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WIKI ANALYSIS
Kimberly-Clark (NYSE: KMB) is a consumer products giant. The multi-billion dollar corporation produces mainly paper products, including well-known brands such as Kleenex, Huggies, and Scott paper towels. Kimberly-Clark is perhaps most recognized for its innovation in its Pull-Ups diapers, a product to potty-train children with disposable diapers which seem to the child like underwear. This innovation, however, has not been followed up with more new consumer products in the past decade. With Kimberly-Clark's lack of return on research and development investment, new revenue generation will continue to be difficult to achieve.
Rising material costs and competition provide further obstacles in the consumer products industry, and Kimberly-Clark is definitely feeling the changes in rising oil prices, forestation regulations, and costs of wood pulp. Additionally, as consumers in the United States have become more price-aware spenders, KMB has seen enormous sales growth in developing and emerging markets. For example, its Kleenex bathroom tissue captured 10% market share in Russia after only a year after launch. [1]
With $19.4 billion in sales for FY 2008 and net income of $1.7 billion [2], Kimberly-Clark is a large force to be reckoned with in the consumer products industry. The company continues to hold a significant market share in paper hygiene products, with the No. 1 or No. 2 market share position in more than 80 countries.[3] In order to see continued growth and profits, however, Kimberly-Clark must come out with some new innovations or figure out a way to compete more effectively with cheaper products. If it cannot do this, it is possible that the company will become increasingly less profitable. For example, the company's net profit declined 9% during Q3 2008 as its raw materials costs reached an all- time high.[4] To cope with rising commodities prices, the KMB raised its prices across most of its products during the quarter, which was the main driver in the company's 8% growth in revenue.[4]
In Q4 2009, Kimberly-Clark reported $492 million in net income, or $1.16 per share, missing average analyst expectations of $1.25 per share.[5] Net sales came in at $4.8 billion, helped by higher prices and greater sales of Kleenex during flue season. Increased demand for face masks amid the spread of H1N1 resulted in a 22% overall increase in health care sales.[5] In fiscal 2009, the company cut 1,600 jobs in an effort to reduce costs.[5] Looking forward, KMB expects its revenue to grow in 2010 by 5-6%.[5]
Company Overview
Kimberly-Clark is a complex company with many different product areas. It is primarily a health and hygiene manufacturer, with well-known brands such as Kleenex, Huggies, Kotex, Pull-Ups, Scott, Andrex, Poise, and Depend. If you have been to a toilet or kitchen, you have likely seen a product made by Kimberly-Clark.
The company had sales of $18.3 billion in 2007 (and $9.8 billion in net sales for the first two quarters of FY 2008)[7], 76% of which came from sales of diapers, wipes, feminine products, tissues, paper towels, toilet paper, and other related paper tissue products. Its Q2 2009 revenue was $4.73 billion, 5.6% down from Q2 the year before.[8] Kimberly-Clark has also made a foray into the medical world with Kimberly-Clark Health Care, providing hygiene and sanitary products for health care professionals. Emerging market sales are now 31% of revenues, up from 25% a few years ago. Part of the success is driven by KMB's thorough consumer research, which includes home visits and shopping trips with consumers to better understand purchase decisions.
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Based in Dallas, Texas, Kimberly-Clark has operations all over the world, selling its products in over 150 countries. It employees around 55,000 individuals at numerous locations.
Business Segments
Kimberly-Clark operates into following four operating business segments. These business segments are based on product groupings.
- Personal Care (43% of net sales [9]): The Personal Care segment manufactures and markets disposable diapers, training and youth pants, and swimpants; baby wipes; feminine and incontinence care products; and related products. Products in this segment are primarily for household use and are sold under a variety of brand names, including Huggies, Pull-Ups, Little Swimmers, GoodNites, Kotex, Lightdays, Depend, Poise and other brand names.
- Consumer Tissue (35% of net sales [9]): The Consumer Tissue segment manufactures and markets facial and bathroom tissue, paper towels, napkins and related products for household use. Products in this segment are sold under the Kleenex, Scott, Cottonelle, Viva, Andrex, Scottex, Hakle, Page and other brand names.
