FMCG

by Greg Thain

  The Kimbies post-mortem had identified three factors where any new brand had to excel to have any chance of succeeding:

  · The dryer the baby’s bottom for longer, the better

  · A reduction in, or elimination of leakage versus Pampers

  · An adhesive tape that was reusable several times over without any danger of coming unstuck (something no manufacturer had yet achieved)

  Achieve this excellence and consumers had indicated they would pay a substantial premium over Pampers. With an R&D budget four times that allocated to Kimbies, work commenced. The clock was ticking: if Procter & Gamble spent big to establish Luvs on a national footing, the window of opportunity would close.

  As well as product issues, there was also a significant retailing issue to be solved. How to get on the shelves? Procter & Gamble had created a must-stock category that was as much a business builder as had been Kotex 50 years earlier. But the product was so bulky, and had such a fast turnover; it had to be allocated a disproportionate amount of shelf space just to keep in stock during the shopping day. Consequently, unlike most other product categories, retailers in even the biggest stores had a huge reluctance to stock any more than the top two brands, and maybe a cheaper private label. Therefore, for any new diaper to succeed, it had at the very least to knock the number two brand out (currently held by Johnson & Johnson). A huge challenge.

  By December 1977, Kimberly-Clark was ready to go. As the name communicated, Huggies checked all the boxes – achieving a much tighter fit than Pampers and all but stopping leakage. The Kleenex name was tacked on the front to provide consumer reassurance that their beloved babies’ bottoms would be cared for as much as the nation’s runny noses. The brand was launched in Wisconsin and Michigan, an area of relative Pampers weakness. It was positioned not as a slightly better Luvs (which was not yet a significant player), but as a much better Pampers. The advertising was cleverly aligned. Huggies were helping mother’s battle leakage, rather than taking the credit, as Pampers had been doing. The tagline read: ‘Introducing a diaper that helps stop leaking’. This thought would remain communicated, in various expressions, for the next quarter century. Entering at a 30% premium to both Proctor & Gamble and Johnson & Johnson, Kleenex Huggies was racing to occupy and hold the ultra-premium segment identified by Luvs.

  Within four years Johnson & Johnson, which was offering nothing better than Pampers, was decimated, and withdrew from the category completely. Proctor & Gamble finally woke up to what was happening and rolled out Luvs nationally, but now they faced the retailing space problem. With Pampers as number one brand and Huggies number two; there was no reason for anyone to find extra shelf space to display Luvs. It had no advantages over Huggies. Proctor & Gamble used all its muscle to replace Huggies with Luvs, and at one point did match market share. Theirs was a push strategy against Huggies’ highly effective pull strategy (which was highly appropriate), which meant there would only be one winner.

  In 1983 Huggies achieved fully national distribution with a 21% market share and, even worse for Proctor & Gamble, kept gaining ground on Pampers. Huggies was not occupying a super-indulgent niche. It had staked out territory that was becoming the new standard. In 1985 Huggies overtook Pampers to lead the market. The gamble had paid off: Kimberly-Clark was now playing and winning in the big leagues of packaged goods.

  The two manufacturers waged a super-absorbency war for the rest of the 1980s. Cellulose padding was replaced by polymers with many times the absorbency. There was no decisive winner. Kimberly-Clark edged ahead with the introduction of Huggies Pull-ups in 1989. This captured a respectable 9% share, as Procter & Gamble were again slow to respond. By the end of the 1980s, Huggies was accounting for the bulk of Kimberly-Clark’s sales and profits, along with a sleeper brand launched in 1980. Depend tackled adult incontinence: Kimberly-Clark deftly addressed another sensitive subject on the back of their vast experience regarding menstruation. The company also had fledgling operations in the industrial sector with a variety of wipes, masks and paper-based coveralls, and a small healthcare division.

