Dairy Pak
A “Value Chain” Perspective on
Product Line Strategy
Dairy Pak
• The year is 1988, and the Vice President of the DairyPak 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
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.
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
Dairy Pak
• As customers demanded more convenience
and variety, the market for prepared ready-todrink fruit juice grew quickly.
• This segment of the carton market is growing
rapidly as more beverage companies are
entering the juice market.
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
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.
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.
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
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%
Champion’s Domestic Pure-Pak Cartons
1980 (tons)
% share
1987 (tons)
% share
200
39%
150
40%
30
46%
30
25%
230
40%
180
36%
Champion’s Paperboard Production
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
33
S. 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
U.S. Folding Carton Stock Export for Liquid Packaging by
Destination (000 tons)
1988 Domestic Share of Market for Ready to Serve Orange Juice
Orange Juice Manufacturer’s Use of Paperboard Cartons
Q1: Dairy Pak Value Chain
Paper mill
Extruder
Conversion
OJ
Manufacturers
Regional
Dairies
Supermarkets &
Distributors
customers
Value Chain
Regional Dairy & OJ –vs- 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%
Value Chain
mill – extruder – processor
(per ton)
Price to Processor
freight
processor margin
cost to converter
converter margin
CM %
sale price to converter
freight
conversion cost
cost to extruder
extruder margin
sale price to extruder
transport
papermaking
cost of pulp
paper mill margin
paper mill %
Dairy
Branded Juicer
(14400*.08) 1152
(14400*.06)864
10.00
10.00
231.00
231.00
663.00
663.00
248.00
-40.00
21.5%
-4.6%
663.00
663.00
35
35
94
94
540
540
0%
0%
540
540
3
3
105
105
319
319
113
113
21%
21%
Q2 – What can we learn from the value
chain?
Dairy
Regional OJ
Branded OJ
Store margin
(14400*.12)=$1728
(14400*.30)=$4320
(14400*.47)=$6768
Processor margin
(14400*.09)=$1296
(14400*.20)=$2880
(14400*.25)=$3600
Converter
$248
$248
$(40)
Extruder
5 (estimated)
5
5
Mill
113
113
113
Total Champion
$366
$366
$78
Champion margins
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%
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?
Q4
Buyer Power Analysis
Dairy
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 buys
commodity board
High. OJ needs
differentiated board
Cost of carton/total cost
8.5% (8¢/95¢)
5% (6¢/117¢)
Buyer’s Margin
8.6% (9¢/104¢)
17.6% (25¢/142¢)
10.7%
.7%
Value by Segments
Total Margins:
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?
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.
Q&A