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October 2012
Seeing The Forest for the Trees
By Barbara Fagan

     In business, innovation is a good thing—a pathway to growth, a doorway to progress and possibly even a trajectory to industry leadership. But while innovation may be good for business, Pete Stewart found that being a business innovator wasn’t always easy.

      Stewart admits that his career in forestry began as a high school toss-up between oceanography and forestry, which he jokes is proof that “17-year-olds should never make decisions that affect the rest of their lives.” A couple of college career days later he was studying forestry, eventually earning a bachelor’s degree from Texas A&M University and a master’s degree in forest economics from the University of Georgia.

     No matter how casually made, the career choice turned out to be a smart one. According to the American Forest & Paper Association, the forest products industry accounts for about five percent of the total U.S. manufacturing GDP, producing approximately $175 billion in products each year and employing close to 900,000 people.

     It was also a good choice for Stewart who found that he enjoyed the business and its surprisingly mathematical and statistical bent. His first job as a consultant in the industry moved him from his native Texas, where he was a wood buyer for a large forest products company, to Charlotte. It was not long before Stewart first noticed a systemic problem.

     “About 30 percent of all timberland is owned by pension funds,” Stewart explains, “and I was in charge of valuing it. But I could never find good data. It was nearly impossible.

     “I began thinking that there’s got to be a better way to collect, handle and distribute this data. At the time I worked for a company of about 50 people and we would literally spend hundreds of thousands of dollars trying to figure out the market. If a company our size was spending that kind of money, I could only imagine what the largest forest products companies were spending to get good market data. Billion dollar companies like Weyerhaeuser and International Paper had to be spending just tons of money.”

     Based on that premise, Stewart went to New York and pitched an idea to some private equity groups, raised some capital and started Forest2Market, Inc. in 2000. Stewart, president and CEO of Forest2Market, likens the company to a Bloomberg-type news service specifically for the forest products industry.

     “What Bloomberg did really well was develop analytical tools so their users could track the particular metrics that were important to them. We do essentially the same thing but for specific metrics in the pulp and paper, sawmill, timberland and other related industries.

     “It’s all about the data, and what’s different about our data is that we collect the actual transactions as they come across the scales so we know where the trees came from on earth, how far they traveled, who hauled them—every last detail. I know it sounds like a lot of minutiae, but we’re the only ones who do that. There’s no other company in the country with that level of detail.”

     The scale of data is also notable. Forest2Market collects a mass of 30 million transactions a year across all its product lines. In its most prominent markets, this equates to 92 or 93 percent of all U.S. transactions. Data is collected from both buyers and sellers to confirm its accuracy and all the participant companies, including Forest2Market, are subject to independent audits.

     “Our goal is to ensure that our data is always true to market,” says Stewart. “Our next best competitor just collects survey data. They call people in the marketplace and ask them the price of wood. That just doesn’t cut it when you’re relying on this data to make business decisions.”

 

Barking Up the Right Tree

     Stewart began collecting data by building a stumpage price database—that is, the price of trees in the forest still connected to the stump. Forest2Market now offers a suite of products that includes price reports for timber and lumber, price forecasts, wood basin supply and demand assessments, and benchmarking services for delivered wood raw materials and lumber. Their newest product is a benchmarking service for recovered or recycled fiber.

     They also offer syndicated studies that identify, evaluate and quantify industry trends and proprietary studies that answer a particular customer’s specific questions or address a company’s individual business needs.

     Customers use Forest2Market data to set benchmarks, price contracts, value assets and make many other decisions to enhance everyday business performance. But the data is also vital in decisions with much higher stakes.

     “If a company’s putting in a new mill, they need to know that there’s enough raw material in the area to support it and at what price,” Stewart explains. “That’s not something you can determine by a casual assessment of the local area. We have the sophisticated mathematical models that allow us to simulate the growth of the forest. And since we have data about the transactions coming from the forest, we are uniquely positioned to help our customers in ways others cannot.

     “If a CEO wants to shut down a billion dollar pulp mill or, conversely, expand a mill, that CEO takes comfort in the fact that Forest2Market can provide a complete picture of market conditions, including price, supply and demand for trees—not only locally but across the country. We can go to the CEO and say that we can take the guesswork out of this critical decision. With our transaction-based data, CEOs can confidently and unequivocally know how their costs stack up to their competitors’. That’s extraordinarily valuable to them.”

     Stewart recalls one client situation where the stakes were particularly high. “We had a customer with a real cost issue. They couldn’t figure out why their costs were out of line and it was causing serious financial difficulties.

     “They asked us to look into it and we discovered that they were hauling their timber 15 miles more than the norm; this translated into a cost eight or nine percent higher than the market. That’s a big deal when 65 percent of your costs are the raw materials coming in.

     “As a result, they re-engineered their supply chain and saved about $5 million a year. And since this happened during the economic slump of 2008 through 2010, it helped them hang on till things improved. They didn’t have to layoff their employees or go out of business.

