Consumer goods giants Kimberly-Clark (NYSE:KMB) and Procter & Gamble (NYSE:PG) have announced plans to overhaul their raw material sourcing strategies for paper and pulp, showing a growing commitment towards adopting an environment-friendly approach to production. This is likely to have a significant impact on the operational structures of both companies, which together account for nearly 30% of tissue paper sales worldwide.
Kimberley Clark has committed to sourcing around 50% of its paper pulp from non-wood, recyclable sources such as bamboo by 2025. The company currently sources less than one-third of its pulp from eco-friendly sources. This marks a significant shift for the company in terms of supply-chain dynamics given that nearly 80% of its products currently make use of some form of wood fiber. ((Why Kimberly-Clark is banking on bamboo, GreenBiz, November 09, 2012))
P&G, on the other hand, announced its goal of sourcing 100% of its pulp requirement from sustainable or recycled materials by 2015. The company plans to achieve this by cutting ties with suppliers who have not been certified sustainable by regulatory authorities such as Germany-based Forest Stewardship Council (FSC). ((P&G Releases New Fiber Sourcing Goals for Tissue-Towel and Absorbent Hygiene Products, P&G Press Releases, November 08, 2012))
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Increasing pressure from environmental groups
The large-scale shift towards greener production has mostly come about due to intensive lobbying from environmental groups such as Greenpeace. In addition, environmental conservation organizations that reward green initiatives with a variety of environmental subsidies are also part of the reason why Kimberley-Clark and P&G are gradually moving towards recycled products.
Margins to get tighter in the short term, long-term outlook more positive
The shift to greener production is expected to have a negative impact on margins of both companies in the short term. The FSC-accredited pulp is more expensive than non-accredited sources as they are in shorter supply. The impact of this change is likely to be more marked on Kimberley Clark’s margins as it uses wood fiber in nearly 80% of its products. Increasing competition in the segment as well as expansion into price-conscious emerging markets will likely limit the companies’ ability to pass on price increases to the consumer in the short run.
In the long term, however, the supply-demand imbalance of FSC-certified raw materials will most likely sort itself out. An increasing number of loggers are expected to move to a more sustainable way of forestry as buyers such as P&G and Kimberley-Clark exert more pressure. Moreover, a sustainable way of production is more likely to insulate buyers from price volatility, which primarily arises out of a sudden downfall in production due to ecologically damaging practices. Switching to recyclable paper will also help in this respect.
Marketability to be a key short-term driver
Growing awareness of ecological problems is making the average consumer more inclined towards products marketed as ‘green’ and ‘eco-friendly’. The changes in raw material sourcing strategies adopted by Kimberley-Clark and P&G provide them with an opportunity to engage customers with a refocused marketing message and product differentiation. This might have a positive impact on their market shares.