PULP PLAY: MERGER WAVE, RETAIL PRESSURES SPUR THICKET OF NEW PRODUCTS, AD SPENDING - PAPER TIGERS FLEX NEW MUSCLE IN CATEGORY

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Call it pulp friction. The once-sleepy paper sector is turning into one of the hardest-fought battlegrounds in package-goods as consolidation, reorganization and pressure from retailers raise marketing budgets along with the stakes.

In the past year, all four major marketers in bath tissue and paper towels have launched product upgrades and new ad campaigns. Even brands that have seen only scant advertising for decades, such as Kimberly-Clark Corp.'s Scott and Georgia-Pacific's Angel Soft and Sparkle have received an infusion of media support this year.

"I'm not sure there are many categories as actively competitive as paper," said Sven Risom, consultant at Cannondale Associates and former VP-general manager of tissue/towel at Fort James. "You have great competitors and it's a destination aisle for [retailers]. It's an incredibly dynamic category."

A STARK CONTRAST

The suddenly competitive landscape stands in stark contrast to five years ago, when almost no one but P&G advertised.

"There were two brand equities in the [tissue-towel] world -- one was Charmin and the other was Bounty," Mr. Risom said. "When you looked at [consumer] loyalties and reasons to believe, there was only Procter."

Then James River merged with Fort Howard to create Fort James and Scott Paper Co. was acquired by Kimberly-Clark. What followed was a series of product improvements all backed by increased media support. Since then, the level of rivalry has stepped up, Mr. Risom said.

In fact, the $3.7 billion bath tissue aisle has become perhaps the most fiercely contested in the past year.

WHIPPLE OUT OF MOTHBALLS

Category leader P&G brought Mr. Whipple out of retirement in June as part of a $50 million effort from D'Arcy Masius Benton & Bowles, New York, to squeeze an improved Charmin that's stronger, lighter and cheaper.

Fort James, marketer of No. 2 brand Quilted Northern, is throwing advertising weight behind a stronger version of its bath tissue to ship later this fall, backed by an extension of the current "Quilting Bee" campaign from DDB Worldwide, New York.

P&G's latest strike counters K-C's rollout last year of an improved version of its Kleenex-Cottonelle brand, backed by a total of $100 million in marketing support touting "superior cleaning" from Ogilvy & Mather, New York (since succeeded by J. Walter Thompson Co., New York, on the account).

Even Georgia-Pacific, which has built its market share in recent years primarily on aggressive pricing and trade promotion, launched its first major consumer advertising in two years this February with TV and print ads from Fallon McElligott, New York, touting the germ-fighting prowess of Angel Soft bath tissue and Sparkle paper towels.

Most recently, K-C's Scott 1000 value brand -- under pressure from private label and Fort James' Soft & Gentle -- launched its first TV advertising in more than a decade in July from J. Walter Thompson USA, New York.

PROMO ACTIVITY

Heightened competition for the retail shelf is one factor quickening the marketing pace. Georgia-Pacific, for instance, has expanded Angel Soft to new markets in the Midwest, prompting a promotion barrage from Fort James, according to a buyer for one retail chain.

So far, aggressive promotions on Quilted Northern appear to have worked, the buyer said, noting sales for that brand are up. Sales of Angel Soft are minimal and sales of Charmin appear flat in recent weeks despite an aggressive media effort, he said.

The flight to marketing may in part be a fight for survival, said Burt Flickinger, consultant with Reach Marketing.

Most of the largest retailers are weeding out some products using efficient item assortment analysis in the category. Because of the physical bulk of the products they take up more shelf space dollar-for-dollar than other categories, he said.

"A lot of the unmarketed or unadvertised brands are at significant risk of discontinuation under these analyses," noted Mr. Flickinger.

At particular risk may be K-C's Scott brand, which until recently has seen no significant marketing support. "K-C must [support Scott with marketing], or risk losing the ability to sustain any significant brand share in the future," Mr. Flickinger said.

K-C has been hampered by problems integrating Scott, which had more manufacturing and marketing problems than K-C anticipated in 1996, said Ken Harris, a partner with Cannondale Associates.

But in K-C's recent aggressive moves to build its largest category lead ever over P&G in diapers, Mr. Harris sees a clear indication that management has overcome problems with Scott.

Fort James, meanwhile, has consolidation pains of its own, with problems integrating computer systems from the 1997 merger of James River and Fort Howard. That led to inventory buildups and earnings shortfalls that sent the company's stock plunging 25% on Sept. 20.

Rising pulp costs played a role, but the company also blamed higher promotion expenditures for lower profits.

EVEN STRONGER EFFORTS

Even so, industry consolidation and restructuring could ultimately fuel even stronger marketing efforts, said industry watchers. Fort James, for example, earlier this year sold its packaging business in a move that should free cash for new marketing initiatives, Mr. Risom said.

P&G's Organization 2005 restructuring, which splits its paper business into three global units, including baby care, feminine products and paper towels, should also sharpen that company's focus on Charmin and Bounty, said Mr. Flickinger.

"While everybody at Procter was off fighting diaper wars, bathroom tissue and facial tissue suffered to a certain extent, and the opportunity to widen the share gap in Bounty really was missed," Mr. Flickinger said. "By having dedicated focus, I think the company is going to be able to market more effectively."

Ultimately, the outcome of the current round of paper wars could be more industry consolidation, predicted one industry executive.

"You get into a process where everyone's raising the bar," he said. "Ultimately the consumer wins, and the best company wins. And at the end of that kind of

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