General Manager Alp Öğücü explains the key choices now facing the industry as its dynamic expansion is poised to move into its next phase. Report by Senior Editor Helen Morris.
On 17 May 2024, against a backdrop of overcapacity, fierce competition, and quick changing consumer trends, Turkish tissue giant Lila Kağıt announced its next strategic leap forward: a TL3bn tissue facility located in Erzurum, north eastern Türkiye.
Speaking now for TWM’s September/October Türkiye Country Report, Alp Öğücü, General Manager, explains the logic behind the investment: “We are a big country, and the investment in Erzurum – to a different geographical location from our current facilities, which are almost 2,000 kilometres away – is very strategical. We want to reach our current customers’ markets from that region, and we expect that being located in Erzurum will help us to grow in a healthy and strong way.”
Within the Turkish tissue market, the location of competing tissue mills is mostly in the western or middle regions, with none in the east. The new location and TL3bn site will service both the home regional market and neighbouring export markets including Georgia, Azerbaijan, and Iraq.
The plant will be the first tissue paper facility in the Eastern Anatolia and Eastern Black Sea region, with 100,000m2 of construction being carried out on 160,000m2 of land. Converting facilities are expected to be operational in 2025, and the jumbo roll paper production line aimed to be started-up in 2027. A machinery supplier is yet to be announced. Once up and running it will produce toilet paper, paper towel, napkins, and handkerchiefs, manufacturing Lila Kağıt’s Sofia, Maylo, UltraBerrak, Nua brands as well as private label products. With an annual capacity of 35,000 tons, it will boost Lila Kağıt’s total production capacity to 306,000 tons.
Originally founded as the Lila Tissue Factory by entrepreneur Abdullah Öğücü in 2006, Öğücü – the son of current Chairman Orhan Öğücü – took on the role of General Manager in 2014. Within that time, he has overseen the growth of the business, and the company’s annual paper production gross capacity of branded and private label finished products is currently 271,000tpy. Lila Kağıt is also one of the largest roll paper producers in Europe and the Middle East among fully integrated facilities, and, significantly, in 2024 Q2 it exported 73% of its total revenue to 81 countries across five continents.
Give overcapacity in the Turkish market, why the decision now to invest in yet more? The internal market, Ogucu says, is not growing as it used to: “The market had started to see double digit market size increases in early 2003 to 2005, and this growth rate continued until 2012. There was a small stumbling block around that time and then until 2016 it continued. After that, growth here has not been as it was, and today we can call it almost a flat line, rather than the inclining line that we were used to. Now, we have almost more than double the capacity installed compared to the local market.”
The country is now at a stage where the export tonnage has gone above domestic sales: “This has happened for the first time in 2024 – and it has happened monthly. It is now a record high export situation.”
Ogucu reflects on the fluctuations of the market. 2015-2016 had “a lot of noise.” 2021 was also “a bit crowded.” Now, he’s not surprised that it looks like being quiet for some time ahead: “The new tissue capacity records according to the National Paper Association is currently around 1.4m tons. With our new project start-up in 2027, and maybe some upgrades, this may reach up to 1.5m tons. So, unless there’s a surprising last-minute event, it looks like it’s going be quiet for the next three to four years, which is a key reason why we invested now in 2024.”
Overcapacity is “a key challenge” for the industry: “We have too much capacity, and not that much consumption locally. Türkiye is exporting to many markets, as we are, and we are the leader in that area. Since there will be new projects locally for the time being, this will influence our production and it may also influence our market share abroad.”
He expects supply side stability to return, as well as see growth in the local regional markets. Does he have plans to increase the export percentage once the Erzurum site comes on-stream in 2027? “It’s not easy to comment on that, because we are currently already selling to Georgia, Iraq, Armenia, Azerbaijan, all the ex-CIS countries over there. But yes, we will be increasing our sales to those countries, that’s the plan. But also increasing local sales is another perspective. So I don’t think the number will change that much – approximately 25% of our sales will remain for the domestic.”
