in the business. 85% of Domtar's revenue came from its paper segment, while the rest came from its other papergrade, fluff, and specialty pulp business.[26].
Wausau-Mosinee Paper (WPP) - Wausau Paper focuses on making specialty paper products but also prdocues printing and writing paper. 52% of the paper the company produced was colored paper, which adds a unique touch to the company's products.[27].
The company’s paper-based packaging competitors are:
Packaging Corporation of America (PKG) - PKG is the sixth largest producer of containerboard and corrugated products in the United States. It's only business segment is focused on the production of containerboard and corrugated materials, which makes it a direct competitor of International Paper in this business[28].
Sonoco Products Company (SON) - Sonoco almost all of its revenue from it's consumer packaging and tubes and cores/paper segments[29]. Although the company doesn't produce containerboard and corrugated packaging like IP does, its paperboard products are used for packaging. Also, unlike Smurfit-Stone, Sonoco has a packaging services segment; this segment represented 5% of the Sonoco's revenue in 2009.
Smurfit-Stone Container (SSCC) - Smurfit-Stone makes paper based packaging products with a focus on containerboard and corrugated containers[30].
Rock-Tenn Company (RKT) - Rock-Tenn provides many different types of packaging material such as paperboard, corugated packaging, folding cartons, and interior packaging [31].
In July 2005, the company consolidated its operations to focus on three platform businesses: Uncoated Papers, Industrial Packaging, and Consumer Packaging [3]. The Uncoated Papers business handles the production of printing and writing paper, while the Industrial Packaging business produces containerboard used to make boxes, and the Consumer Packaging business produces cardboard used in the packaging of consumer goods ranging from food to cosmetics. The company sold its entire forest products segment in 2006 (this segment represented 11% of net sales in 2005[4]). In 2009, the company only owned 200,000 acres of forest, and the segment represented less than 1% of the company's sales and earnings.
In 2009, IP was tested by the weakening demand of paper products as a result of the struggling global economy. During tough economic times companies look to save money by any means possible, and one of those ways is to decrease the amount of paper used on a day to day basis. Additionally, high levels of white-collar unemployment also decreases the demand for paper products. When the demand for paper or goods that come packaged in containerboard decrease, International Paper's bottom line is negatively affected. In 2009, International Paper suffered from lower sales volume in all of its product categories, but benefited from lower raw materials, energy, freight costs, (all of which had negative effects on the company in previous years) and alternative fuel mixture credits.
Contents
1 Company Overview
1.1 Product Segments[1]
1.1.1 Industrial Packaging (38% of net sales, 32% of operating profit)
1.1.2 Printing Papers (24% of net sales, 46% of operating profit)
1.1.3 Consumer Packaging (13% of net sales, 18% of operating profit)
1.1.4 Distribution (28% of net sales, 2% of operating profit)
1.1.5 Forest Products (<1% of net sales, <1% of operating profit)
1.1.6 Specialty Businesses and Other (0% of net sales, 0% of operating profit)
1.2 International Paper’s Transformation Plan
1.3 Alternative Fuel Mixture Credits
2 Business Growth
2.1 FY 2009 (ended December 31, 2009)[13]
2.2 Q1 2010 (ended March 31, 2010)[14]
3 Trends and Forces
3.1 Rising Commodities and Energy Prices are Forcing International Paper to Make Difficult Choices
3.2 Environmental Regulations and Liabilities
3.3 A Slow Economy Means Less Demand for International Paper’s Products
3.4 Electronics Decreasing Global Paper Demand?
4 Competitors
5 References
Company Overview
Product Segments[1]
International Paper divides its sales into six different product segments
Industrial Packaging (38% of net sales, 32% of operating profit)
The company is the largest manufacturer of containerboard in the United States as it producing 10 million tons annually. About 70% of the containerboard is converted by the company into corrugated boxes (heavy cardboard) and other types of packaging. In 2009, net sales in the Industrial Packaging segment were up 16% to $8.9 billion compared to sales in 2008. Operating profit in 2009 nearly doubled for the year reaching $761 million. The segment benefited from lower wood, energy, and freight costs for the year. Net sales in North America have nearly doubled since 2007, reaching $7.6 billion, whereas sales in Europe have fallen 11% to $980 million during the same period.
