by Greg Thain
Build on regional strengths in feminine care (Americas and parts of Asia)
The mystery attached to this priority having been relegated a place was resolved. News came that their US feminine hygiene business was in the doldrums with continued share losses.
Extend Professional portfolio into higher margin segments (workplace, safety, do-it-yourself)
More bad news. The division was essentially flat, year-on-year: despite bringing Wypall microfiber cloths to market in only eight months, and launching Kimtech Pure clean room wipers for the electronics industry.
Expand Healthcare globally, adding higher margin products to portfolio
A big success story. Global volume grew 7%, led by the company’s Sterling brand of exam gloves which, being made from nitrite, were proving to be a very successful, affordable alternative to latex gloves.
2007
Aided by a strong following wind on currencies, Kimberley-Clark had its best year for some time. They recorded a 9% sales increase, of which 6% came from volume, pricing and mix improvements. The stars of the show were the Personal Care division, where a volume increase of 8% contributed to a total sales increase of over 12%; and the non-North Atlantic markets, which delivered $1 billion of the total company growth of $1.5 billion. Highlights in Personal Care included a Huggies turnaround in North America, helped by a $50 million increase in the company’s total marketing spend; and growth of 21% in the Developing and Emerging markets. China again led with sales growth exceeding 40%. Since 2004, sales in total Developing and emerging markets had increased 25%, powered by a 50% increase in the BRICIT markets. Elsewhere, Consumer Tissues had a decent year, growing sales by 5% in the difficult North American market. However, the Healthcare division stuttered as the company withdrew from the latex gloves business.
2008
In a difficult year for all consumer businesses, a sales increase of 6% (up to a new record of $19.4 billion) was not to be sniffed at. Rapidly rising commodity costs meant that the company focused more on achieving price increases (up 4%) than driving volume (up 1%). Within the categories there were quite different dynamics: particularly in North America, where Personal Care sales inched ahead despite significant price increases. Consumer Tissue volumes were much less able to support higher prices, and volumes plummeted 7%. The situation was worse in the price-conscious paper towels category - volumes were down double-digit. In Developing and Emerging markets the same differences in category robustness were evident, but from a much higher baseline. Personal Care sales volumes increased by 10%, despite price increases, but Tissue sales remained flat. The BRICIT markets were again the highlight, as sales advanced another 30%.
The company was still putting cost savings money behind their brands. The marketing budget was again increased, by $95 million. One of the more notable innovations introduced was Kleenex Facial Tissue with Lotion, made using a proprietary technology. This benefited from the largest sampling campaign in the history of the brand. The company’s Healthcare division continued its transition away from its heritage. Paper-based disposable items gave way to still disposable but hi-tech medical devices, such as their new enteral feeding tube introducer kit and an expansion of their range of InteguSeal microbial sealants. This part of the portfolio was now becoming quite attractive, but at 7% of total company sales and 8% of operating profits, it was a long way from being a corporate game-changer.
2009
Perhaps 2008 had imbued an over-confidence that price increases could be pushed through relatively painlessly. The company increased prices by an average of 4% in a year when commodity input costs actually decreased and in a year when national economies, particularly the US and Europe, were sluggish to say the least. The outcome was a decline in total volumes of 1.5%, compounded by adverse currency rates. These wiped out the benefit of the price increases and more besides. The vibrant Personal Care category managed to grow volume by 2% and Healthcare had an exceptional year, growing volume 14%. However, fully one-third of this growth was in facemasks due to the H1N1 influenza virus. Hence it could not be counted on as anything other than a blip. Consumer tissue sales were down another 5% as was the Professional division.
Kimberly-Clark was now more reliant than ever before on the Personal care division for its profits: it accounted for 62% of operating profit compared to 44% of sales. But even within that, it was tough to extract consistent growth from the large US market and the European businesses, with exceptions like the UK and Italy, were something of a problem. In the rest of the world, organic sales of Personal Care products were up 15% as Kimberley-Clark expanded its reach, but few commanding positions were built. General nervousness about prospects was not helped by an end-of-year announcement of another 1,600 job cuts.
2010
Personal are once again effectively carried the business. Volume grew 3%: Health Care again provided the cream with a 7% increase. After several years of price increases and volume declines, it was difficult to escape the conclusion that the Consumer Tissue division was being milked. Its operating margin was half that coming from Personal care and clearly should be improved. The tissue category was much more commoditised than the various personal protection markets in which the company operated. Price increases that the market would not absorb and cutting headcount (another round of sackings and plant closures was to be announced in January 2011) was not looking like a viable long-term strategy for the division. Continued volume declines in a division that accounted for a third of company sales made overall progress difficult to achieve. This was in the absence of breakthrough innovation, and in truth, the company had not managed this since opening up the adult incontinence markets. The core problem was that the merger with Scott, while it had brought international and cost synergy opportunities, had not brought many strong brands into the portfolio. Nor had the R&D department pulled up any trees in the meantime.