- K-C Professional & Other (16% of net sales [9]): The K-C Professional & Other segment manufactures and markets facial and bathroom tissue, paper towels, napkins, wipers and a range of safety products for the away-from-home marketplace. Products in this segment are sold under the Kimberly-Clark, Kleenex, Scott, WypAll, Kimtech, Kleenguard and Kimcare brand names. This division was the only segment to post a fall in operating profit margin in the first quarter of 2009. Analysts say the division is struggling with the economic downturn because its customers include many restaurants and food service businesses. [10]
- Health Care (6% of net sales [9]): The Health Care segment manufactures and markets health care products such as surgical gowns, drapes, infection control products, sterilization wrap, disposable face masks and exam gloves, respiratory products and other disposable medical products. Products in this segment are sold under the Kimberly-Clark, Ballard and other brand names.
Branding and Differentiation
In addition to potential trouble with making and shipping products, the hygiene products industry faces fierce competition amongst brands. When forced with purchasing decisions, consumers will often choose the cheaper option if there is not a substantial quality difference. Thus, store brands which are traditionally cheaper than brand products of Kimberly-Clark will seem more appealing. To hold onto consumers and market share, Kimberly-Clark must continue to differentiate its products--both in perception and in actual quality. It did this in the early 1990’s with Huggies and Pull-Ups training diapers, but there has not been a significant new product like those in the past few years. Kimberly-Clark is, however, spending a good deal of money on investment and research, and the returns so far do not seem proportional.
One strategy that Kimberly-Clark has employed is product differentiation within a class. For example, there are several varieties and thicknesses of Kleenex or Scott Brand, and these “different” products provide consumers with a variety they cannot necessarily find in other brands, justifying the price. To do well, however, Kimberly-Clark must come out with new products in the near future and find ways to cut costs and hook consumers. Otherwise, it will likely continue to lose market share to cheaper versions of its products.
In recent years, discount retailers are aggressively introducing and marketing Private Label Products as they earn higher profit margins on private labels. Private Label Products are not of low quality and dull packaged anymore. Retailers are close to the consumers and better understand the purchasing behavior of the customers. They have the point of sales data and know the needs of customer by continuous communication with consumers. Retailers are leveraging on these strengths to design and launch better private label products that meet the demand of the consumers. Such private label brands directly compete with Consumer Goods Company for the customer and shelf space.
Trends and Forces
Raw Materials and Regulation
In addition to oil, Kimberly-Clark relies very heavily on other natural resources, namely trees from which it produces its paper products. The price of lumber is at the mercy of many forces, few of which can be controlled by Kimberly-Clark, and so this creates further uncertainty about the cost of production which once again creates uncertainty about revenue. Some factors include:
Climate Changes
Severe storms, droughts, and other weather phenomena effect the price of lumber. If severe weather occurs, growing seasons could be reduced, not as much lumber could be available, and this could raise the cost of lumber. A rise in the cost of lumber would decrease revenue margins, hurting Kimberly-Clark’s profits.
Government Regulations
There are strict regulations in developed (and some developing) countries about lumber harvesting. Only a certain number of trees can be taken and a certain number must be replanted. As regulations increase, the cost of lumber also increases, and in some cases the supply of lumber could be decreased. In the long run, regulation ensures that there will always be lumber, but if less is available it will cost more, once again driving up the cost of raw materials for Kimberly-Clark.