Printing Papers (24% of net sales, 46% of operating profit)
The company is one of the world’s leading producers of printing and writing paper. In 2009, net sales in the segment fell 17% to $5.7 billion compared to sales in 2008; however, operating profits for the year were nearly double compared to the previous year at $1.1 billion. The segment benefited from improved manufacturing operations, lower raw materials, energy, and freight costs, and higher sales volume in Brazil, but was hampered by lower sales volume in North America and Europe due to lower consumer demand. This segment also benefited from $884 million in alternative fuel mixture credits.
The company sells two primary products in this segment:
Uncoated Papers: this type of paper is used in copiers and printers and can be transformed into brochures, pamphlets, cards, and books. The company sells this kind of paper under brand names such as Hammermill, Springhill, Williamsburg, and Postmark.
Market Pulp: is used to make printing, writing, and specialty paper as well as towel, tissue, and filtration products.
Consumer Packaging (13% of net sales, 18% of operating profit)
International Paper also makes high quality coated paperboard which is used in packaging everyday products such as food, cosmetics, and pharmaceuticals. The paperboard is also sold in commercial printing for cards, books, and lottery tickets under the brand Carolina. The company sells paperboard under the brands Everest, Fortress, and Starcote. In 2009, net sales of the segment decreased 4% but operating profits increased significantly from $17 million in 2008 to $433 million. The segment benefited from higher sale prices and lower operation costs, but the real gain in operating profits came from $330 million in alternative fuel mixture credits. Sales volume were higher in Europe and Asia but lower in North America.
Distribution (28% of net sales, 2% of operating profit)
The company’s North American merchant distribution business xpedx provides distribution services and products to markets such as commercial printers, building services, and manufacturers. The business operates out of 122 warehouse locations and 130 retail stores in the U.S., Canada, and Mexico. The segment’s 2009 net sales and operating profit were down 18% and 51% respectively due to weak economic conditions.
Forest Products (<1% of net sales, <1% of operating profit)
As part of the company’s transformation plan, the company sold 5.6 million acres of forestland in 2006[5] . At the end of 2009, the company owned approximately 200,000 acres of forestland in the United States. The remaining forestland is managed as a portfolio which represents properties that are likely to be sold to investors and other buyers.
Specialty Businesses and Other (0% of net sales, 0% of operating profit)
This segment previously included the Arizona Chemical business, which was sold in the first quarter of 2007[6].
International Paper’s Transformation Plan
On July 19, 2005, International Paper announced that it would be establishing a three-part business transformation plan to improve returns, strengthen the balance sheet, and return cash to shareholders. The main strategy of the plan was to consolidate business and focus on two key platform businesses: uncoated papers and industrial and consumer packaging (which includes the distribution business xpedx). The company felt that it had a solid global foundation in the uncoated paper market, as it was the world leader in uncoated paper production at 6.6 million tons annually, and saw opportunities for growth in packaging. In 2004, these businesses accounted for more than 70% of the company’s net sales. Another part of the plan dealt with profit improvements, which included resizing to a smaller asset base, using a more profitable mix, and implementing a U.S. mill realignment to cut costs [7].
In accordance to the transformation plan, the company divested away from several of its businesses. In 2006, the company sold 5.6 million acres of forestland, virtually selling off its Forest Products segment (at the end of 2009, the company owned just 200,000 acres). In 2007, the company completed the sales of its Beverage Packing operations[8], its Kraft Papers business [9], its Arizona Chemical business, and most of its remaining Wood Products segment. The sales of these businesses were in line with the consolidation and cost cutting measures the company had planned to do. As a result of these divestitures, the company's Forest Products and Specialty Business segments essentially dissipated as combined they represented less than 1% of the company's sales and profits in 2009.
