Can Kimberly Clark Learn from P&G’s Recession Strategy?

As the global economy gradually recovers from the recessionary 2008-09, consumer products companies across the globe are implementing measures sustain growth and meet investor expectations.  It comes as no surprise that all the big players such as Procter & Gamble (NYSE:PG), Kimberly Clark (NYSE:KMB), Colgate Palmolive (NYSE:CL) and Unilever (NYSE:UL), among others, and have resorted to time-tested strategies to maintain the most crucial metric in personal care industry, their market share.

But while P&G continues to beat the market expectations, further raising its outlook for sales growth to 7% for the year ahead, Kimberly Clark issues downside guidance for the full year with sales growth expected to be around 2%. This caught our attention and got us thinking what is it that P&G is doing right?

Response to economic downturns

While the recent recession was devastating in its scope, economic downturns are no anomalies by themselves.  In fact, businesses with sound fundamentals along with good cash and working capital management often stand to gain in the long term from downturns. Here’s how the personal care consumer products companies have responded to the adverse macroeconomic environment.

1) All the global players have compensated for low growth in developed markets by focusing on emerging markets in South Asia, Latin America and Eastern Europe, which have been exhibiting double-digit growth rates on account of rising disposable income levels and high population growth rates. While the cash rich players can reasonably target inorganic expansion by acquiring local/regional players amidst lower valuations in general and expensive credit (which restrains the cash starved competitors thereby eliminating competitive bids).

2) The cash starved competitors undertake corporate restructuring and cost-cutting initiatives so as to improve operating margins. This might also involve divestiture of non-strategic and less profitable business units and/or businesses with low growth potential. The industry as a whole focuses on consumer promotions (For instance: Buy Two Get one Free) and retracts from advertising and media spending. Research and development too gets allocated lower budget in general.

What Makes P&G Different?

P&G has focused on offering value-for-money to the consumers who are strained with cash amid rising unemployment and reduced disposable income levels. Offering branded (quality) products at lower price points has helped P&G maintain and even gain market share. With this result, P&G has been exhibiting robust volume growth in excess of 7%, partially compensated by a negative growth in prices (~1%), still leading to an impressive 5%- 6% value growth.

Kimberly Clark on the other hand continues to focus on building the brand. Despite having a portfolio of leading baby care and feminine care products, Kimberly Clark has been losing share to private labels and other competitors, as consumer trade down to other lower priced substitutes.  The impact of loss in volumes to private labels lasts much longer than the recession itself since consumers tend to stick to lower-priced products that offer acceptable quality even after the economic conditions improve.

What’s the way ahead for Kimberly Clark?

We believe Kimberly Clark too could benefit by focusing on value-proposition to the consumers. Extending the product portfolio to better compete with private labels and other mass brands would not only maintain market share and make the products range better suited for emerging economies with significantly lower income levels but also bring in the volumes which would dilute fixed costs thereby improving operating margins and increase the overall efficacy of advertising and media spending by targeting a larger audience.

Let us consider the impact of Kimberly Clark going the P&G way of focusing on offering value proposition to the consumers, on the two largest product segments, Baby Care and Feminine Care, which as per our estimates constitute over 34% and 28% of its stock respectively.

If Kimberly Clark  grew at around 6%, still in excess of the expected baby care market growth rate of close to 4.5% and feminine care market growth rate of 5%, we expect it to gain market share in the process.

While our base estimates for Kimberly Clark, incorporate growth on account of expansion into emerging markets, Kimberly Clark focusing on lower priced products in developed markets presents additional upside to our current $75 Trefis Price estimate of Kimberly Clark’s stock.

You can drag the graphs above to see the impact of Kimberly Clark’s stock.

You can see our detailed $75 Trefis price estimate of Kimberly Clark stock here.