Environmental Sensitivity
Over the past few years, Kimberly-Clark has received negative attention from environmental activists at Greenpeace who claim that the company is cutting down ancient growth forests. The Kleercut campaign aims to smear Kimberly-Clark's reputation, and in some areas this has effected Kimberly-Clark's image and sales. The company is combating the campaign by claiming it is using sustainable methods and banning lumber harvesting on the Pacific Coast. Furthermore, KMB has also stepped up its use of environmentally sustainable business practices including use of green energy, like wind or solar power. Because of its enhanced environmental image, KMB found its way to the EPA's National Top 50 list of Fortune 500 green power users, ranked ninth.[11]
Supermarket Consolidation
As the supermarket industry becomes more consolidated, a smaller number of Kimberly-Clark's customers are accounting for a steadily larger percentage of its total sales. A prime example is Wal-Mart, Kimberly-Clark's largest customer, who accounted for around 13% of the company's 2007 sales.[12] As a result of this increasing dependence on fewer customers, Kimberly-Clark is losing a great deal of its ability to price its goods at a level that maximizes its own profit margins. Since Wal-Mart and other large retailers buy such a large amount of the company's goods, they can effectively bargain for lower prices; without them, Kimberly-Clark would lose a large percentage of its business. Also, retail chains, Wal-Mart in particular, have been placing an increased focus on private label goods, which provide higher margins for retailers and, usually, lower prices for customers. This trend could be detrimental to Kimberley-Clark and other manufacturers of branded goods as low-price, private label goods increase competition.
Population Demographics
One final, and perhaps underestimated, factor that shapes Kimberly-Clark's business is the number of babies being born. With diaper sales accounting for nearly a quarter of total revenue, a swing in the number of babies would likely have an effect on Kimberly-Clark's sales of diapers and total profit. The U.S. infant and toddler retail market today is worth approximately $39 billion. There is a huge amount of money to be had, and if Kimberly-Clark can tap into this with innovative ideas such as Pull-Ups training diapers, it could reap great rewards. The amount of money available does have to do with the age of a population, as well as wealth. If the US, Europe, or other developed countries see a rise in births, there will be more need for diapers, higher sales, and therefore higher revenue.
Management Initiatives and Progress
Management at Kimberly-Clark has well anticipated the challenges mentioned above and started some initiative which focused on following area.
strengthening position in various business segments by continuous innovation and increased demand In financial year 2007 company has achieved solid volume growth across baby & child care, adult care and consumer tissue segments. The growth was driven by hosts of innovations and demand for consumer tissue products internationally.
Accelerating Growth in D&E Markets In 2007, KMB has achieved 21% sales growth (22% sales growth quarter on quarter for the first quarter in 2008) in Developing and Emerging Markets and sales grew by approximately 13% in BRICIT countries (Brazil, Russia, India, China, Indonesia and Turkey), both of the drivers being increases in volume of sales.[13] International Sales contributed approximately 44% of Total Sales for FY 2007.
Extending the K-C Professional Portfolio in Higher-Margin Segment In year 2006, Company has introduced range of laboratory cleaning products, protective Clothes and Gloves, which helped drove the double digit Sales Growth in Safety Channel.
Customer Interaction and Collaboration with Retailers
While much of K-C's focus on targeted growth opportunities involves connecting with shoppers and users, K-C implemented a number of programs that helped it better connect with customers and become their indispensable partner.
In America and Europe, K-C gained market share by working with leading retailers to develop a new user program for K-C baby and child care products. Innovation summits and top-to-top meetings with its strategic customers in North America and Europe foster more open collaboration and helped K-C obtain insights and early support for a variety of initiatives, from new products to category development strategies.
As a result of this focus, Kimberly-Clark has seen a significant improvement in its standing among all customers. In the most recent annual Cannondale PoweRanking Survey, U.S. retailers for the first time ranked K-C among the top 10 consumer packaged goods companies. More than 350 retailers and manufacturers participated in this survey, ranking each other on strengths in areas such as sales organization, insights, supply chain management, marketing, category management and company strategy. Retailers ranked K-C substantially higher in 2006 across all measures.
Kimberly-Clark is Sensitive to Petroleum Prices
Fuel prices are one of the biggest factors in the manufacturing industry. Kimberly-Clark’s products must be shipped all around the country and the world, which requires gasoline. A rise in the price of oil can make shipping more expensive. Airlines, trucking companies, and ships all charge more to compensate for rising costs, and this extra cost must be absorbed either by the consumer or by the company. If the company passes this cost on to the consumer, this means that product prices will have to rise, which could turn away consumers and reduce sales. Alternatively, the company could leave prices alone and accept a smaller margin of profit on their products, but either way profits will likely decrease.