Within the Turkish tissue market, Öğücü adds that, as with many others, one unfortunate trend they are seeing more and more of is the issue of desheeting, which is causing a growing clash between branded products and private label products. This has happened more in the past two to three years, since the market growth started to slow down: “We are definitely seeing a reduction in the number of sheets. It is a trend that I believe happens all around the world, and which paper manufacturers hate. It’s against any efficiency issue. From whichever perspective you look at it, unfortunately it’s not helping. From an ecologically sustainability perspective, it’s not good, and if you look at it from an efficiency perspective cost per piece, cost per kilo, it’s also not good.”
It started within the branded part of Lila Kağıt’s market: “In this market, when you look if GDP per capita is not growing, then you would expect that the private labels are gaining market share. But this is the opposite of that happened in the past three to four years.”
Why is this happening to such an extent now in 2024? “Because the desheeting started. In the private labels division, the SKU range is quite static, so because the customers are giants, they cannot list many numbers of private label SKUs. So they have to go for the most important one, and the brands are now fighting with private label regarding decreasing the number of sheets.”
Brands, he adds, with the help of inflation, were able to get back market share: “This is something that Western countries are not that used to. Now, consumers in Türkiye have started buying in big bulk packs and that has helped the brands to sell more against private label, because private labels are generally in smaller packs. A standard for a small size grocery item. These facts have helped the brands to gain market share, but they are not in the best interest of the consumer or the producer. It just adds a small advantage at first when you are dealing with the customers, but that’s just for a short-term period.”
Do you forecast this trend to continue in the next few years, and how is Lila Kağıt adapting? “It looks like we are at the final stage of the desheeting issue, hopefully. But we cannot estimate with a very clear picture what exactly is going to happen between private label and brands here in Türkiye. There are many different criteria going on all at the same time. It’s not only the usual ‘marketing trends’, but the macroeconomic effects are severely impacting this matter.”
Furthermore, he says there is the competition between big retailers, and this has affected the market as some retailers have chosen to act more on their private labels, whilst others choose to act more with brands: “The profitability of the retailers also has an effect on this, so it’s not very easy to say, ‘it’s going continue that way or the other way’. All we can do is be prepared for both eventualities.”
As the company is exporting three quarters of its whole production abroad, how important is sustainability for the business? “Sustainability is an issue that is not just important to us because of our values, but also because of the standards that we must obey – our customers’ demands, mainly in the western markets, for example.”
The company is working on a new programme in the run up to the EU’s Carbon Border Adjustment Mechanism (CBAM) – a carbon tariff on carbon intensive products imported into the European Union – that comes into effect in 2030. “This will be relevant for the entire paper sector and means that anyone what wants to export to Europe will have a very high standard of carbon emission limits. If these aren’t met, there will be an extra tax or penalty, and we’re getting prepared for that well in advance of its introduction.”
In preparation for CBAM, the business is working with an advisory group, not only limited to Türkiye, but also internationally: “It’s not only about environmental issues – it’s the full programme, environmental, social and governance. The targets are going to be quite tough, so we will be trying to achieve results that are going to be – hopefully – a first in Türkiye. And not only that, but also probably at the highest level in our business sector worldwide.”
He says the company’s efforts will also include addressing climate change diversity, human rights, equal opportunity, water and energy management topics that are the most common in tissue industry: “The aim is to approach them in a braver way. A way to positively disrupt. That’s why I can tell you some solid facts. Right now, we have already built 12,5 megawatts or capacity of solar power panels on our roof in our current facility and we have also promised to reach 50 megawatts of solar power plants. We have also already obtained the licences and declared our investment programme for this. So that has started, and that’s something solid and concrete that’s already going on.”
Following Covid-19, how has the AfH market rebounded? “Well, this had both similar effects like we see in the world, but also some separating parts. To start with, obviously Türkiye has quite a large population, almost reaching 90m people now. The AfH market is roughly estimated to be 20 – 25% of the whole tissue market. During Covid in 2020, it just stopped for three to four months. There were a lot of effects for schools, airports, tourism. But then in 2022, “the revenge”, as they say, happened. Shopping or revenge tourism, and the AfH market was quite alive in 2022.”
However, he adds the AfH market has also not been immune to the issue of desheeting and the GSM reduction: “Again, something tissue producers don’t like, and unfortunately this is taking place. This is not in the best benefit of the consumer or the customer because if you go and get a weak towel in the restaurant, I don’t think everyone is going to get one towel. And since no one is looking at that time, people just pull two more towels as one is too weak. You cannot follow that consumption level, and also we cannot prevent it from happening by ourselves.”
