MSOD 617: Industry and Firm Analysis

Ruthie Weller, Michael Jonckheere, Sarah Rowe

Pepperdine University
MSOD 617: Industry and Firm Analysis

Industry Analysis: Forest, Paper & Packaging Industry

Our group conducted an analysis on the forest, paper and packaging industry and one of

its major firms: Weyerhaeuser. Using the most relevant of Porters five forces model as the basis

for our analysis, we determined the industry is not attractive for investors and funds would be

better invested in a money market.

Supplier Power: Supplier power in the forest, paper and packaging industry is strong.

The industry, particularly at the top of the supply chain, is comprised of large, vertically

integrated companies. The timberland owners have substantial power over their customers

because there are a small number of large-sized companies with access to prime timber real

estate. These timberland companies, however, are subject to powerful supplier forces

themselves. Their own timber supply is tightly controlled by government regulations for harvest

quantities and environmental standards. Margins are also impacted by governments

manipulation of interest rates and tariffs. Land, mills and equipment are typically leveraged by

debt. At the same time, changing interest rates affects the housing industry and therefore creates

or removes a critical source of demand for timberland products.

A step down the supply chain is pulp, paper and a variety of other types of mills. The cost of

inputs such as woodchips, chemicals, recycled paper and pulp make up about 60% of this

segments revenue (IBISWorld, 2014). Suppliers of these inputs are more concentrated than the

buyer segment and for many of the wood product supplies (wood chips, lumber, etc.) significant

transportation costs make it costly to switch from the geographically closest supplier. Another

essential input comes from utility companies because the industry uses substantial quantities of

water, fuel and electricity for daily operations (IBISWorld, 2014). These suppliers are typically

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MSOD 617: Industry and Firm Analysis

large energy companies or government entities that are highly concentrated and therefore have

significant control over pricing, giving firms little to no bargaining power.

Buyer Power: Buyer power is moderate in the forest, paper and packaging industry.

Buyer power is limited because of increased fragmentation down the supply chain from a small

number of large timber companies to a large number of independent mills to a heavily dispersed

wholesale and retail market. While the product is a commodity, high switching costs exist for

buyers due to transportation expense. Additionally, customers are unlikely to backward integrate

due to heavy investment costs in buying land or establishing a mill and wood products are of

high strategic importance to buyers. These factors are mitigated due to high fixed costs in the

supply business, price sensitive customers and the production costs of the product being well

known in the industry.

Threat of Substitutes: The threat of substitutes in this industry is medium and growing.

Although the threat of substitution for timber is low, the threat of substitution for paper, which

represents nearly a quarter of the industry, is significant and on the rise (IBISWorld, 2014). This

is due to technological advancements such as smartphones and e-readers and the shift to

electronic options like online publications, e-billing, and internet applications (Benway, 2014;

IBISWorld, 2014; PricewaterhouseCoopers LLP, 2013; Dilworth, 2014). Many newspaper and

book publishing companies have moved exclusively to digital print and a variety of other

technologies now threaten calendars, magazines and other traditionally printed materials. These

advancements have resulted in a significant decline in the demand for printing paper in recent

years. According to trade publication, Pulp & Paper Week, uncoated free sheet shipments have

declined on average by 3% annually, since 1999 with shipments in 2013 less than 50% of 2005

levels (Benway, 2014; Dilworth, 2014). This drop, which prompted a number of industries to

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MSOD 617: Industry and Firm Analysis

close in recent years, is attributed in part to increased use of new forms of communication

(Benway, 2014; Dilworth, 2014). As developing countries become more accustomed to digital

media, this threat is predicted to rise (IBISWorld, 2014).

Rivalry: The threat of rivalry in the industry is high. There is little differentiation between

industry firms and their products, resulting in considerable price competition. This is

compounded by the ease with which countries can import and export timber and pulp, which

increases both foreign and domestic price competition (IBISWorld, 2014). Low levels of market

concentration in pulp and paper have increased the competitive nature of the industry as well,

with smaller local firms occupying 94.8% of the market share worldwide (IBISWorld, 2014).

