Juggling Paper and Postal Costs

By Christopher Heun

The price of paper continues to climb, but some publishers are more worried about what the postman will deliver next year: A postage hike.
General-circulation publications should count on a 5.4 percent increase in postage starting January 1, the first time the U.S. Postal Service has raised its rates since 2002, and there's a chance they may go up again in 2007. The postal service, which earned $72 billion in revenue in 2004, needs to come up with an additional $3.1 billion next year because Congress changed the way it funds its pension obligations.

On top of the postage hike, paper prices are rising too. Marie Myers, the senior vice president of manufacturing at CMP Media ,reported that her company is getting hit November 1 with higher prices for much of the paper it uses, $1 per 100 weight. Prices already went up once in April after rising twice last year, at $3 per 100 pounds each time.

And that's not all. Myers says International Paper , Fraser Papers Inc . and Stora Enso will all start adding a fuel surcharge for the first time of 25 cents per 100 pounds of paper.

Jim Sheibley, commercial director for coated mechanical papers at Stora Enso North America, estimates that paper prices per ton have jumped 20 percent to 30 percent in the last three years. But they're still less than what they were ten years ago.

Still, despite the rising prices, Myers says her biggest concern is the postage hike. She can't dodge it by making the size of CMP books any smaller;they've already been slashed from 10.75 inches by 8.5 inches to 10.5 inches by 7.75 inches.

Lean Times for the Paper Industry

What's frustrating for some in the industry is that recent paper-price increases are the result not of a spike in demand but of higher costs for raw materials and manufacturing. Mills in Canada also have been hit by a weak U.S. dollar. And even as paper prices rise, they are not enough to rescue many paper companies, which have been piling up losses and layoffs.

Since last summer, at least six paper companies;Abitibi Consolidated Inc. , Cascades Fine Papers Group Thunder Bay Inc. , Weyerhaeuser Co ., Belgravia Paper Co., Sappi Fine Paper North America , and Tembec ;have all announced layoffs totaling about 2,000 employees. Most of those companies, often citing higher energy costs, also shut down mills.

In October alone, Weyerhaeuser Co. said that the Prince Albert pulp and paper mill in Saskatchewan, Canada, which has an annual capacity of 280,000 tons of uncoated paper and 130,000 tons of market pulp and employs 690 people, will close January 2. And Bowater Inc., which posted net losses of $290.2 million the last two years and reported a $3.6 million loss for the second quarter, said in a statement in early October that it would begin implementing a program to reduce annual operating costs by $80 million.

That's putting the pressure on publishers. "Everybody out there is saying ﾑHow can I reduce cost by trimming size or weight?'" Sheibley says. The answer may lay in a shift to lighter paper weights that still maintain comparable stock quality. Most of the popular weekly newsmagazines run on paper that has a 30 percent lighter substance weight than in the eighties and is 20 percent lighter than just a decade ago, he says.

Stora Enso introduced a special version of coated publication paper in the summer of 2004, called consu press advantage, that performs the same as paper that weighs 10 percent more. About 20 percent of Stora Enso customers, including CMP, have switched to the new paper, which costs about the same but saves on postage.

That's important for Myers, who wants to reduce weight without also cutting thickness. She says the new paper is like a "supercount +++" and a 34-pound sheet equals a 38-pound in thickness.

"They say it runs better than ones in the past," Myers says. "We're looking at those things to make our books not look paper thin."

But slimming a magazine will only pay off so much with the postal service, since rates for periodicals are determined by both weight and piece rate, which is usually the most expensive factor;and unrelated to weight;in determining the price of postage.

For example, a four-ounce piece of periodical mail with advertising on half its pages mailed to zone eight, the most expensive under the postal service's system, would cost 10.4 cents in pound-rate postage; reducing it by 10 percent, to 3.6 ounces, would make the price 9.35 cents, according to Jim Quirk, a U.S. Postal service spokesman.

Instead, publishers looking to save on postage would be better served not by sending lighter mail but by making delivery easier, with barcodes on address labels that can be read by sorting machines. Pieces with the same five-digit Zip Code that are grouped together in a sack and designated to a delivery post office save three cents per addressed piece. Mail with the same first three numbers in their zip code that are sent to a processing facility rather than a post office save 4.1 cents per addressed piece, Quirk said.

Postage Hikes Mean Paper Drops?