  The company had been successfully realigned behind consumer products - another newcomer was Poise pads (for adult light incontinence), which neatly extended the Kotex Lightdays technology. It had been saved from what would most likely have been a genteel slide into oblivion. Nevertheless, they were, not unlike Tambrands, essentially a one-brand company. As such, they were at risk of unforeseen technological breakthrough killing their golden goose. In a situation not dissimilar to that facing many companies today, they needed a step change in size and breadth. Otherwise, Kimberly-Clark and their Huggies brand were vulnerable to being snapped up by one of the industry goliaths such as Unilever.

  The answer lay in a merger with their long-time foe in the paper business, Scott Paper. Scott’s consumer division had headed in a different direction to Kimberley-Clark. They had built up strong positions in paper towels, toilet paper, and with Scotties tissues still hanging on as a second-tier value brand. Scott had also been much more aggressive than Kimberly-Clark in expanding internationally. This would provide a quick and cheap way to internationalise the Kimberly-Clark brands. Scott had been America’s most profitable paper company in the 1960s, but had fallen on hard times - due mostly to a variety of disastrous acquisitions. By 1991 Scott was losing money. Nevertheless, with sales of $4.7 billion in 1993, it was a major player.

  In 1994, Scott appointed Albert J. Dunlap as CEO, and he wasted no time in living up to his nickname of Chainsaw Al. Dunlap slashed every budget in sight, sold every building not deemed completely essential and cut staff numbers by 35%. Next, he began the search for a buyer. Kimberly-Clark was one of twenty-four candidates identified by the investment bankers. The $9.4 billion agreed merger between Kimberly-Clark and Scott in 1995 created a solid number two in consumer paper products behind Procter & Gamble. They had a sales presence in 150 countries and manufacturing operations in 33. To complete the deal, the Scotties brand in the United States had to be sold. Kimberly-Clark laid off 6,000 workers of their own to realise the cost synergies needed to make financial sense.

  It took a couple of years to get to grips with this vastly expanded business and repair the damage of Chainsaw Al’s slashing of 50% of Scott’s R&D budget. By 1999 Kimberly-Clark was turning over $12 billion a year. They introduced new and improved Scott’s bathroom tissue products, supported by advertising for the first time in a decade.

  The same year, the new company went on the acquisition trail to beef up its healthcare lines of surgical gowns, drapes and disposable face masks. They purchased Ballard Medical Products for $774 million, which added higher-value lines: such as Trach Care, the number one line of respiratory suction catheters; enteral feeding tubes; endoscopy devices and disposable defibrillator pads. This was soon followed by a range of purchases: including Safeskin, a leading maker of disposable gloves for hospitals and scientific institutions; the makers of Italy’s second-largest diaper brand; and a Polish tissue business. They also bought, where they could, rights or partnerships to market their brands abroad. Then in November 2004, the company spun off a newly created subsidiary, Neenah Paper. This was specifically created to divest the company of its remaining paper and pulp mills businesses. The transition to packaged goods was now complete, albeit with much enlarged healthcare and professional divisions.

  The International Dimension

  As with many US companies who transitioned into packaged goods, international expansion was not a priority for a long time. The first port of call was Canada, where the company began selling its products in 1925. They opened a newsprint mill there. They also formed a UK subsidiary to market Kotex and Kleenex but it was little more than an import office. In 1955, the company took the UK more seriously, yet still shied away from building any overseas factories. They signed up a British contract manufacturer to make Cellucotton under licence, with the products being distributed by a Kimberly-Clark subsidiary. Two years later a new British factory was
built in a joint venture with their partner, but was managed by Kimberly-Clark as they gradually took full control of their British outpost. Meanwhile in 1956, Scott Paper had entered into a British joint venture with Bowater Paper Mills, forming Bowater Scott. Their key brand was the highly successful Andrex toilet rolls.