Additionally, the company switched rolls as it went from major seller to a major buyer. In March 2008, the company purchased the containerboard, packaging, and recycling operations of Weyerhaeuser Company (WY), one of its biggest competitors[10]. The purchase was directly in line with the company’s goal to expand its industrial and consumer packaging divisions. The purchase included 9 containerboard mills and 72 packaging factories. In April 2010, the company announced that it was going to buy SCA's packaging business in Asia for $200 million. The company hopes to strengthen its packaging business and making it more competitive in Asia by adding 13 corrugated box plants to its 12 already existing plants in the region.[11]
Alternative Fuel Mixture Credits
Part of the US Internal Revenue Code provides a tax credit for companies that use alternative fuel mixtures to produce energy to operate their businesses which is equal to $0.50 per gallon of alternative fuel contained in the mixture. In January 2009, International Paper was approved as an alternative fuel mixer. In 2009, the company received $2.1 billion in the tax rebate.[12]
Business Growth
FY 2009 (ended December 31, 2009)[13]
Net income rose to $663 million compared to a net loss of $1.3 billion the previous year. Earnings included $1.4 billion of alternative fuel mixture credits. The company's bottom line increased because of growth in the company's Industrial Packaging, Printing Papers and Consumer Packaging segments. These segments benefited from lower raw material, energy, and freight costs, which were offset by lower sales volume as a result of weak consumer demand in the struggling economy.
Net sales fell 6% to $23,366 billion from $24,829 billion in 2008.
Long-term debt was reduced by $3.1 billion and cash balances increased by $800 million.
The company closed some of its mill operations in North America, leading to millions of tons of downtime. The company hopes to benefit in the long-run from higher operating rates, and lower fixed and payroll costs.
Q1 2010 (ended March 31, 2010)[14]
International Paper incurred a net loss of $162 million for the quarter compared to a gain of $257 in the previous year's quarter. The company attributes the loss to a significant increase in fiber costs (fiber is used to make the company's products) and charges due to selling one its mills.
Net revenue rose 2.5% to $5.81 billion from $5.67 billion a year earlier. The company said that strong results in its European businesses helped offset higher costs in North America.
The company reported that the cost issue peaked in March and then moderated for the rest of the quarter. It expects better results in the next quarter.
Trends and Forces
Rising Commodities and Energy Prices are Forcing International Paper to Make Difficult Choices
Higher production costs due to high raw materials and energy costs have already forced the company to shut down several of its facilities, such as its beverage packing operations and Arizona Chemical plant. Additionally, in Q1 2010, higher fiber costs caused the operating profits in all of the company's segments to fall as revenue margins declined.[15] The ability to obtain raw materials such as wood fiber, caustic soda, and polyethylene at favorable prices is an essential part of the company’s success. Higher commodities prices translate into high production costs for the company, which forces the company to either raise the prices of its products by placing the burden on the consumer or to take the burden itself by absorbing the higher costs and decreasing profit margins.
The company also faces the issue of increasing price of energy adds to production costs. Production plants and its machines are powered by oil and natural gas. Higher energy costs translates into higher production costs and once again the company is forced to either pass the burden to consumers by raising prices or take the burden itself and suffer decreasing profit margins. After an initial spike in energy prices in 2008, prices decreased somewhat in 2009. Despite lower sales volume in some of its category, International Paper benefited from the lower energy costs and its bottom line improved[13]
Environmental Regulations and Liabilities
In 2009, the company spent $15 million on projects with aims to control pollution releases into the air and water.[16] International Paper is forced to adhere to many federal, state, provincial, foreign, and local environmental regulations. To make sure that these regulations aren’t violated, the company must implement policies and invest in more efficient technology to ensure they are emitting below pollution emission standards; this process can be very costly to the company. In addition, if the company fails to meet all environmental regulations, they face hefty fines. Such examples of environmental regulations are the EPA’s Cluster Rule [17] for water discharges and its Maximum Achievable Control Technology (MACT)[18] standards.
