Scott Paper Company Business Information, Profile, and History

History of Scott Paper Company

Until its acquisition by the Kimberly-Clark Corporation, Scott Paper Company was a global consumer products company and the world's leading manufacturer of tissue products such as toilet tissue, paper towels, and paper napkins. Scott had an arsenal of well-known brands and dominated the American market for mid-ranged tissue paper and paper towels with its ScotTowels and ScotTissue products. Other Scott offerings included facial tissues, baby wipes, paper towels, napkins, tablecloths, plates, and plastic cutlery and cups. The company also operated the S.D. Warren Company as a wholly owned subsidiary until 1994, when it sold this leading producer of light-weight and heavy-weight coated papers. After Al Dunlap took the helm of the company in 1994, Scott shed some $2 billion worth of assets and laid off one-third of its global workforce. Although Scott ceased to exist as a corporate entity upon merging with Kimberly-Clark, its new parent company maintained many of Scott's brands.

Scott Paper Company Launched in 1879

Scott Paper Company was founded by brothers E. Irvin Scott and Clarence R. Scott in Philadelphia, Pennsylvania, in the fall of 1879. Scott originally produced 'coarse' paper goods such as bags and wrapping paper. By the late 19th century, however, the introduction of domestic bathroom plumbing created a market for a new product, toilet tissue. Scott soon began tissue production, though Victorian mores prevented the company from launching an effective advertising campaign, so Scott sold various grades of tissue to private dealers who marketed the tissue under 2,000 individual brand names.

At the turn of the 20th century, Irvin Scott's son Arthur Hoyt Scott urged the company to begin marketing toilet tissue under its own label. He established a company philosophy that characterized Scott's marketing style well into the 1960s. Arthur's idea was to make only a few high-quality products, to sell them at as low a cost as possible, and to keep them in the public eye with high-profile advertising.

In 1902, the company made its first acquisition, purchasing the private label Waldorf from one of its customers. The oldest name-brand toilet tissue in the United States, Waldorf continued to be sold in U.S. grocery stores into the 1980s and was one of the few consumer products that had been available since the turn of the century.

In 1907, Scott introduced the paper towel. The invention was supposedly inspired by a Philadelphia school teacher who thought it unsanitary for her pupils to share the same cloth towel day after day. Whatever its origins, the paper towel, together with toilet tissue, formed the backbone of Scott's business.

A Long Period of Prosperity

As the demand for consumer paper products rose steadily, Scott hired innovative engineers to upgrade its papermaking technology. With the introduction of new machines in its Chester, Pennsylvania, plant in the early 1920s, Scott became the world's largest and most technologically advanced tissue manufacturer. In order to guarantee its growing success, Scott saw that it would be wise to acquire control of its sources of raw materials. When Thomas McCabe became president of the company in 1927, he began Scott's long-term acquisition of mills, machines, and timberland with the 1927 purchase of a Nova Scotia, Canada, pulp mill and its attendant timber holdings.

Despite the stock market crash and the Great Depression, Scott's plant was operating at full tilt in 1930; not one employee was laid off, and company sales were as high as ever. This was partly because the economic climate did not affect consumption of Scott products, and partly because Scott was the largest advertiser in its industry. As a result of its unimpeded success, Scott was able to continue its acquisition program. In 1936, it joined with The Mead Corporation to form Brunswick Pulp & Paper Company, which built and operated a pulp mill in Georgia to supply both Mead and Scott.

During World War II, Scott continued to prosper despite paper shortages. Scott's aggressive acquisition program continued during the 1940s and 1950s; the company bought mills in Fort Edward, New York, and in Marinette and Oconto Falls, Wisconsin. By 1948, Scott's sales approached $75 million. During the 1950s, Scott merged with Southview Pulp Company and Hollingsworth & Whitney Company, which provided substantial timberlands and pulp and papermaking facilities in Everett, Washington; Mobile, Alabama; and Winslow, Maine.

Throughout the 1950s, Scott's Scottie tissues and Scotkins napkins dominated the home paper products market with little competition except from Kleenex, made by Kimberly-Clark. By 1955, Scott had a 38 percent share of the sanitary-paper business, its closest competitor taking only 11 percent. During the late 1950s, Scott led the U.S. paper industry in profits and growth despite the fact that it introduced only two new products--a plastic wrap and a sanitary napkin--between 1955 and 1961. Much of the company's success lay in its impressive product research and development. Bringing out few new products, the company focused on careful development and elaborate advertising. This was the basic strategy that Arthur Scott had prescribed at the turn of the century.

