Why Is Kimberly Clark Relying Heavily On Cost Savings?

by Trefis Team
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Recently, with the slowdown in global economic markets and dwindling consumer confidence indices, most of the consumer goods companies have turned to cost saving initiatives to support bottom-line growth. Colgate Palmolive (NYSE:CL) has its Global Growth and Efficiency Program going on for this purpose and Unilever (NYSE:UL) has adopted ‘Zero-Based’ budgeting approach where various expenses are allotted from step 1 starting each new period. Similarly, Kimberly-Clark (NYSE:KMB), which owns popular brands like Huggies, Kotex, Kleenex & Scott, is heavily relying on its cost cutting initiative named FORCE (Focused On Reducing Costs Everywhere). The program aims to reduce costs by improving productivity, optimizing product cost design, and reducing the raw material prices through negotiations.

Since the start of this decade, Kimberly Clark as been successful in improving the efficiency and lowering the cost of its operations, as the FORCE savings have seen an increase of almost 9% since 2012.  This definitely is a good indication, but all is not so rosy, as the net sales and operating profits of Kimberly Clark have declined 1.5% and 12% respectively on a CAGR basis since 2012. This has led to ‘savings as percentage of operating profit’ to inflate from 14% to 24% during this period. It would have been better for the company’s health if sales and profits better reflected this rise in cost cutting.

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See our complete analysis for Kimberly-Clark here

Factors Leading To Increased Dependency On Cost Savings

  1. There has been a rise in dollar index from 80 to 95 since 2012, due to which Kimberly Clark has incurred significant currency losses, thus forcing it to rely more on savings and efficiency enhancements for the purpose of stabilizing the profits.
  2. There has been a tough competition in baby formula and feminine care segments, which combined account for 50% of total sales of the company, because of the emergence of local players in the developing markets such as China.  These are hitting the businesses of other international companies as well. A a result, Kimberly Clark is being forced to compete on the price front.  This in turn  is putting additional pressure on operating margins, which have fallen from 12% in 2012 to 9% in 2015.
  3. The global economic conditions have not seen much of an improvement as world GDP growth rate has declined since start of this decade. This has ultimately led to erratic demand from various geographies, leading to slow sales growth for the FMCG (i.e., Fast Moving Consumer Goods) sector. [1]

See our complete analysis for Kimberly-Clark here

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Notes:
  1. World Bank Data []
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