Merchants at the crossroads - Print 21 magazine feature

What’s to be done about the paper merchanting business? While the writing has been on the wall for a number of years now, the next 12 months could prove to be crucial, writes Tony Duncan, as paper merchants struggle to find a sustainable business model.

There is no doubt the traditional model of paper merchanting was tired even 10 years ago, and in more recent times profits have virtually fallen off a cliff. Duncan (pictured) is using “profit” as a fairly basic definition of success in this instance, so it’s fair to say in many ways the industry has not had a particularly successful recent history.

Issues relating to improved printing processes, commoditisation of grades, digitisation of communications, quality convergence and the merging of major paper and print manufacturing groups all played their part in the collapse—and most of these factors were identified 10 years ago as likely to have a negative impact on the traditional merchant model.

Attempts have been made to drive profitability by developing a pan regional or global presence, but without global brands, customers, suppliers, IT platforms or logistics, the synergies required to deliver adequate profits were never going to occur. It really does seem to be at most a regional business, perhaps even smaller.

A bit depressing? Perhaps.

The really depressing bit is the length of time it has taken for change to occur within the key players—and for their customers that has not been a good thing.

A strong supplier base is critical for a successful print industry; it provides fundamental support for industry development, whether that is industry sponsorship or lobbying on industry policy, climate change or 30-day rules. A strong supplier base has the financial capacity to help customers weather downturns while having the confidence to impose financial disciplines.

And despite some marketing puffery and the best intentions of well-meaning individuals, no amount of spin can paper over the inability to make sustainable profits which has impacted major paper merchanting groups in recent times.

A critical year ahead

Duncan suspects the next 12 months are going to be critical for a number of paper merchants. Not that they are going to disappear—quite the contrary; the next 12 months will see a flurry of activity.

Some need to prove to investors that bulking up is a genuine strategy for long-term profits, while others he suspects will “trim down” and become less corporate in an attempt to improve returns. One area which will be of interest is the current trend to diversify.

There is no doubt that the most successful paper suppliers in recent years have had (sizable) paper sales activities attached to other operations, and he has no doubt that they will continue to enjoy success.

They tend to be less sentimental about the product and supply it as a service while enjoying the benefits of slightly reduced inventory lines. And although expansion into the wider print market remains an option for some, it is doubtful they would bother. However, it appears to be easier to diversify into paper than out of paper. Duncan wouldn’t have said that 20 years ago, but the new reality suggests that is the case.

Or perhaps it’s easier to diversify downstream than upstream. Printers become data/content managers, provide logistics capabilities, digital equipment manufacturers supply paper etc.

So paper merchants expand into print/packaging? It may sound a little fanciful and scary for some, but he thinks it will happen as the traditional printer base itself consolidates and shrinks.

There is a current trend to re-define merchanting as a logistics business, based on the logic that storing and delivering stuff is a core competency. This may work, based on the ‘same service/new market’ strategic model, but the competition is large, mature and efficient. And some of the competitors in this space have a fairly good understanding of what the print industry is all about, so I wouldn’t be annoying them too much.

On the other hand, diversifying downstream into packaging has opportunities to build on the strengths of product and some market knowledge. Both have risks and certainly what is right for one business is not necessarily right for another. To survive the next five years, some fairly gusty calls are going to have to be made.

Nevertheless, there is real expertise within these companies, if management has both capability and the courage.

Duncan was in one major market a couple of weeks ago, larger than Australia but not dissimilar in maturity. It was suggested to me that merchant business there has declined 27 per cent in the past three years. Even if that rate slows, there is no way the market status quo supplier situation will survive the next three years; decisions there and in Australia need to be made and implemented fast. It won’t be a fun time, and the outcome is not clear, but change is not optional.