New Competitors Enter the Market in the 1950s and 1960s

Scott's success could also be attributed to its virtual monopoly of its market, which began to erode with Procter & Gamble's entry into the home paper products market. Primarily a soap maker, Procter & Gamble (P & G) in 1957 acquired Charmin Paper Mills, a regional producer of facial and toilet tissues and paper towels and napkins. P & G aggressively promoted Charmin's Puffs facial tissue and White Cloud toilet tissue in their traditional market area, the north central states. By 1961, these brands began edging out Scott products in that region. Nevertheless, in 1961 Scott was the most profitable paper company in the United States in terms of profit margin and return on investment, and was not greatly disturbed by P & G's regional success. In a conservative response, Scott refused to use promotional coupons and price deals, opting instead to reduce the price of its products. With its entry, however, P & G had opened up the sanitary-paper market; by 1966, Scott had five major competitors. In addition, supermarket chains began selling their own low-cost private-brand tissues. Scott responded mildly, introducing new colors and styles for its already established product lines.

Heavy competition eventually led the company to use one of its most innovative promotional gimmicks: the launch of the paper dress. Scott had developed its Dura-Weve paper fabric with the intention of marketing disposable medical products such as linens, towels, and wipes, but in 1966 it also sold 50,000 disposable dresses for $1.25 each in grocery stores to promote its new colored tissues. While the fashion fad came and went, the development of paper fabric gave rise to such modern conveniences as P & G's Pampers, the first completely disposable paper-plastic laminated diapers. Scott's own disposable diaper, introduced in 1969, was never a commercial success.

Diversification in the 1970s and 1980s

Believing that its philosophy of specializing in just a few products was becoming outmoded, Scott also began to diversify. McCabe made Scott's first non-paper acquisition in 1965--Plastic Coating Corporation of Holyoke, Massachusetts, and its subsidiary, Tecnifax Corporation. Plastic Coating allowed itself to be bought by Scott to finance a major expansion of its coating plants. Plastic Coating needed to expand to meet the needs of its two largest customers, Polaroid and SCM Corporation. However, following the expansion, Polaroid failed to grow as expected, and SCM built its own coating plant. Moreover, the Tecnifax subsidiary, which made visual education aids, lost its profitability when the government cut back on educational funding in the late 1960s.

In 1967, Scott purchased S.D. Warren, a maker of fine book papers. Within a few years, Warren's profits were eaten up by the general advertising recession and the government cuts in educational funding, which reduced the textbook market. Brown Jordan, a maker of casual furniture, was purchased in 1968, as were two manufacturers of audio-visual aids. By 1969, Scott's sales reached their highest to that date, yet its return on equity was only 12 percent.

McCabe retired as chairman in 1969, and president and CEO Harrison Dunning took over as chairman of the board. Dunning decentralized Scott's management by instituting profit centers, and designating brand managers with responsibility for the research, manufacture, sales, advertising, and earnings of their respective products. This delegation of power cleared the decision-making bottleneck that had plagued Scott, as did Dunning's three-man president's office in which he worked with president Charles Dickey and vice-chairman Paul C. Baldwin. All three men were empowered to make a decision on any issue at any time.

By 1970, Scott's competitors in the toilet tissue market had increased to 11, and in facial tissue to seven. Both markets were fully mature, growing at about two percent annually. Between the erosion of their market share and unprofitable acquisitions costing nearly $200 million, Scott was faltering badly. Its earnings fell 18 percent by the end of 1970, at which point return on equity was down to 9.5 percent. To make matters worse, in 1971 P & G began national marketing of its Charmin toilet tissue, advertising for which soon made Charmin the most popular bathroom tissue.

