Paper Products Inc.

Individual Case - Paper Products Inc.

Winter 2016

Marketing 200

 Diane Chin, marketing manager for Paper Products Inc. (PPI) must decide whether she should permit her largest customer to buy some of PPI’s commonly used file folders and market them under the customer’s own brand, rather than under PPI’s FILEX brand. This type of arrangement is called ‘private-labeling’; PPI’s brand name would not appear on the product at all. She is afraid that if she refuses, this customer—Office Centre Inc.—will go to another file folder producer and PPI will lose this business. Office Centre Inc., is a major distributor of office supplies and has already managed to put its own private-label brand on more than 45 high-sales-volume office supply products. It distributes these products—as well as the branded products of many manufacturers—through its nationwide network of 150 retail stores. Now Ken Sawyer, vice president of marketing for Office Centre, is seeking a line of file folders similar in quality to PPI’s FILEX brand, which now has over 60 percent of the market. This is not the first time that Office Centre has asked PPI to produce a private-label file folder line for Office Centre. On both previous occasions, Diane Chin turned down the requests and Office Centre continued to buy. In fact, Office Centre not only continued to buy the file folders but also the rest of PPI’s lines. And total sales continued to grow as Office Centre built new stores. In the past PPI consistently refused such private-label requests as a matter of corporate policy. This policy was set some years ago because of a desire (1) to avoid excessive dependence on any one customer and (2) to develop the PPI brands so that success wouldn’t depend on low pricing. The policy developed from a concern that if PPI started making products under other customers’ private-label brands, those customers could shop around for a low price and the business would be very fickle. PPI has been in business 28 years and now has a sales volume of $40 million. Its primary products are file folders, file markers and labels, and a variety of indexing systems. PPI offers such a wide range of size, colour, and type that no competition can match it in its part of the market. About 40 percent of PPI’s file folder business is in specialized lines such as files for oversized blueprint and engineer drawings; see-through files for medical markets; and greaseproof and waterproof files for marine, oil field, and other hazardous environmental markets. PPI’s competitors are mostly smaller paper companies. But excess capacity in the industry is substantial, and these competitors are always hungry for orders and willing to cut price. PPI’s distribution system consists of 10 regional office supply companies (40 percent of total sales), Office Centre Inc. (30 percent), and more than 40 small local office supply companies (30 percent). The regional suppliers sell directly to large corporations and to some retailers; the local companies are wholesalers, and also operate a few retail locations. In contrast, Office Centre’s main volume comes from sales to local businesses and walk-in customers at its 150 retail stores. Diane Chin has a real concern about the future of the local companies’ business, as they are forced to compete with Office Centre’s 150 retail stores, the large regionals, and the superstore chains, which are spreading rapidly. These chains—for example, Staples Business Depot, Office World, and Office Max—stress convenience, wide selection, and much lower prices than the typical office supply retailers. They buy directly from manufacturers, such as PPI, bypassing wholesalers. It is likely that the growing pressure from these chains is causing Office Centre to renew its proposal to buy a file line with its own name. For example, Staples Business Depot offers its own dealer brand of files and many other types of products. Office Centre’s profits have been the highest in the industry. Further, its private-label brands are almost as well known as those of some key manufacturers—and its expansion plans are aggressive. And now, these plans are being pressured by the fast-growing superstores, which are already knocking out many local companies. Diane is sure that PPI’s brands are well established in the market, despite the fact that they have spent far more on newproduct development rather than on promotion of existing brands. But Diane is concerned that if Office Centre brands its own file folders it will sell them at a discount, and may even bring the whole market price level down. Diane is not sure whether Office Centre will continue to sell PPI’s FILEX brand of folders along with Office Centre’s own file folders if Office Centre is able to find a source of supply. Office Centre’s history has been to sell its own brand and a major brand side by side, especially if the major brand offers high quality and has strong brand recognition. Diane is having a really hard time deciding what to do about the existing branding policy. PPI has excess capacity and could easily handle the Office Centre business. And she fears that if she turns down this business, Office Centre will just go elsewhere and its private-label brand will cut into PPI’s existing sales at Office Centre stores. This Office Centre business will be easy to get, but it will require a major change in policy, which Diane will have to sell to Paul Jennings, PPI’s president. This may not be easy. Paul is primarily interested in developing new and better products so the company can avoid the “commodity end of the business.”