With high capital costs and specialization involved in constructing mills, barriers to exit remain

high, driving increased rivalry (Dilworth, 2014). Strong competition from industries in emerging

economies has also driven competition and industry fragmentation such as in South America

where agricultural and labor rate advantages have enabled markets to expand their pulp capacity

and growing domestic demand visa-vis competitors (Deloitte, 2013). Finally, merger and

acquisitions have been very common in the industry over the past five years, driven primarily by

the desire to acquire the necessary know-how to support innovation and control the supply side

of the industry (IBISWorld, 2014; Dilworth, 2014; PricewaterhouseCoopers LLP, 2013).

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MSOD 617: Industry and Firm Analysis

Firm Analysis: Weyerhaeuser

Weyerhaeusers position in the industry is cost leadership. This strategy can be seen in

each of its business segments as the firm focuses on cost reduction while maintaining a

competitive pricing structure and providing high quality, value-added products.

Today Weyerhaeuser owns or manages approximately 20.3 million acres of timberland

across 11 countries. Weyerhaeuser focuses on four primary business segments: timberlands,

wood products, cellulose fibers and real estate (Weyerhaeuser, 2013). In the timberlands

business, Weyerhaeuser grows and harvests trees aiming to extract maximum value from each

acre they own or oversee (Weyerhaeuser, 2013, p. 2). In the wood products division the

manufacturing and sales of wood products focuses on delivering high-quality lumber, structural

panels, engineered wood products and complementary products for residential applications

(Weyerhaeuser, 2013, p. 2). When selling in the cellulose fibers market the company focuses on

value-added pulp products. The real estate business endeavors to build and sell homes as unique

value propositions in target markets (Weyerhaeuser, 2013, p. 2).

Weyerhaeuser currently holds a competitive position as one of the largest firms in the

forest, paper and packaging industry. Ranked third according to revenue among North American

paper and forest products companies with December 2012 revenues reported as $7,059 million,

Weyerhaeuser is a strong competitor in the North American market (Benway, 2014). In the

international market, the firm is making slow, but steady upward progress in the ranking of the

Top 100 Global Forest, Paper & Packing Industry companies. With sales of $4,624 million in

2009 (19th globally), and sales of 5,629 million in 2010 (16th globally) the firm is demonstrating

steady and promising growth since the economic downturn of 2008 which profoundly impacted

the whole of the global industry (PricewaterhouseCoopers LLP, 2011).

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MSOD 617: Industry and Firm Analysis

In order to continue its growth position within the industry, Weyerhaeuser has

implemented numerous cost reduction and value-add initiatives within each of its business

segments. Since 2011, the firm has effectively harvested its resource timberlands and managed

an inventory level corresponding to market demand. This has made a year round flow of logs to

internal and third party customers possible. Weyerhaeusers efficient management of inventory

and ability to deliver to mills nearby its timberlands has enabled it to see a steady increase in

timberland sales from $1,251 million in 2009 to $2,142 million in 2013 (Weyerhaeuser, 2013).

This increase demonstrates the firms gains in obtaining an increased market share through

inventory management and increasingly cost efficient distribution.

Weyerhaeuser also acquired Longview Timber in July 2013 adding approximately

645,000 acres of timberlands in Oregon and Washington. This purchase is in close proximity to

other Weyerhaeuser timberlands providing productive lands with increased harvest options. In

time, this acquisition will provide expanded capacity reaffirming the companys strategy of cost

leadership (Weyerhaeuser, 2013).

In the wood products division of Weyerhaeuser, the focus is on reducing controllable

manufacturing costs to achieve an industry-leading cost structure while maintaining a value-

added product mix (Simons, 2014). This demonstrates the firms intention to be a cost leader in

the wood products market. The company is striving for operational excellence that will reduce

manufacturing costs by $30-40 million in 2014 (Simons, 2014). Additionally, by the end of the

second quarter of 2014, Weyerhaeuser had reduced its distribution costs by reducing warehouse,

delivery and sales costs by 4% (Simons, 2014).