Another issue, he says, is that inflation has “a great effect” on local consumption: “Most restaurants, schools, airports, when they want to cut costs, paper is usually one of the items at the top of the list. So the desheeting or GSM decrease helps in that aspect as the prices are not increasing as much, but not in the most transparent way.”
Tourism’s part in AfH levels has also not returned as expected: “The interest rate here is over 50%. And since it’s quite high, the spending levels are decreasing, so people’s wages, the cost of tourism, restaurants, hotels, it’s quite high in foreign currency. This past year, the country is much more expensive than it was in the past two to three years.” The attractiveness of the Turkish tourism market for foreigners is not as it was.
“Three years ago, everything was so cheap, to an extent that it was undervalued at that time. You could have a coffee anywhere in Europe and probably pay €3-4 for a big cup, and then to compare that, if you came to Türkiye it was half the price for the same cup of coffee. Now it’s the opposite, it’s €4-6 euros. It’s very expensive. But the reason is that the Turkish lira is at its top value compared to the past five to six years, that’s the problem. We should have a devaluation of the Turkish lira and then it will be back to normal.”
Following the Erzurum investment, would the company ever consider a tissue plant abroad? “That’s something we cannot comment on at this time. But it looks like as of today, the Turkish market – both in terms of consumption and production – is at a level where it’s not going to be healthy to invest anymore. The sound way for Turkish producers looks like that there should now be further investments in where tissue is going to be consumed.”
How has the business reacted to pulp price volatility? “Volatility is a challenge that we have to adapt to. And we have to accept at this point because in the past, the changes of either increase in price or decrease would happen over a longer period. But now it’s happening very fast and then turning the other way again, quite fast. The amplitude of the wave is again not small, and also the frequency is not long either. So, this is now the market trend and we have to adapt to it.”
Öğücü also notes the logistical cost differences, competition against China: “And who knows what’s going to happen in Panama if the channel is going be open or not. Or what’s going to happen with the war in Ukraine or Palestine. They all have effect, petroleum prices, natural gas prices. Or port closures or strikes. As we have a business where three quarters of our full production is international, everywhere is a market, and so we must follow all the markets. The most important thing about pulp is that it should increase or decrease equally in every continent. This is my main comment. We are not treated equally. They say we are equal, but we are not. I think it would be fair to say that the pulp producers should not be part of the competition between let’s say regions.”
Now in 2024, the company is four times its initial capacity from when it first started to produce paper in 2007. And it’s still planning to grow. The aim is now solely to grow in tonnage, but to also grow with brands, private labels, export markets, the local market and AfH, and the consumer products market. “We will not just grow in terms of volume, but also in sustainability programme, in governance issues, IPO. Numbers can only explain the basic facts about growth, but we are also trying to prove growth with something other than numbers,” he adds.
Another issue is that of getting – and keeping – employees with the right skill sets. “This is a worldwide issue, but a bigger issue in our local markets. In 2005 when we were completing the business plan for this area, there were only three probably tissue producers in Türkiye and the total tonnage was about one tenth of today. Maybe 12-14%. So in less than 20 years, it has become eight to 10 times bigger. So many new companies and also many present companies have been increasing their capacities with new lines. This requires a lot of new people, although the automation level is increasing still, more skilled people and also faster lines that are more complicated. The skill level is an issue and keeping the same people is another issue. It’s easier to build new capacities, but educating and keeping the skilled people within the companies is much harder.”
In terms of AI and digitalisation, how are tissue mills taking advantage of this? “There’s a lot more can be done. The limit to this is the dark factories that this can go through. And it looks like we will reach there soon. Ten years ago we did not have robots running in our plants. Well, now we do. Ten years ago we would not think about AI working for us. Now we do. In many other areas, we are adapting to this.”
Looking ahead 10 years, he sees the industry, since it requires a lot of space, a lot of load, a lot of internal logistics, having much more robotics. But the issue is ROI: “That’s the first criteria to make that investment. Today we are using AI, mainly in office works. But soon it will be more. In data analysis, most probably it will be used first. To correct the big data and to find anomalies, and also to suggest the best decision in optimisations, or for example the usage of chemicals, or some setups that will be used. But in four to five years, I will be able to clearly say – we have moved on to another phase.”