     “That’s the sort of detail that we work with to find and improve those gaps in costs. These mills deal in $150 to $200 million worth of raw materials, so a savings of a half or a quarter of even one percent matters.”

     David West is general manager of fiber supply at Longview Fibre Paper & Packaging in Longview, Wash. Before becoming a Forest2Market customer in 2010, he used public and survey data for market information.

     “That kind of data may have helped in seeing trends, but it also allowed companies to influence the market,” West says. “Forest2Market gives a true representation of what’s actually going on in the market. And the information is timely. Within 10 days, you know the data from the last month.”

     Steve Smith, managing director, forest management, for Timberland Investment Resources in Atlanta, uses Forest2Market data for appraisals and valuation purposes. He says he renewed their contract with the company because of the scope and breadth of their product across the Southeast. “They’re in all the regions we are,” Smith says.

     Stewart’s vision for Forest2Market encompassed timely, accurate, unbiased data gathered from the majority of U.S. transactions at a level of detail never captured before combined with analytical tools and industry experts to interpret that data for widespread industry or specific company use. Given the industry’s need for reliable data to be competitive and successful, it seems like it would be an easy sell—but Stewart tells a different story.

 

Out on a Limb

     “I would never have imagined how hard it would be to get people to believe something different,” says Stewart. “Change comes hard, and being a change agent, isn’t for the meek. You need money and patience. You need five times more money than you think and at least as much patience. When I started, I didn’t appreciate the inertia that’s out in the marketplace.

     “When you start a new business, you better be ready to throw away your business plan every three months if you want to survive. You envision a grand plan, but the market will tell you what the market wants to buy and you have to react to that or you’ll be out of business.”

     Stewart admits that his choice of business model also contributed to early challenges. “I started Forest2Market as a subscription business because it’s a solid, repeatable business model, but the first company in really gets no value because it’s only their data in the system. You’ve got to build momentum. It was 2003 before we could pay all our bills all the time.”

     Even with the inherent early problems, Stewart is happy with the subscription model. “We’ve found that many of our customers use our data for something critical in their business—they use it to price a contract or the data is injected into their compensation plan. When the subscription is tied in that way to a customer’s business, the customer is very loyal. Our customer retention each year is close to 100 percent.”

 

Branching Out

     Stewart’s premise starting out was that data detail would be of paramount importance to a Forest2Market customer. That turned out to be a winner.

     “Yes, we have insane detail,” says Stewart. “I’m the first to admit it, but there’s real value in that level of detail. The market has really responded to it. We’re definitely more expensive than our competitors, but we’ve found that with the right quality of data, there’s little price sensitivity.”

     Stewart agrees that codifying the massive data gathered by his company is less than glamorous. He even likes to tell the story of a customer who teases him by saying that Forest2Market is a success because no one else would want to do something that boring. But he balances that with the knowledge that what he does makes a difference.

     “Our data and techniques solve important business problems for our customers,” he touts.

     Stewart began Forest2Market by himself and made his first hire a month later. Forest2Market now has a main office in Charlotte and regional offices in Appleton, Wis., and Eugene, Ore., employing 25 people company-wide and currently serving 1,200 customers.

     Over the last 12 years, Forest2Market has helped over 100,000 landowners ranging in scale from individuals owning 50-acre tracts of timber to companies owning several million acres. They also count as clients giants with commonly recognized names like Potlatch on the forest and wood products side of the business and Duke Energy on the bioenergy side.

     Currently, the company is experiencing 30 percent annual revenue growth, and expansion is on the horizon.

     “I’m traveling down to Brazil this month,” Stewart says. “We’re looking at extending our wood raw material data services to South America, principally Brazil and Uruguay. The economies of both those countries are growing and their forest products industries are booming.

     “We’re also opening an office in London to serve our European bioenergy clients and specifically to develop a business to meet European Union sustainability regulations required for EU utility companies.

     “The utilities need to have a measurement of the amount of carbon used in their process, so they need to determine how much diesel was used to cut down the trees and to haul them to the mill, all the energy used in the manufacturing process and transporting materials to port, and finally, the fuel used to ship it to Europe.

     “Forest2Market has a way to track all of that so we believe we’re in a unique position for this business. That would be a whole new customer base for us. A number of our customers are also suggesting we develop a pricing system for northwest Russia and Eastern Europe.

     “Our growth strategy was to spread across the U.S. and then expand across end product lines (lumber, for example). We’ve pretty much accomplished that. It’s a natural progression to expand to overseas markets now that the company is big enough to support those sorts of operations.

    “Still, it’s a lot easier to envision it than actually do it,” Stewart says with a smile. It’s a lesson he’s already learned—business innovation isn’t always easy.

Barbara Fagan is a Greater Charlotte Biz freelance writer.
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