A Slow Economy Means Less Demand for International Paper’s Products
International Paper is dependent on consumers and businesses buying typical goods, especially durable goods. A slowing economy spells trouble for International Paper. As consumers cut back on spending [19], it leads to a decrease in demand of goods. As the demand for these goods drops, International Paper’s customers order less corrugated containers because fewer items are being shipped out. Fewer sales lead to less revenue and negative effects the company's bottom line. For example, because American consumers are spending less money and are less willing to get car repairs due to the slumping economy [20], fewer automotive parts are being ordered by repair shops. Fewer parts means a decrease in demand for IP's corrugated packaging. Other related demand is for Industrial Packaging products, which is closely correlated with non-durable industrial goods production, as well as with demand for processed foods.
Additionally, a weak economy means lower employment levels in many industries. The demand for printing paper is related to white collar employment levels, so as unemployment increases, the demand for printing paper decreases. In April 2010, the white collar unemployment rate was 10.2%.[21]
As a result of lower product demand, International Paper suffered from lower sales volume in most of its product categories in FY 2009.
Electronics Decreasing Global Paper Demand?
A good chunk of International Paper’s revenue comes from the sale of ordinary printing and writing paper. But as the world becomes friendlier to technological change, the global demand for paper has taken a slight hit. Paper consumption per person grew annually in the 1980's and 90's, but has plateaued and fallen in the 2000's; consumption per person in the world's richest countries fell by 6% from 2000 to 2005. [22] For International Paper, this simply means that there is less revenue to earn in the paper market. The United States is already seeing some affects of this technological switch-over. Major newspapers such as the Chicago Tribune and L.A. Times are cutting hundreds of staff positions because they simply can’t afford to pay their employees with the declining demand for paper newspapers [23]. The United Postal service has continually increased the price of sending first-class mail as a result of steady quarterly losses[24]. Although the demand for paper is still very high and the average person still consumes more than 500 pounds of paper annually, [22] people are starting to make the switch-over to electronics which is starting to bring those consumption numbers down; in a shrinking paper market, International Paper has less opportunity for growth.
One reason why some people have switched to electronics over print is because they believe that it is better for the environment--using less paper means having to cut down fewer trees. In order to prevent this trend from growing, International Paper launched a website http://www.internationalpaper.com/apps/d2e/down2earthonline/index.html which provides information on the differences between the paper and electronics industry.[25]
Competitors
Because the Paper & Paper Products Industry has few barriers to entry and many competitors, the company faces competition from both big companies with a diversified line of products and other smaller narrowly-focused companies.
The company’s paper making competitors are:
Domtar (UFS) - Domater is the largest (by production capacity) maker of uncoated freesheet paper in North America and the second largest in the world; making it IP's top competitor in the business. 85% of Domtar's revenue came from its paper segment, while the rest came from its other papergrade, fluff, and specialty pulp business.[26].
Wausau-Mosinee Paper (WPP) - Wausau Paper focuses on making specialty paper products but also prdocues printing and writing paper. 52% of the paper the company produced was colored paper, which adds a unique touch to the company's products.[27].
The company’s paper-based packaging competitors are:
Packaging Corporation of America (PKG) - PKG is the sixth largest producer of containerboard and corrugated products in the United States. It's only business segment is focused on the production of containerboard and corrugated materials, which makes it a direct competitor of International Paper in this business[28].
Sonoco Products Company (SON) - Sonoco almost all of its revenue from it's consumer packaging and tubes and cores/paper segments[29]. Although the company doesn't produce containerboard and corrugated packaging like IP does, its paperboard products are used for packaging. Also, unlike Smurfit-Stone, Sonoco has a packaging services segment; this segment represented 5% of the Sonoco's revenue in 2009.
Smurfit-Stone Container (SSCC) - Smurfit-Stone makes paper based packaging products with a focus on containerboard and corrugated containers[30].
Rock-Tenn Company (RKT) - Rock-Tenn provides many different types of packaging material such as paperboard, corugated packaging, folding cartons, and interior packaging [31].