How Will P&G’s Brand Consolidation Program Impact Kimberly-Clark?

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KMB: Kimberly-Clark logo
KMB
Kimberly-Clark

Leading tissue products manufacturer Kimberly-Clark (NYSE:KMB) may be headed for difficult times in the near to medium term. The company has performed reasonably well in the year so far, having achieved solid growth in volumes and margin. (Read: Here’s Why Kimberly-Clark’s High PE Ratio is Justified) It even managed to recover from a precipitous share price decline of 14% in August this year and is currently trading near its 52-week high of $122.97. However, the strategic direction of its bigger competitor, Procter & Gamble (NYSE:PG) could put Kimberly-Clark’s successful run under pressure. With P&G’s brand consolidation program on the one hand, and waning growth in emerging markets on the other, Kimberly-Clark could soon be caught between a rock and a hard place.

In this report, we explore the impact of P&G’s brand consolidation program on Kimberly-Clark. According to our estimates, the success of P&G’s plans could result in a downside of 15% in Kimberly-Clark’s valuation, unless the latter comes up with a counter-plan.

Our price estimate of $118 for Kimberly-Clark is slightly lower than its current market price.

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See our complete analysis for Kimberly-Clark here

P&G’s Emphasis On Fewer Categories Means Heavier Competition for Kimberly-Clark

Procter & Gamble is currently going through an ambitious brand consolidation program intended to turn around its flailing revenue growth. The program will help the company get rid of deadweight brands and allow it to focus on its leading, best-performing brands across just 10 product categories. (Read: Here’s Why Procter & Gamble Should Not Break Up) It has the potential to transform P&G into a much leaner organization and address accusations that it has turned into “a lumbering giant akin to an index fund”. [1]

Personal Care has historically been a key strength at P&G. According to our estimates, the Baby Care and Family Care segment alone accounts for over a quarter of the company’s valuation. This segment, which includes baby care, feminine care, adult incontinence, and tissue paper products, is likely to be a part of the center-stage in the newly transformed company. With deadweight brands out of the way, P&G will turn its focus to its top brands like Pampers, Always, Bounty, and Charmin. Each of these are billion-dollar brands that compete head-on with Kimberly-Clark.

Procter & Gamble’s increased emphasis to the baby care, feminine care, and family care categories naturally implies heavier competition for Kimberly-Clark in these segments. According to our estimates, Kimberly-Clark derives over 50% of its value from personal care products, spread equally over Baby Care and Feminine Care (including adult incontinence) segments. The remaining value is derived from at-home and away-from-home tissue products. Since all these segments overlap with P&G, a significant increase in competition in these categories could have a substantial impact on Kimberly-Clark’s market share and valuation.

KMB Market Share Forecasts

As seen in the above table, the increased competition from P&G could negatively impact Kimberly-Clark’s market share across all its business segments. Such a scenario could result in more than a 10% downside to our valuation of the company. To avoid losing market share to its bigger rival, Kimberly-Clark needs to come up with a counter-plan to tackle the inevitable increase in competition, should P&G’s brand consolidation program be successful.

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Notes:
  1. Procter & Gamble: Time for a Split, Barron’s, November 21, 2015 []