The old adage, “There is strength in volume,” is propelling smaller buyers of newsprint into “buying groups,” a commonly used procurement technique for everything from office supplies to corn syrup. Even the government uses the technique.

Michael Ducey

Small buyers band together and agree on a standard of purchase and send it out for bid to the big producers. The resulting supply should result in lower prices, but what is the true cost?

The premise that smaller buyers pay higher costs in our world of oligopolies is simple fallacy. Newsprint production and consumption is still diverse enough to support personal relationships between buyers and sellers for many reasons. Location and proximity to markets is a chief factor due to transportation costs. Diversity in stock consumption (newsprint, improved news, super-calendared, lightweight coated) and printing technique (roto, offset, flexo) are reasons why markets will always remain somewhat fragmented. Last but not least, the legacy of quality and cooperation stills rises over the horizon to complete a sale or two in the ruthless global markets.

Concentration of buying and selling in U.S. newsprint markets

Industry consolidation in restructuring among publishers preceded the consolidation of producers through the last two decades. Large buyers of newsprint like Gannett and Knight Ridder drove the market down to historical price lows and forced closure and conversions of many newsprint mills across North America. The largest five publishers now control nearly 75 percent of all newsprint purchases.

A decade later, Abitibi and Bowater emerge as the two chief suppliers of newsprint. They now control over two-thirds of domestic production, and with the next two or three producers, over 85 percent in all of North America. The battle lines have clearly been drawn.

Smaller buyers found themselves out in the cold. The big producers saw no reason to use distributors for them and led fellow smaller producers to price recovery — until the weak economy set in. So for all the industry consolidation, the market swung way up in 1999 and 2000, then took another huge nosedive in 2001. Pricing has been flat most of this year. Consolidation may have actually exacerbated price spirals and spikes.

Smaller buyers and entrepreneurs felt no reason to continue in limbo, and established buying groups to lead purchasing on contract for newsprint products, including SC and LWC. A group leader, usually an outside firm with experience, gathers as many locations as possible to form the request for qualifications and submits it to the producers. Producers comply with a filled-in spreadsheet on location-specific quotations, and waits for counter-offers. The buying group leader simply picks off the low bids at each location and submits them to the member for approval. A rejection triggers the counter-offer at or near the same price, and a response is issued. The process ends when all offers are accepted and exhausted, resulting in a new set of supply arrangements.

The buying group “cost”

As with the large buyers, the group buyers drive the price down and lower the profitability of newsprint manufacturing. Newsprint makers have to reduce cost to maintain profitability targets, and this usually hits investment and service hardest. The old adage in manufacturing is, “You can’t fire the machine.”

On the service side, the two areas that suffer are technical service and logistical service. Technical service is handled by people, usually highly qualified and well paid for their advice and counsel in solving problems from the shipping dock to the pressroom. On the logistical service side, paper companies reduce cost by reducing capacity to ship and store, and by leaning on transportation companies.

In the past, the smaller buyer could rely on the supplier for services because both parties knew he was paying more for a ubiquitous product. Today, smaller buyers can get lost in their group — the gain financially may get traded for reduced services. The big publishers have the resources and the muscle to wring out services (either externally or internally), while the smaller publishers find themselves at the mercy of the supplier in a pinch.

Future strategy in buying newsprint

The buying cycle for newsprint has come full circle. In the past, the savvy buyers would wait until the last possible interval to buy newsprint, hoping that through the early part of the cycle a producer would get left out and offer aggressive pricing to secure market share at the end of the cycle. Then the big buyers moved into that space, waiting for someone to go for market share. The most patient buyers fetched the lowest prices — up to a point.

Today, the big buyers are forced to buy when and where they can at the price offered on contract, but this is a small percentage of volume. The big buyers have centralized buying agents but tell localities to buy when they can, thus re-fragmenting the marketplace. The new buying groups may be stuck with higher prices since the producers want to deal with the big publishers first. Waiting until the end of the cycle now ensures a higher price and possibly no choice on quality.

Smaller buyers should think twice about joining a buying group. At this stage of industry history, smaller buyers will gain services and not lose much on price if they select the right relationship — long term supply that makes sense for both mill and pressroom. Buying at the beginning of the cycle may be beneficial for the mill to achieve a base of manufacturing before he gets to the big consumers. This can mean a price break. Buying newsprint without all the fuss is likely to endear you to the mill, making it easy for them to extend services. And it will never be a mystery to find out the price of newsprint — either check published sources or call that young sales rep — both are likely to be fairly accurate.

Michael Ducey is a writer and researcher in the pulp, paper and printing industries. He contributes to a variety of technical and business journals about paper, printing, packaging and converting, and publishes market research reports for a worldwide client base. He can be contacted by e-mail at paperinfo@excite.com.