Kimberly-Clark’s Push For Alternative Raw Materials Kills Two Birds With One Stone

Kimberly-Clark (NYSE: KMB) is the world’s largest manufacturer of tissue paper products for at-home as well as away-from-home use. Its Kleenex and Scott tissue brands are the world leaders in at-home use tissue products and generate over $1 billion in annual sales. In 2014, Kimberly-Clark’s Consumer Tissue (at-home use tissue products) and K-C Professional (away-from-home use tissue and related products) segments accounted for over half of the company’s total revenues of $20 billion.

Kimberly-Clark has been steadily decreasing its reliance on forest products like tree fiber, wood pulp and recycled paper since 2011. ^[1] Recently, it announced the roll-out of a new line of tissues and paper towels that use non-traditional products like bamboo and wheat straw. ^[2] The company’s latest move is geared towards achieving its 2015 sustainability goals, which includes deriving at least 25% of its sales from environmentally innovative products. ^[3]

The connotations of using alternative raw materials are clear from an environmental perspective. After all, it is common knowledge that the dwindling availability of forest resources is a matter of global concern. Thus, incorporating alternative renewable raw materials in the manufacture of tissue products will reduce pressure on traditional forest resources.

However, it is not immediately evident that Kimberly-Clark’s sustainability strategy is beneficial for the company’s coffers as well. In this report, we will explore how Kimberly-Clark’s sustainability strategy is not just environment-friendly, but shareholder-friendly as well.

We have a price estimate of $101 for Kimberly-Clark, which is about 5% lower than its current market price.

See our complete analysis for Kimberly-Clark here

Lower Commodity Costs

Kimberly-Clark primarily uses wood pulp and secondary fiber as raw materials for the manufacture of tissue products. Wood pulp prices are at historically high levels and are expected to continue to rise over the next three years. ^[4] Wood pulp prices have declined slightly since touching a 3-decade high in 2011, but are expected to increase again at 2.1% annually through 2017.

So far, Kimberly-Clark has addressed the issue of rising input prices by passing on the higher costs to customers. The company does so either by outright price hikes, or through indirect, under-the-radar measures like “de-sheeting”. ^[5] However, these are temporary measures that are inadequate for protecting the company’s bottom lines over the long term. This is evident from the fact that Kimberly-Clark suffered $240 million in input cost inflation in 2014, ^[6] which it was unable to offset completely through price hikes. As a result, the EBITDA margin of its Consumer Tissue segment declined 2.5 percentage points, while the EBITDA margin of its K-C Professional segment contracted by 3.4 percentage points in 2014.

We believe that the use of alternative raw materials is the long-term solution to the predicament of climbing input costs. Currently, the proportion of alternative materials in Kimberly-Clark’s new GreenHarvest line is only 20%, although there are outliers like a line of copy paper under the Staples brand which uses 80% alternative materials. If Kimberly-Clark is able to increase the proportion of such alternative materials in its tissue products, the potential cost savings would be immense. This is because of the huge disparity between the prices of traditional and alternative raw materials – wood pulp costs over $850 per ton, ^[4] while wheat straw costs a mere $80 to $90 per ton. ^[2]

Therefore, it is clear that if Kimberly-Clark’s R&D team is able to find ways to increase the proportion of alternative raw materials in tissue products, the potential benefits would be tremendous for mother nature as well as the company’s bottom lines.

Addressing the Environmentally-Conscious Consumers

The last few years have seen the emergence of a new class of consumers who choose products based on the environmental and sustainability practices of the company. A survey by Nielsen last year showed that these consumers are willing to put their money with their idealism. According to the survey, 55% of the online consumers polled across 60 countries admitted that they would be willing to “pay more for products and services provided by companies that are committed to positive social and environmental impact”. ^[7] In fact, as many as 52% of the respondents check the labeling of products to ensure that the brand is “committed to positive social and environmental impact”.

This clearly demonstrates that a market for environmentally-conscious customers exists and is ripe for capitalizing upon. Consumers are not only becoming increasingly conscious of the aforementioned factors, they are also willing to pay a premium for brands that satisfy the social and environmental criteria.

Kimberly-Clark is already well on the way to addressing this class of consumers with its GreenHarvest product line. At a time when the company is reeling from commodity cost inflation, its sustainability initiative can allow it to charge a premium for products that cost lesser to manufacture. Thus, the strategy provides a boost to Kimberly-Clark’s topline by addressing a new market, and its bottom-line through the premium pricing model.

Good PR

As illustrated by the Nilesen survey, a majority of the consumers prefer socially and environmentally conscious brands. When brands make a push for these factors, it inevitably results in a boost to the company’s public relations (PR) image. And when the company in question is a global consumer products powerhouse like Kimberly-Clark, with a formidable marketing muscle, the PR impact is even more notable. This is evident from the numerous sustainability awards won by Kimberly-Clark.

The public relations impact is perhaps the least tangible benefit of the sustainability initiative for Kimberly-Clark’s financial performance. Nevertheless, its indirect influence is substantial enough not to be ignored. After all, good PR is what adds to a brand’s value.

Therefore, it can be irrefutably concluded that Kimberly-Clark’s push for alternative raw materials is a socially as well as financially conscious strategy. Over the long term, the company’s sustainability goals are likely to not only benefit the environment, but also its shareholders.

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More Trefis Research

1. Kimberly-Clark 2013 Sustainability Report [↩]
2. Kimberly-Clark Makes Bet on Bamboo and Straw, The New York Times, April 12, 2015 [↩] [↩]
3. Kimberly-Clark Sustainability 2015 Progress [↩]
4. Wood Pulp and Paper Prices on the Rise, IBIS World, January 14, 2015 [↩] [↩]
5. Toilet-Tissue ‘Desheeting’ Shrinks Rolls, Plumps Margins, The Wall Street Journal, July 24, 2013 [↩]
6. Kimberly-Clark 2014 Fourth Quarter Earnings Call Transcript, Seeking Alpha, January 23, 2015 [↩]
7. Global consumers are willing to put their money where their heart is…, Nielsen, June 17, 2014 [↩]