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Dairy Pak

A Value Chain Perspective on

Product Line Strategy

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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 wheretheir business is declining

Their manufacturing system is old

Limited production capacity; no growth

Rapidly expanding international market offersopportunities, but could bring more problems than

opportunities

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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

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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.

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Dairy Pak

OK.. So lets take a look at the company.

Champion has not expanded capacity since the1960s. 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.

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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.

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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

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Dairy Pak

Domestic Consumption of Pure-Pak Cartons (000)

1980 (tons) 1987 (tons) % change

Dairy 506 374 -26%

Non Dairy 66 120 +82%

Total 572 494 -14%

Champions Domestic Pure-Pak Cartons

1980 (tons) % share 1987 (tons) % share

200 39% 150 40%30 46% 30 25%

230 40% 180 36%

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Champions Paperboard Production

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U.S. Folding Carton Stock Export for Liquid Packaging by

Destination (000 tons)

1985 1986 1987

Far East 214 233 248

Europe 50 56 59

Australia 30 35 36

Africa 30 28 35

Canada 9 17 33S. America 30 29 29

C. America 13. 8 14

Caribbean 3 5 7

Middle East 2 10 6

Other 14 11 14

Total 395 432 481

Uncoated Rolls 94 103 116

Coated Rolls 272 313 336

Converted Cartons 29 16 29

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U.S. Folding Carton Stock Export for Liquid Packaging by

Destination (000 tons)

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1988 Domestic Share of Market for Ready to Serve Orange Juice

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Orange Juice Manufacturers Use of Paperboard Cartons

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Q1: Dairy Pak Value Chain

Paper mill

customers

OJ

Manufacturers

Extruder

Conversion

Regional

Dairies

Supermarkets &

Distributors

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Value Chain

Regional Dairy & OJvs- Branded Orange Juice

(per carton) Milk Regional OJ Minute Maid Tropicana

Consumer Pays $1.16 $1.50 $1.89 $2.26

Store Pays 1.04 1.20 1.42 1.79

Store Margin 0.12 0.30 0.47 0.47

Store % 10.3% 20.0% 24.9% 20.8%

Distributor Cost 1.04 1.20 1.42 1.79

Processor Cost .75 .80 .64 ?

Pasteurization .06 .06

Distribution & Shrinkage .06 .06 .11

Carton Cost .08 .08 .06

Advertising - - .36

Dairy/Juicer Margin .09 .20 .25

Dairy/Juicer % 8.65% 16.7% 17.6%

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Value Chain

millextruderprocessor

(per ton) Dairy Branded Juicer

Price to Processor (14400*.08) 1152 (14400*.06)864

freight 10.00 10.00

processor margin 231.00 231.00

cost to converter 663.00 663.00

converter margin 248.00 -40.00

CM % 21.5% -4.6%

sale price to converter 663.00 663.00

freight 35 35

conversion cost 94 94

cost to extruder 540 540

extruder margin0% 0%

sale price to extruder 540 540

transport 3 3

papermaking 105 105

cost of pulp 319 319

paper mill margin 113 113

paper mill % 21% 21%

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Q2

Percentage of value chain profits by each segment:

Dairy Regional OJ Branded OJ

Champion 10.7% 4.7% .7%

Processor 38% 38% 34.5%

Market 53% 57% 64.8%

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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?

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Q4

Buyer Power AnalysisDairy Branded OJ Producers

Number of buyers 1000 3

Size of buyer Small LARGE

Avg. order size 375 tons (375,000) 30,000 tons

Buyer switching costs Low. Dairy buyscommodity board

High. OJ needsdifferentiated board

Cost of carton/total cost 8.5% (8/95) 5% (6/117)

Buyers Margin 8.6% (9/104) 17.6% (25/142)

Value by Segments

Total Margins: 10.7% .7%

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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?

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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 investover $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 newpremium products could produce higher margins and

more profits.

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Q&A