Weyerhaeuser is one of the worlds largest producers of fluff pulp, the absorbent material

used in products such as diapers. The firms stated competitive strategies in this business

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MSOD 617: Industry and Firm Analysis

segment include: improving cost-competitiveness through operational excellence; focusing

capital investments on product quality, cost reduction and green energy opportunities; and

driving growth of higher margin products (Weyerhaeuser, 2013, p.13). Weyerhaeuser reduced

capital spending in this cellulose fibers business segment from 160 million in 2012 to 92 million

in 2013 (Weyerhaeuser, 2013, p.13). In an industry with capital-intensive manufacturing and

production processes this signals successful cost leadership.

In 2013, Weyerhaeuser divested Weyerhaeuser Real Estate Company (WRECO), the

homebuilding and real estate development business. This Reverse Morris Trust transaction

allowed the company to reorganize and be acquired by Tri Pointe Homes, Inc. (Weyerhaeuser,

2013). The sale of this business segment demonstrates Weyerhaeusers commitment to being a

cost leader; enabling it to transition its focus to growing, harvesting and selling trees, and

converting them at the lowest possible cost into products their customers want and are willing to

pay for (Weyerhaeuser, 2013). Reports from J.P. Morgan (2014) and BMO Capital Markets

(2014) note that Weyerhaeuser has made significant strategic changes to increase their

competitive advantage through cost leadership in recent years. The sale of WRECO and the

acquisition of Longview Timber have demonstrated the companys focused intent to narrow into

the timber, wood products and cellulose fibers markets. Weyerhaeusers commitment to increase

profits for its shareholders by reducing costs and increasing operational efficiency across

business segments is paying off as earnings have increased in 2013 and the first two quarters of

2014 (J.P. Morgan, 2014). Projections indicate that the future is favorable for this focused firm

as gains in performance and gradual cyclical improvements are causing the strength of the

company to increase (J.P. Morgan, 2014).

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MSOD 617: Industry and Firm Analysis

References:

Benway, Stewart J. (2014, February). S&P Capital IQ: McGraw Hill Financial. Industry

Surveys: Paper & Forest Products. Retrieved from

http://www.netadvantage.standardandpoors.com.lib.pepperdine.edu/NASApp/NetAdvant

age/showIndustrySurvey.do?task=showIndustrySurvey&type=pdf&code=pfp

BMO Capital Markets. (2014). Timber & Wood Products: Weyerhaeuser. Retrieved on

September 3, 2014 from BMO Capital Markets Corp.

Deloitte. (2013). 2013 Global forest, paper, and packaging trend watch; A changing landscape:

South Americas influence on global markets. Retrieved

from http://www2.deloitte.com/global/en/pages/manufacturing/articles/2013-global-

forest-paper-and-packaging-trend-watch.html

Dilworth, J. (2014). Forestry, Paper & Packaging. Retrieved from

http://tippie.uiowa.edu/henry/reports14/forest_products.pdf

IBISWorld. (2014, August). IBISWorld Industry Report. Global Paper & Pulp Mills. Retrieved

from IBISWorld database.

J.P.Morgan. (2014). Weyerhaeuser. Retrieved September 5, 2014 from North America

Equity Research.

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MSOD 617: Industry and Firm Analysis

PricewaterhouseCoopers LLP. (2011). Global Forest, Paper & Packaging Industry Survey: 2011

edition survey of 2010 results. Retrieved from http://www.pwc.com/gx/en/forest-

paper-packaging/assets/global-forest-survey-2011.pdf

PricewaterhouseCoopers LLP. (2013). Global Forest, Paper & Packaging Industry Survey: 2013

edition survey of 2012 results. Retrieved from http://www.pwc.com/gx/en/forest-paper-

packaging/thought-leadership-forest-paper-packaging/global-annual-forest-paper-and-

packaging-industry-survey-2013-edition.jhtml

Simons, Doyle (2014). WY presented at UBS global paper & forest products conference

[PowerPoint slides]. Retrieved from

http://investor.weyerhaeuser.com/index.php?s=119&item=403

Weyerhaeuser. (2013). Growing a truly great company: Weyerhaeuser 2013 Annual Report and

Form 10-K. Retrieved from http://investor.weyerhaeuser.com/annual-reports