2011
Another year and more of the same. Sales increased by 3% to $20.8 billion, with none of the trends changing. Personal Care was still driving volume growth along with the Health Care division, while Consumer Tissue was still putting up prices and losing volume. A change came in the international businesses outside of the North Atlantic. Dollar sales were up an apparently healthy-looking 8%, but volume actually declined by 6%. This was due to aggressive price increases of 7% and some minor divestments and market exits. These international businesses were now not managed regionally, but via a management group, K-C International.
The changing fortunes of the business now led the company to a revision of its growth strategy:
· Grow strong positions in personal care by using our brands and providing innovations
· For Consumer Tissue: bring differentiated, added-value innovations to grow and strengthen our brands; while focusing on net realised revenue, improving mix and reducing costs
· Continue the shift to faster-growing, higher margin segments within the Professional and Health Care divisions
· Drive growth through K-C International by deploying our strong brands and innovation capabilities
The real change from the past was a clear, increased emphasis on innovation. Kimberly-Clark had excelled at incremental innovations, particularly on the Personal Care brands with, for example, Huggies Little Movers Slip-On Diapers. However, in such established categories when facing well-established competitors, that kind of innovation is required just to stand still. It is difficult to think of a Kimberly-Clark major success that could not trace its roots back to Cellucotton, which had been invented during the First World War. Something needed to change in the R&D function. Also, the company’s self-set challenge in Consumer Tissue looked more like a wish list than a strategy: more and better innovation while reducing costs and putting prices up. Good luck with that one!
During the previous five years, Kimberly-Clark had increased top-line sales by an average of 2.8% a year, barely keeping up with inflation. Gross Profit had increased by an average of 1.6% a year, due mainly to
increases in raw material costs outstripping sales growth. Operating Profit had increased by only 6.7% across the entire five years, due to endless restructuring changes being taken to chase down fixed costs. Kimberly-Clark was beginning to look vulnerable.
2012
At the time of writing, the first three quarters of 2012 showed precious little change from the previous few years. Volumes were up in Personal care and Health care. There was a mixed bag in Professional; and prices were up and volumes down in Consumer Tissue. Geographically, North American sales were sluggish, Europe a mess and K-C International powering ahead. In the first three quarters of the year, K-C International sales were up 9%: including stellar performances in the Chinese, Russian and Brazilian diaper markets.
In many of Kimberly-Clark’s European operations, the company had been so late to the market that their diaper business had never really got off the ground despite two decades of effort. As a consequence, the company announced it would be exiting the diaper category in western and central Europe, along with the poorer performing tissue markets in some countries. This involved the sale or closure of five factories, the loss of around 1,400 jobs and a reduction in annual top-line sales of approximately $500 million. This left just a few European strongholds for Kimberly-Clark - UK, Italy, Spain, and Switzerland. These had mostly been developed from the Scott merger or subsequent acquisitions.
What is Their DNA?
A Kimberly-Clark DNA is quite difficult to define. Both Kimberly-Clark and Scott Paper built their businesses by understanding paper and the company still has much expertise in the area with Kleenex, Scott paper towels, Andrex and the like. However, the fact is that the growing parts of their business today have little to do with paper or its derivatives; it’s been a long time since Huggies were filled with Cellucotton. Nevertheless, there are interesting spikes of excellence among the spread of Kimberly-Clark’s businesses.
Trust
This might seem something of a given. In the world of consumer-packaged goods, every brand is a bond of trust between brand owner and brand consumer. However, Kimberly-Clark operates in areas that both require and engender a very strong bond of trust. We have a much more intimate relationship with many of their products than we do with, say, a can of Coca Cola. Most of the company’s large and thriving brands are in the fields of sanitary protection, incontinence protection, diapers and medical devices. We really need to know that these products do what it says on the pack and have been made to the highest standards.
The strength of Kimberly-Clark is that we completely trust their products on and in our bodies, dealing with issues that are a huge problem if the product fails. You cannot get more intimate than that. It is interesting that the parts of the company portfolio that are not doing well are ones that, by and large, do not have the same degree of trust dependence. If a Scott washroom towel doesn’t quite dry our hands, we can live with that. If we can’t depend on Depend, or an enteral feeding system, that is a deal-breaker.
Embarrassing Subjects
Another corollary of the company’s product fields is that, over the decades, they have built up an institutional expertise talking to consumers about difficult or embarrassing subjects. This requires an in-depth body of knowledge on how to do these things well: and to adapt the conversation over time to reflect changing social norms and differing cultures. Kimberly-Clark can be depended upon not to be tone-deaf in dealing with difficult subjects. At the moment, they may not have markedly superior products to the likes of Proctor & Gamble, but they have the capability to have more intimate conversations with consumers. Can they achieve sufficient leverage with this advantage? That is the issue.
Absorbency
If something needs mopping up in the workplace, soaking up from some bodily function, or wiping off something delicate, be it a sore nose or a computer component, Kimberly-Clark has the answer. It makes one wonder if there are other areas in which such expertise could be applied – soaking up oil spills in the Gulf of Mexico, for example.
