DEPARTMENTS MARKET ISSUES

Sofidel: going for growth in the USA

Cellynne acquisition will take group over one million tonnes of capacity By Hugh O’Brian, Tissue World chairman and contributing editor

Luigi Lazzareschi, Sofidel’s chief executive

Sofidel, the privately-owned Italian tissue company that has expanded very rapidly throughout Europe since the mid- 1990s, surprised the industry somewhat in July when it revealed plans to enter the big American tissue market. Over the past few years the company had been quietly looking at various opportunities that could enable it to get into the US market. Now it has made a move with the announcement that it has agreed to buy Cellynne Corporation, a medium-sized integrated tissue company headquartered in Florida.

Sofidel, based in Lucca, Italy, has shown explosive growth over the past decade. While the company’s roots date back to the 1960s, the largescale expansion outside Italy is much more recent. Starting in 1997 it has successively opened operations in France, Poland, the UK, Germany, Spain and many other markets across Europe.

Today, after expanding initially through organic growth but more recently via acquisitions, it has operations in 12 European countries. It is now the second largest tissue company on the European market, after SCA, with a very modern asset base in both papermaking and converting. Globally, it ranks as the number six producer and with this acquisition Sofidel will have over one million tonnes of tissue capacity, which is more than three times its output of a decade ago.

Cellynne is also a fast-growing privately-owned company. Although it is nowhere near the same scale as Sofidel, it has developed very well over the past 10 years from a small converter to an integrated producer with two modern paper machines. The two paper machines, which were Sofidel: going for growth in the USA installed in 2006 and 2008, give it a paper capacity of nearly 70,000 tonnes per year, while converting capacity is slightly under 100,000 tonnes.

Cellynne has traditionally mainly served the away-from-home sector, but it has also recently been building its consumer tissue business as well.

Three good reasons

With its purchase of Cellynne, Sofidel is making a calculated bet that it can be successful in the USA. Sofidel’s chief executive Luigi Lazzareschi explains the attractiveness of the US market:

“For sure Cellynne will be a foothold for us on the American market, and to be a true multinational company you have to be in the US. Some people ask me why we’re not going to other areas such as China and Asia, where the market is growing much faster. In our opinion there are three good reasons for entering the US market now.

“The first is culture, which is very similar between Europe and the US. That makes us comfortable. Second, we believe that in general the quality of tissue making assets in the US is very poor compared to Europe and Asia. So we see there is work to be done. And third, there is an opportunity to grow quite a lot in private label.”

The sheer size of the US tissue market must also be appealing. The US is the world’s largest market and it also has the world’s highest per capita consumption at about 22 kg per year. But it is an extremely mature market with high penetration rates that are most likely not going to increase markedly. Overall market growth will come from the moderate population growth, not from wider use of tissue products per capita.

Private label to take market share

So if Sofidel wants fast growth in such a mature market, there is one pretty obvious way to do it: take market share. And it’s clear that is what Lazzareschi plans to do: “We are going to push an expansion plan to take market share with private label. We think it is easier for a newcomer to start with private label in the US now, compared to earlier when the brands were so dominant.”

The US is today still clearly a branded market, with brands taking close to 80% volume share of consumer tissue, depending on the category and region of course. As a comparison, in Europe brands on average have less than 40% of the tissue volume. However, statistics show that PL tissue is slowly, but surely, increasing in the US each year. And it may be accelerating as big American retailers are increasingly demanding ultra and premium quality for their private label tissue products to offer consumers the same quality level of the leading brands. Thus quality is moving up across the US and to meet these demands companies like First Quality and Clearwater have responded with big investments in TAD capacity destined for the PL sector.

Will Sofidel go the TAD route as well? “I don’t believe we are going to invest in TAD at the moment,” says Lazzareschi. “We see there is still a lot of room for growth by increasing US quality levels based on conventional tissue technology.”

Another question is whether Sofidel will also eventually attempt to enter the US branded tissue sector. Private label has been its main growth engine in Europe, although it has also been successful with its Regina brand in the major European markets. Lazzareschi says brands are not in his US plans at the moment: “Private label, in theory at least, is easier to start with. Also it’s very difficult to launch a brand based on a small to medium sized company like Cellynne. Perhaps we will venture into brands later on when the quantities are more significant, but we don’t know now.”

Why Cellynne?

“We have to start somewhere,” explains Lazzareschi, “and quite honestly, Cellynne is one of the few small to medium sized companies in the US that has assets that are up to Sofidel standards. This will be our first step and what our future steps are is very difficult to say. First we have to get integrated into the market and get acquainted.

“For the future, I imagine Sofidel’s growth will be much more in the US than in Europe. How we will grow is uncertain but I expect it will be more through greenfield investments rather than acquisitions.”

With a strong European track record behind it, and a clear idea of what is wants to achieve going forward in the US, it will be extremely interesting to see how Sofidel navigates, and impacts, the US market in the coming years.

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