Fort James deal creates new paper powerhouse

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Georgia-Pacific Corp., a company better known for building supplies than consumer products, suddenly is vying for leadership of two major package-goods categories following its proposed $7.8 billion acquisition of Fort James Corp.

The deal catapults Georgia-Pacific from the No. 4 slot to leadership in the $4.1 billion toilet tissue category; it also rises from fourth place to a strong No. 2 position in the $2.6 billion paper towel category.

Although Georgia-Pacific is a bigger company than Fort James by virtue of its building materials and cardboard businesses, it ranks behind its acquisition target in consumer categories. That has some analysts questioning whether it's up to the challenge of category leadership or turning around Fort James brands that have struggled lately.

UNDERESTIMATED

"They're going to bang heads with Kimberly-Clark and Procter & Gamble in a consumer products business," said Mark Wilde, analyst with Deutsche Banc Alex. Brown. "Would you bet on the world's largest plywood company in that situation?"

Actually, anyone taking that bet in recent years would have won. Georgia-Pacific's market share in paper towels, where it owns the Sparkle and Coronet brands, rose from 9.6% in 1994 to 12.1% in the 52 weeks ended June 18, according to Information Resources Inc. Its share in bath tissue, where is has the Angel Soft, MD and Coronet brands, also grew, from 12.1% to 14.6% in the same period.

"The fact that we've taken Angel Soft from a brand nobody ever heard of in 1988 and made it the No. 2 bath tissue brand in the United States [on a volume basis] shows we know a lot more about brands and marketing than we're given credit for," said Alton Correll, Chairman-CEO of Georgia-Pacific, adding the company would keep on Fort James' marketing talent.

On the plus side, Georgia-Pacific's access to scrap from its plywood operations gives it cost advantages over rivals, analysts say. Whether the newly minted category leader uses that advantage to simply fatten profits or aggressively build share through increased ads, promotion or lower prices could have a major impact on the paper categories.

Privately, executives for rival companies say Georgia-Pacific has long poured savings from cheap pulp into heavy price promotion, accounting for its share gains.

GAINING GROUND

Georgia-Pacific's growth seems to have come regardless of its advertising, as its brands gained ground through most of 1997 and 1998 without media support. Georgia-Pacific dropped J.W. Messner, Grand Rapids, Mich., in 1997 in favor of Wells Rich Greene, New York, just before Wells folded without producing work for the account. Last year, however, Georgia-Pacific launched a $10 million TV and print ad campaign via Fallon, New York.

Overall, Georgia-Pacific spent $25 million last year on media, according to Competitive Media Reporting, including ads for building supplies from McCann-Erickson Worldwide, Atlanta. By contrast, Fort James has spent fairly consistently in recent years behind its Brawny, Quilted Northern, and Dixie cup and plate businesses, spending a total of $30 million last year via DDB Worldwide, New York, according to CMR.

A spokesman said discussion of agency assignments is premature before the deal closes, which is expected in the fourth quarter. Anti-trust regulators may require some brands to be sold.

COST ADVANTAGES

The most logical course for Georgia-Pacific is to use its cost advantages to reap stronger cash flow on Fort James brands rather than increase marketing spending, said David Slotnik, analyst with Credit Suisse First Boston. "I don't think they would look to attack or gain much more market share," he said.

Mr. Wilde believes problems with Fort James, which has experienced slow sales growth go beyond manufacturing issues to include marketing. "I think Fort James is a busted company that's in large measure a consumer products company," he said. "And I just can't get myself convinced that Georgia-Pacific is really the best candidate to turn that company around."

Copyright July 2000, Crain Communications Inc.

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