1. Dairy Pak A “Value Chain” Perspective on Product Line Strategy

2. Dairy Pak The year is 1988, and the Vice President of the Dairy- Pak Division of Champion International has to make some tough choices. This is what he is facing: – The fastest growing segment of the carton market is where their business is declining – Their manufacturing system is old – Limited production capacity; no growth – Rapidly expanding international market offers opportunities, but could bring more problems than opportunities

3. Dairy Pak Champion International is one of the top domestic producers of Pure-Pak polyethylene coated paper cartons. As the name might imply, the original use for these cartons was for dairy products like milk and cream.

4. Dairy Pak Competition came early from the plastic carton manufacturers The market for poly-paper cartons shrank, but stabilized. Champion DairyPak survived and is #2 in the industry

5. Dairy Pak As customers demanded more convenience and variety, the market for prepared ready-to- drink fruit juice grew quickly. This segment of the carton market is growing rapidly as more beverage companies are entering the juice market.

6. Dairy Pak International Paper is the market leader and also has superior technology. – IP is also rapidly expanding into foreign markets, sometimes sacrificing their domestic market to competitors like Champion

7. Dairy Pak OK.. So let’s take a look at the company. Champion has not expanded capacity since the 1960s. They can produce 250,000 tons of poly coated paperboard annually. The machines that coat, wrap, and print the board for use have not been updated for decades.

8. Dairy Pak When the juice market exploded in the 1980s, Champion was not prepared to meet the needs of these customers. They chose to compete on price alone rather than quality and diversity.

9. Dairy Pak Looking at the market, we can learn the following facts: 1.Champion, as well as other manufacturers, have no growth in the dairy product carton market 2.Non Dairy & specialty juices are the leading growth area 3.The export market is growing rapidly

10. Dairy Pak Domestic Consumption of Pure-Pak Cartons (000) 1980 (tons)1987 (tons)% change Dairy506374-26% Non Dairy66120+82% Total572494-14% Champion’s Domestic Pure-Pak Cartons 1980 (tons)% share1987 (tons)% share 20039%15040% 3046%3025% 23040%18036%

11. Champion’s Paperboard Production

12. U.S. Folding Carton Stock Export for Liquid Packaging by Destination (000 tons) 198519861987 Far East214233248 Europe505659 Australia303536 Africa302835 Canada91733 S. America3029 C. America13.814 Caribbean357 Middle East2106 Other141114 Total395432481 Uncoated Rolls94103116 Coated Rolls272313336 Converted Cartons291629

13. U.S. Folding Carton Stock Export for Liquid Packaging by Destination (000 tons)

14. 1988 Domestic Share of Market for Ready to Serve Orange Juice

15. Orange Juice Manufacturer’s Use of Paperboard Cartons

16. Q1: Dairy Pak Value Chain Paper mill customers OJ Manufacturers Extruder Conversion Regional Dairies Supermarkets & Distributors

17. Value Chain Regional Dairy & OJ –vs- Branded Orange Juice (per carton)MilkRegional OJMinute MaidTropicana Consumer Pays$1.16$1.50$1.89$2.26 Store Pays1.041.201.421.79 Store Margin0.120.300.47 Store %10.3%20.0%24.9%20.8% Distributor Cost1.041.201.421.79 Processor Cost.75.80.64? Pasteurization.06 Distribution & Shrinkage.06.11 Carton Cost.08.06 Advertising--.36 Dairy/Juicer Margin.09.20.25 Dairy/Juicer %8.65%16.7%17.6%

18. Value Chain mill – extruder – processor (per ton)DairyBranded Juicer Price to Processor (14400*.08) 1152(14400*.06)864 freight 10.00 processor margin 231.00 cost to converter 663.00 converter margin 248.00-40.00 CM % 21.5%-4.6% sale price to converter 663.00 freight 35 conversion cost 94 cost to extruder 540 extruder margin 0% sale price to extruder 540 transport 33 papermaking 105 cost of pulp 319 paper mill margin 113 paper mill % 21%

19. Q2 – What can we learn from the value chain? DairyRegional OJBranded OJ Store margin (14400*.12)=$ 1728 (14400*.30)= $4320 (14400*.47)= $6768 Processor margin (14400*.09)= $1296 (14400*.20)= $2880 (14400*.25)= $3600 Champion margins Converter$248 $(40) Extruder5 (estimated)55 Mill113 Total Champion$366 $78

20. Q2 Percentage of value chain profits by each segment: DairyRegional OJBranded OJ Champion10.7%4.7%.7% Processor38% 34.5% Market53%57%64.8%

21. Q4: Analysis of Value Chain What do we do now with this data? – Champion has the opportunity to expand or maintain status quo – What areas can be exploited for more profit? – Should Champion invest in new equipment to produce higher quality product?

22. Q4 Buyer Power Analysis DairyBranded OJ Producers Number of buyers10003 Size of buyerSmallLARGE Avg. order size375 tons (375,000)30,000 tons Buyer switching costsLow. Dairy buys commodity board High. OJ needs differentiated board Cost of carton/total cost8.5% (8¢/95¢)5% (6¢/117¢) Buyer’s Margin8.6% (9¢/104¢)17.6% (25¢/142¢) Value by Segments Total Margins:10.7%.7%

23. Results What should Champion do based on this value chain analysis? – Invest in new equipment to produce cartons for the branded OJ companies? – Focus on leveraging their existing products for their existing customers? – Focus on the export market?

24. Our Opinion We feel that Champion should leverage their relationships with dairies, as this is where their greatest margins are. To invest in new equipment to service the OJ companies, they would need to invest over $65 million. Focusing on the dairy customer could lead to a stronger relationship and potentially the development of new carton designs for new milk products. These new premium products could produce higher margins and more profits.

25. Q&A