Kimberly-Clark’s (NYSE:KMB) decision to sell off its diaper business in Western Europe during the third quarter of 2012, marked a symbolic turning point in the company’s history. The priority of pursuing growth in large and expanding markets rather than focus on defending market share in saturated markets such as Europe has led Kimberly-Clark to focus on markets like China. China and other BRIC (Brazil, Russia, India and China) nations have vast populations and rising levels of disposable income that provide huge potential for Kimberly-Clark’s paper-based hygiene products such as diapers and tissues.
A market offering cheaper manufacturing as well as a large potential customer base with increasing levels of disposable income certainly sounds like an excellent proposition for consumer focused companies like Kimberly-Clark. With a population of near 1.4 billion, the country alone offers more consumers than all of Europe combined. In the past, the problem with consumer goods demand in China has been chiefly a socio-economic one. For example, babies previously were wrapped in cheaper, traditional cloth diapers instead of more expensive, disposable ones, but this is changing as economic prosperity has made consumer goods more accessible to the general population.
Meanwhile, geographical changes in the way the China has developed also makes for a compelling argument in favor of disposable consumer goods. In 2012, the urban population in China exceeded the country’s rural population for the first time in the country’s history.  In turn, this rising urbanization is giving rise to an expanding middle class – a segment that is a key driver of the nation’s total consumption. According to Mckinsey, Chinese consumption will account for EUR 6.2 trillion, nearly 25% of the world’s total consumption by 2025.  Kimberly-Clark’s real opportunity lies in catering to the hygiene needs of this burgeoning middle class population.
Meanwhile, the company is also busy setting up new manufacturing units and scaling up old ones in a bid to capture China’s growth potential.  China offers cheaper resources compared to Europe or North America, and also promises less time and higher volume flexibility for delivering products in the local market. These manufacturing plants will also help Kimberly-Clark maintain supplies to other high potential areas in South Asia.
Growth in countries such as China also carries with it some inherent risks. For one, the company’s pricing structure will have to be revised significantly to suit the wallets of third-world consumers. The company will also have to step up its general advertising spend in order to attract new customers. The increase in marketing spend for the company stood at about $115 million for 2012, a double-digit increase from previous year. Meanwhile, growth in emerging economies also exposes Kimberly-Clark to currency risks given the volatility relative to the dollar and euro.
But, Kimberly-Clark’s investments in these regions certainly paid rich dividends over the past year as organic sales from the company’s international operations were 10% higher and operating profit higher by double-digits. Diapers, in particular, offered some spectacular figures as volume sales grew by 45% in China, 20% in Russia and 15% in Brazil.
We have a $86 price estimate for Kimberly-Clark, which is about 10% below the market price.Notes:
- “China’s urban population exceeds rural for first time ever“, January 2012, The Telegraph [↩]
- “Global significance of China’s middle class“, February 2013, ChinaDaily [↩]
- “US paper firm expands for promising Chinese market“, March 2012, ChinaDaily [↩]