  1955 saw Kimberley-Clark venture south of the border into Mexico, buying LA Aurora Paper Company. Renamed Kimberly-Clark de Mexico, it would flourish into one of the country’s leading consumer products companies, and used its factories to supply selling operations in Central and South America. In 1957 the British venture was used as a springboard into West Germany, but this three-way joint venture enjoyed limited success. Two years later, a ten-year deal was agreed with South African Pulp and Paper. They would make Cellucotton for Kimberly-Clark, which enabled the company to become a dominant player in that country’s sanitary napkin market.

  Things then went quiet on the international front until the 1960s when overseas expansion was seen as a major growth opportunity. The company invested $200 million beefing up its European and Latin American set-ups while also expanding into Australia and the Philippines. During the 1970s, 20% of the company’s operating assets were located outside the US, primarily in Europe and Mexico. Unfortunately, Kimberly-Clark’s British operation was far less successful than the Bowater-Scott venture and then Mexico became a problem during the 1980s. A devaluation of the Peso decimated profits. In 1984, the Canadian operation was given a shot in the arm with the launch of Huggies, but overall their international expansion had been very limited. Kimberly-Clark lagged far behind Procter & Gamble and Scott Paper despite now having operations in Korea and Japan.

  During the late 1980s and early 1990s, the company tried again. They invested over $500 million in Western Europe, launched diapers into Germany via a joint venture and built major new plants in Britain, Korea and Australia. As only second-tier marketing and distribution capabilities existed in those countries, these investments failed to pay back. Tentative ventures into Argentina and China did nothing to change the dynamic. Kimberly-Clark was mostly an also-ran in the rest of the world – a realisation that partly drove the merger with Scott Paper in 1995.

  Following the merger, the company used Scott subsidiaries as routes to market for the main Kimberly-Clark brands. They also made acquisitions in Switzerland (serving Germany and Austria), Spain and Portugal. In Taiwan the company bought out the Kimberly-Clark and Scott Paper joint venture partners, and merged the two to form Kimberly-Clark Taiwan into one of the country’s biggest consumer goods companies.

  Subsequently, the company has focused on expanding its presence in developing and emerging markets, especially the six BRICIT markets: Brazil (entered in 1996, with several subsequent acquisitions); Russia (first factory opened in 2010); India (a joint venture was formed in 1994 between Kimberley-Clark and Hindustan Lever); China (first entered in 1994 and now with four factories); Indonesia (entered in 1991 and now with 800 employees); and Turkey (joint venture established in 1999). Today, slightly under 50% of Kimberley-Clark sales are generated outside the US but less than 30% of operating profit. This reflects a company that is still in development mode in many parts of the world.

  How Are They Structured?

  The evolution of the company structure has been mostly straightforward. The US market has predominated and there has been a relative lack of a robust acquisition strategy for the larger part of the company’s history. The first major change was the re-incorporation of CPC back into the Kimberly-Clark main hierarchy in 1955. Shares in CPC had been sold to managers and employees and needed to be bought back. Following the change, marketing of CPC brands was taken over by the Kimberly-Clark marketing department.

  Four years later, there was a major reorganisation aimed to decentralise what had become a cumbersome, top-down structure. Separate divisions were created for Schweitzer cigarette papers, Newsprint, Canadian operations and Consumer Products, with a small International Division tacked onto the latter. The next major change came with the merger with Scott Papers. The structure eventually settled into three divisions: Personal Care; Consumer Tissue; and Business-to-Business. Each of these, to varying degrees, was sold in four regions: United States & Canada, Europe, Asia, Latin America and Other. By 2004, United States, Canada and Europe were consolidated into a North Atlantic Group and by 2006 Business-to-Business had been split into two groups. Professional and Healthcare reflected the increasing size and specialisation of the healthcare business, and had little in common with Scott Towels and Kimberly-Clark industrial wipes.

  What Have They Been Doing Recently?