Summary
Kimberly-Clark is a good example of how understanding the company’s history and development can illuminate issues in the business today. The company is built on three major events: the invention and propagation of Cellucotton; the bet-the-farm strategy of selling the mills and taking on Procter & Gamble in diapers; and the merger with Scott’s. The first move got a paper company into packaged goods. The second got a struggling packaged goods company into a dynamic set of new and growing categories. The third got the company into a dynamic and growing set of new countries.
However, the latter two came at a price. To compete head on with Proctor & Gamble over a long period of time demands that they be at least matched on R&D resource and sales and marketing umph. This is expensive. Equally, the Scott merger really saddled the business with an increasingly commoditised tissue business they could probably well do without. While the company is turning in decent enough increases in top-line sales, it is the source of the sales growth that is concerning. Too big a part of the portfolio is in volume decline, which, once entrenched, can be very difficult and expensive to stop. The company is chasing after the costs, the latest being named FORCE (Focus On Reducing Costs Everywhere), yet is constantly restructuring as tissue volumes decline further. Consequently, profit performance in recent years has been completely underwhelming. One cannot help thinking that what the company needs is a bold move #4 and to get rid of the tissue business completely. The proceeds could then be spent on really ramping up its international division.
Kraft
Where Did It Come From?
In 1903, you could have filled a medium-sized auditorium with the food industry pioneers whose brands would one day be sold as Kraft. Little did the likes of Oscar F. Mayer, C. W. Post, George Cadbury, Theodor Tobler and countless others realise their own business empires would disappear. Instead, their enterprises would be subsumed under the name of a 29-year-old Chicago cheese pedlar, whose sole asset was a rented cart and only employee was a horse named Paddy.
James Lewis Kraft (known as J.) was an offspring of a Canadian Mennonite family. He moved to Buffalo, New York State, and worked with a cheese company. While running the Chicago branch office, his less-than-reliable partners in Buffalo decided they could do better without him. So, he was left unemployed, with $65 to his name. JL had become well versed in the business, and saw an opening by setting up his own cheese delivery service. Cheese was plagued by poor quality and much waste, so JL was first in line at the wholesalers each morning to purchase the best cheeses. Then, with Paddy pulling his rented cart, he would make the rounds of local grocers.
Having saved them an early-morning trip, he now offered a high-quality product.
Superior quality and service is never a bad business model. Yet, JL struggled to make it viable. He was dismayed to discover, after totting up his December 1903 accounts, a loss of seventeen cents. This was the outcome of early starts and cart driving in all weathers. In 1905, he had the breakthrough idea of wrapping the cheeses and branding them ‘Elkhorn’. JL had realised that, as he was the guarantor of quality for his retail customers, this was in fact the primary requirement for a brand: trust. If he delivered already-wrapped cheeses under a wholesaler’s or producer’s name, he was a mere delivery boy. By choosing only the best cheese, he was able to brand his service – delivering reliably better cheese. This got things moving. JL soon relocated to larger premises, where four of his brothers and joined him, by 1911, the company was advertising Elkhorn cheeses across Chicago.
JL was far from happy. His brand promise was still in the hands of others. If the wholesaler’s stock lacked good cheese, JL’s choice of the best of a bad lot was not much help to his customers. After all, they were betting their reputations on the quality of cheese JL delivered. ‘Not quite as bad as someone else’s cheese’ was no help to JL, the Elkhorn brand or his customers. So JL spent countless hours experimenting. He aimed to blend cheeses to achieve a regular, dependable taste and
consistency. The blend would then be sterilised for an extended shelf life. If he could crack this, it would solve the main problems inherent in the category: inconsistent product and a painfully short shelf life.
Three years of experimentation got him nowhere. No matter which cheeses, temperatures and cooking methods he tried, the result was always the same: the cheese separated into protein and fat. Dismayed, his attention turned to beefing up the cheese wholesaling until the outbreak of World War One cut off imports of European cheeses. Kraft purchased an Illinois creamery to get into the production side and begin domestic manufacturing of Camembert, Brie, Edam and Gouda.
However JL never lost interest in coming up with a consistent sterilised cheese. His big breakthrough came in an experiment when he absentmindedly stirred the hot cheese for fifteen minutes and realised it had not separated. Excitedly, he poured the molten cheese into sterile containers, whereupon it set as it cooled. JL had inadvertently discovered the secret to the process: homogenising the cheese. In August 1915, the product was launched as Elkhorn Kraft Cheese (‘The cheese of creamy richness – will keep in any climate’). JL patented his process the next year.
While the breakthrough was good news for the Kraft’s, it was bad news for almost everyone else in the cheese industry. Kraft’s sterilised cheese was a genuine paradigm-shifting innovation. It brought product consistency and prolonged shelf life to a category beset by quality and freshness issues. Consequently, Kraft incurred the wrath of the cheese barons, Inflammatory press articles describing the product as imitation embalmed and even moonshine cheese. JL had one advantage: people liked his cheese.
It was also a big hit when America entered the war in 1917. The army purchased six million cans of Elkhorn to send to troops in France, which in the process created millions of brand advocates. After the war, Kraft Cheese was being widely advertised in the main magazines of the day; and by 1923, less than a decade after inventing the process, Kraft was the largest cheese company in the world.