Where some publishers see danger, others see opportunity. Jay Goldberg, publishing director at Mansueto Ventures, which bought Inc. and Fast Company from G+J USA Publishing in July, expects paper costs to decline next year about a $1.25 per 100-pound per quarter. The paper stock for both magazines will be upgraded to a minimum 40-pound weight, possibly 45-pound. Currently, Inc. prints on a 34-pound and Fast Company on 38-pound. "Historically, when postage is up, paper prices are down," says Goldberg, who started his job in September. "Contrary to what most publishers are doing in 2006 to combat postage increases;they're downgrading paper or folio size, or the number of pages;Inc. and Fast Company are definitely going to be increasing basis weights to improve the look and feel of the publications," he says. "This is a key time for differentiation."

While he did acknowledge that new ownership makes the magazines a unique case, they are not immune from escalating paper prices. Goldberg says paper for the October issues cost $3 more per 100-pound, a 7 percent increase. Still, that did not prevent management from using a higher stock for the November Inc. 500 issue, which at 228 pages plus covers is the largest folio for that issue since 1999.

Myers, who expects a double-digit postage increase in 2007, says CMP is looking to increase its multimailing programs beginning in January, when many of its printer contracts come up for bid. She's already moved three or four titles to multimailers at printers like Quad/Graphics, which can combine several different publications on a multimailer, arrange them in Zip Code order, label and package them and then transport them on its own fleet of trucks to an SCS postal center.

The ability to combine publications is an big feature for those with low circulations. "They're the ones that will get hit the hardest," Myers says. "They have fewer bundles, they have more sacks than pallets." Printers have to have multimailing capability to stay competitive. I'm finding almost all printers are starting to get into it."

Another trend that has developed recently, as more and more effort is put into producing paper with a lower weight that's also less expensive, is that paper quality has slowly declined, says Michael H. Evans, market development manager for DuPont Titanium Technologies.

Evans has proposed that the International Digital Enterprise Alliance, a nonprofit print-production organization, create a paper-quality certification program. Another industry group, Specifications for Web Offset Publications (SWOP), has published voluntary paper guidelines, but few people know about them.

In fact, less than half of U.S. magazines meet the SWOP target, but they do meet the minimum standard. Evans hopes IDEAlliance will create a more visible endorsement. "The quality of printing would go up overnight if everybody decided to comply with those guidelines," he says. Evans conducted his own study of 19 different consumer magazines over the last 25 years, obtaining copies of each title in five-year increments. He found that opacity dropped 2.5 points over the time period. "Anybody would be able to see that," he says, "when you look at samples side by side."

He believes there's one constituency that's in the dark regarding paper quality, specifically show-through. "Advertisers have not been paying attention," Evans says. "If they were in the driver's seat, all the advertisers I've talked to would rather pay for better quality paper because it's a miniscule amount compared to what they pay for advertising."

Marshall Spencer, director of purchasing for the book group at Banta Corp., has watched some publishers opt for cheaper paper in three ways. Those that traditionally used coated freesheet are looking at European groundwood paper that is less expensive without sacrificing quality.

Most magazines, particularly newsweeklies, are printed on No. 5 coated groundwood. Supercalendered paper;SCA or SCA Plus;achieves comparable quality results, but costs as much as 15 percent less. However, Spencer says, they consume more ink and can be problematic on printing presses, so printers sometimes charge more to use it, making savings closer to 5 percent.

Finally, mills operated by Abitibi and Bowater make a groundwood paper with a high brightness quality that serves as a low-cost option to traditional uncoated freesheet. Spencer says this paper has a higher opacity, so it can be used at a lower weight. Capacity in Canadian and U.S. mills falls short of demand by about 10 percent to 15 percent, and paper from abroad, mainly Europe, makes up the difference, and actually accounts for a little more of total market share. "New technology usually comes out of Europe, the machines in Europe are newer," Spencer says. "As a consequence the European sheets are superior in many attributes to their North American counterparts."

A New Way To Cut Costs

One different cost-cutting initiative is papiNet, a global electronic standards body for the paper industry. About 230 companies;publishers and printers and suppliers;use papiNet to communicate key supply chain information to trading partners, believing a set of standards to make electronic communication easier and faster between their back-office systems will eventually save money, says Steve Lanzl, chairman of the papiNet North America Management Council and CIO at Bowater.

"It's too early to claim victory yet around cost reduction but it's coming," he says. "PapiNet standards don't say you have to do business in a certain way. We're not pretending to say there's some magical way to set up your supply chain."

Bowater uses papiNet with about eight companies, including Time Inc., to send messages about such activities as orders, invoices, delivery, order status, goods receipt and load available. "The goal for Bowater is to get as many of our customers on the standard as fast as the customer is able to implement it. If Time wants to use it fast, we'll move fast; if someone else wants to move slow, we'll move slow."

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