Dunning's office of the chairman, as it had become, was broken up in 1971, as middle managers called for more leadership from the top. In 1972, Charles Dickey was appointed chairman. During the next five years Scott saw heavy outlays of cash--more than $700 million. More than $100 million was spent on meeting new government requirements for pollution control, and the rest went toward new plants and equipment. Business began to recover slowly with the 1976 introduction of Cotonelle, Scott's answer to Charmin. Scott's aging facilities kept production costs high, however, and by the early 1980s another capital-spending program was required to upgrade its plants and expand capacity. In one effort to raise money for the $1.6 billion, five-year spending program, Scott sold $102 million of new common stock to Canadian-based Brascan, Ltd., raising that holding company's share in Scott to 20.5 percent. Brascan agreed not to increase its holdings in Scott to more than 25 percent before 1986.

Philip E. Lippincott took over as CEO in 1983. Lippincott, who had initiated the spending program in 1981, began to reap its benefits. Profits increased 51 percent in 1984, rising to $187 million, while sales rose five percent to $2.8 billion. Scott promptly bought out Brascan, taking on a $300 million debt but eliminating any threat of takeover.

Lippincott eliminated extraneous staff and instituted an incentive program in which the top 600 people at Scott were remunerated partly according to their contribution to profits. Although most decisions at Scott traditionally came from the Philadelphia headquarters, Lippincott invested lower-level managers with more decision-making power, hoping commitment would increase if corporate strategy were developed organically rather than handed down from above. At the same time, Scott decreased its production costs by using scrap wood and wastes produced by the pulping process as fuel for its mills. In Maine, energy costs were reduced from $140 to $40 per ton of paper. A new system for transporting raw materials at the Mobile, Alabama, plant saved the company about $25 million a year in freight and inventory expenses.

The 1980s and Global Expansion

The 1980s brought a welcome spurt of growth for Scott's coated paper subsidiary, S.D. Warren. Although Warren had long been a market leader, high production costs made its profits mediocre. In 1982, Scott built Warren a new machine to produce lighter-weight papers, anticipating an increase in medium-weight paper consumption. Since other companies had predicted a decrease in demand because of the proliferation of cable television and other media, Warren was able to profit from the burgeoning market for catalog and magazine papers while its competitors were caught unprepared. As a result, Warren was responsible for 45 percent of Scott's profits in 1984, and continued to contribute at least a healthy 25 percent of total profits annually.

A full 50 percent of Scott's profits still came from toilet and facial tissue and paper towels. In the early 1980s, Scott finally found its niche in the market. While its Cottonelle toilet tissue and Viva paper towels still competed with P & G's top-quality brands, ScotTissue and ScotTowels lay claim to the title of midrange or value brands, leaving the higher end of the market to P & G and the lower end to store brands and cheaper labels. Scott's market share stabilized at 25 percent, down from its one-time peak of 50 percent but still a respectable share.

The U.S. home tissue products market remained virtually stagnant and glutted with competitors. To capitalize on its strength, Scott had to seek new venues for selling its traditional products. Scott began selling tissue products to commercial buyers such as restaurant chains and public facilities, but the real opportunities for growth lay in overseas markets. In 1982, Scott's international operations had a loss of $39 million, down from a profit of $40 million the year before. By 1986, however, Scott had rebounded and was the dominant player in Western Europe, with sales of $750 million. Anticipating the integration of the European Common Market in 1992, Scott bought out its European partners in the late 1980s so that it would not have to share its future profits, and Lippincott instituted a three-year, $250 million expansion program for Scott's European facilities.

Scott Worldwide was formed in 1987, to operate in Europe, Latin America, and the Far East. Scott planned to penetrate the latter two markets more forcefully once the European market matured. Still the world's largest producer of personal tissue products, in the early 1990s Scott concentrated on transforming itself from a U.S. company with foreign interests to a truly international company, controlling its operations on a local level rather than from its U.S. headquarters in Philadelphia. Always a specialist, Scott continued to acquire related operations such as Texstyrene Corporation, a maker of styrofoam cups, but the company primarily aimed to expand its worldwide markets rather than to diversify its product lines radically.

Difficult Times in the Early 1990s

Confident in the upgrades the company had made to its production facilities and Scott's stable market share, Lippincott led Scott to expand its capacity in 1990. This decision would prove to be disastrous. According to one observer in the Guardian, 1990 marked the 'beginning of one of the tissue industry's worst downturns.' A slew of new competitors coupled with rampant overproduction drove down prices for Scott's core brands.