  2004

  After the November 2004 spinoff of Neenah Paper Inc., Kimberly-Clark had annual sales of just over $15 billion. A consistent record of decent annual growth stretched back to the post-merger period. Innovation was less blockbuster and more incremental: such as Kotex Lightdays; a new folding design for Scottfold washroom dispenser towels; Huggies Convertibles; Goodnights Youth pants; Andrex with Aloe Vera and Kleenex Anti-viral tissues. The Huggies brand was extended laterally into bath and body products, using third-party manufacturers. The company recognised that greater R&D resource was needed to develop more breakthrough innovations. Other highlights included a 35% sales increase for Poise panty-liners and the company gaining number one position in the US in medical products such as face masks and exam gloves.

  At this point, 58% of sales were coming from the US. Business was split fairly evenly between the three divisions of Personal Care, Consumer Tissue and Business-to-Business. All regions and divisions were recording growth, with the non-US regions growing at a significantly faster rate. This partly reflected the company’s different levels of development - domestic versus overseas - and was also due to significant competitive challenges in the US markets. Of the eight main consumer product categories in which they competed (Diapers, Training/Youth/Swimming pants, Feminine Care, Adult Incontinence Care, Baby Wipes, Facial Tissue, Bathroom Tissue, and Paper Towels), Kimberly-Clark had gained share over the previous two years in only two of them (Adult Incontinence and Bathroom Tissue). This resulted in a need to discount and lower selling prices.

  Outside of the US, the European business, although recording level sales for personal care products, was struggling badly. Volume was down 7% and selling prices another 3%. The region was only rescued by a 10% favourable shift in currencies.

  2005

  The year was dominated by two announcements: a new focused growth strategy, and a major downsizing to pay for it. The growth strategy did not contain any real surprises:

  · Strengthen leadership positions in baby and child care, adult care and family care

  · Build on regional strengths in feminine care (Americas and parts of Asia)

  · Accelerate growth in BRICIT markets

  · Extend Professional portfolio into higher margin segments (workplace, safety, do-it-yourself)

  · Expand Healthcare globally, adding higher margin products to portfolio

  It is hard to argue with any of this, but it was easier said than done. The bill would be met by closing twenty factories and shedding 10% of the workforce. The attractiveness of the BRICIT markets was clear. These markets contained half the world’s population, most of the population growth and low but rising penetration of key Kimberley-Clark categories such as disposable diapers. The company was employing a fairly standard, multi-tier strategy in these markets. They offered: a range of low price, affordable products; mid-tier increased performance at good value; and premium priced products for the wealthy. In 2005, company sales grew by 30% in these markets. Elsewhere, the Healthcare strategy towards higher priced, higher margin products was boosted by the acquisition of Microcuff GmbH, for its proprietary endo-tracheal tube technology.

  Company sales increased a respectable 5.4% to just under $16 billion, with volume growing 3% and net pricing up by 1%. Matters improved in the problematic US market, as a slew of innovation advanced sales by 4%.


  2006

  With another 5% sales increase the new growth strategy seemed off to a reasonable start. But, as usual with multi-faceted growth strategies, some things go better and others not so well. Virtually all the volume growth in the year came from the Personal Care and Healthcare divisions. Consumer Tissue moved backwards: a 1% volume decline was probably caused by a 3% increase in net selling prices. On the profit side however, things were not quite so rosy: cost savings of $265 million was more than swallowed up by input cost increases of $385 million.

  What were the highlights of the current the growth strategy?

  Strengthen leadership positions in baby and childcare, adult care and family care

  Things seemed to be on track, with good volume growth in diapers in North America and Europe. The company had significantly reduced the time taken to get a range of incremental innovations to market. In tissues, the Scott brand’s sales in the US topped $1 billion - primarily via a strategy of competing in the value segment of the market - and more than $2 billion worldwide.

  Accelerate growth in BRICIT markets

  Without explanation, this had been promoted from being the number three strategic priority since 2005. Sales were up over 20% in these markets, led by an impressive 35% increase in China thanks to Huggies now being distributed in 40 cities (although the company lagged far behind Pampers in market share). With disposable diaper penetration in the country only reaching 10%, the future looked bright indeed.