Beginning in 1990, Lippincott undertook three major corporate restructurings with the goal of boosting flagging profits. Scott pledged to focus on its successful personal care products business and began to sell off operations outside this realm. In 1991, for instance, Scott divested its substantial share in the Japanese joint venture Sanyo Scott Company Ltd. and the proceeds were used to reduce mounting debt. Despite Lippincott's efforts, Scott's profits fell from $302.1 million in 1989 to $117.6 million in 1993. Financial World proclaimed that Scott 'hasn't been able to do anything right for the past several years.' In 1994, with the announcement that pre-tax earnings had plummeted 61 percent since 1989 and that sales had remained flat, Lippincott instituted his final restructuring and announced that Scott would lay of 8,300 workers&mdashout 25 percent of its workforce.

Lippincott left the company in 1994, and Scott recruited its first outsider to replace him. After building his reputation for reducing operations, cutting workforces, and dumping all but the most profitable divisions, Scott's new Chairman and Chief Executive Officer Al Dunlap had earned the less than affectionate moniker 'Chainsaw Al.' Despite the trail of unemployment he left in his wake, Dunlap was revered for his ability to return flailing companies to profitability and, more importantly, to raise share prices.

Dunlap immediately got down to business at Scott. He 'has people jumping up and down. He is asking for all kinds of justification reports, analyses of what businesses the company should be in,' a Scott executive told Delaney Informed Communications on May 30, 1994. After filling top management positions with like-minded colleagues, Dunlap put S.D. Warren on the sales block. Although Warren had become the clear-cut leader in its field, the subsidiary did not conform with Dunlap's vision of a streamlined Scott with interests primarily in tissue paper.

In August 1994, Scott announced it would fire 10,500 workers to save an estimated $400 million each year. Dunlap closed Scott's older, more costly, manufacturing plants; reduced warehouses from 60 to 19; and sold off the company's printing and writing paper production operations, Mexican joint ventures, health care and foodservice operations, as well as its energy operations. In his first nine months as CEO, Dunlap divested over $2 billion worth of assets. Scott's share price rose from $37.35 to $84.62--an increase of 225 percent in 18 months. Scott reported a $200 million profit in 1994, compared to the net loss of $277 million recorded in 1993.

1995 Takeover by Kimberly-Clark

Many analysts had speculated that Dunlap's underlying goal was to make Scott an attractive acquisition target. Such suspicions were fueled in July 1995 when Wayne Sanders, the chairman and CEO of Kimberly-Clark, confirmed that Kimberly-Clark and Scott had signed a merger agreement. The deal, which would create a $13 billion consumer products behemoth, offered Kimberly-Clark clear advantages. Kimberly-Clark could use Scott's dominance in the tissue sector, especially in the crucial mid-level segment, as part of its bid to overtake Procter & Gamble. Moreover, Scott had a powerful European division, with best-selling brands such as the U.K.'s Andrex. Kimberly-Clark, on the other hand, had not been as successful in entering European markets. The merger was finalized on December 12, 1995.

After the merger was complete, an 'Integration Team' formulated a plan to unite the two companies' manufacturing operations, product lines, and workforces. More layoffs were enacted, and Scott's headquarters, as well as some office facilities, were closed. Kimberly-Clark stockholders outnumbered those of Scott in the new corporate entity, so the unified company bore the Kimberly-Clark name, and all Scott assets were subsumed within Kimberly-Clark. Nevertheless, Kimberly-Clark kept alive most Scott brands. Not only were Scott's brands the best-selling in the world, but by retaining their cachet with consumers, Kimberly-Clark could also lay claim to Scott's rich and storied legacy.

Chronology

• Key Dates:

• 1879: Scott Paper Company is founded.
• 1907: Scott begins producing paper towels.
• 1915: Company goes public.
• 1957: Procter & Gamble promotes Puffs tissues and White Cloud toilet tissue, stealing market share from Scott.
• 1967: Scott diversifies operations through purchase of S.D. Warren.
• 1976: Scott introduces Cottonelle toilet tissue.
• 1993: Scott reports its all-time worst yearly net loss.
• 1994: Al Dunlap assumes position of Scott as chairman and CEO; announces plans to fire nearly 11,000 workers.
• 1995: Scott absorbed by rival Kimberly-Clark.