In addition to shipping costs, fuel costs affect general production costs. Most of Kimberly-Clark’s products come from trees, and getting the trees and manufacturing paper out of them requires an enormous amount of fuel. The entities involved are usually large factories, mills presses, et cetera, and to continue their own operations many of them also are exposed to energy related costs. A rise in fuel prices would make the production process more expensive, and as with shipping costs, the Kimberly-Clark would likely experience a decrease in revenue.
Competition
Competition in the health and hygiene products market is surprisingly fierce. Margins are not particularly high, and the variable costs, such as fuel prices and materials prices are constantly changing and somewhat unpredictable.
One competitor in the paper products market, SCA Tissue North America (SCA) is a strong company, not just in "away-from-home" tissue, such as toilet paper in public restrooms, but also in the incontinence market. Kimberly-Clark produces both these sorts of products: bathroom tissue for commercial use and Depends brand for incontinence. SCA is not as well known as Kimberly-Clark, but if its prices are right, it can certainly take part of the market from the brand-name giant.
Some of Kimberly-Clark's competitors in the consumer and hygiene product markets include Proctor & Gamble, Clorox, Colgate-Palmolive Company, and L'Oreal. While all specialize in slightly different areas of the market, all are in the consumer products industry and so can be compared across metrics. Competitors such as Proctor and Gamble (PG) are growing through acquisitions. KMB is not actively pursuing this mode of expansion. According to the company, acquisitions are only of interest if it can broaden the company's geography or help expand existing businesses such as in Health Care.
More importantly are the "no-name" brands, the store brands and smaller companies that produce facial tissue, toilet paper, etc at heavily discounted prices. For example, Costco produces Kirkland Brand facial tissue. This is in direct competition with Kleenex, and because Costco has its own brand, it makes a higher margin. There is no wholesaler or middleman in the process and so more of the revenue goes back directly to the company. CVS also produces "facial tissue." Ironically, most of us call these imitation products Kleenex, but they are not Kleenex brand and not Kimberly-Clark. In the same way that Band-Aid has become the common name for an adhesive bandage, Kleenex has become the common name for facial tissue, and Kimberly-Clark does not necessarily reap the rewards.
While the quality of the "no-name" products can be different than Kimberly-Clark, the savings are very salient to consumers, and so the biggest competitor to Kimberly-Clark is often the retail store that sells the company's products.
| Company | Revenue (mm) | Operating Income (mm) | Operating Margin | R&D Spending (mm) | R&D as % of Total Revenue | Major Brands/Products |
| Kimberly-Clark | $18,266 | $2,616 | 14.32% | $276 | 1.51% | Huggies Diapers, Kleenex Tissue, Scott Paper Towels |
| Procter & Gamble | $76,476 | $15,459 | 20.20% | $2,112 | 2.76% | Pantene, Crest, Tide, Downy, Bounty, Folgers, Gillette |
| Clorox | $4,847 | $128 | 15.33% | $474 | 9.78% | Clorox Laundry Bleach, Pine-Sol Cleaner, Glad Plastic Bags, Brita Water Filters |
| Colgate-Palmolive | $3,642 | $676 | 19.24% | $274 | 7.52% | Colgate Toothpaste, Colgate Toothbrushes, Irish Spring Soap, Palmolive Soap, SpeedStick Deodorant |
References
- ↑ Kimberly Clark investor newsletter
- ↑ KMB Annual Report 2008, "Selected Financial Data," page 16
- ↑ KMB 2008 10-K, Item 7 "Management's Discussion," page 19
- ↑ 4.0 4.1 [BusinessWeek.com "Kimberly-Clark 3Q profit declines 9%
- ↑ 5.0 5.1 5.2 5.3 Forbes "Kimberly-Clark Misses Estimates"
- ↑ Kimberly-Clark FY 2007 Annual Report, "Analysis of Consolidated Net Sales," page 29
- ↑ KMB Q2 FY 2008 10-K Quarterly Financial Report, "Part I, Financial Information," page 2.
- ↑ Google Finance: KMB
- ↑ 9.0 9.1 9.2 9.3 Kimberly-Clark 2008 Annual Report, page 2
- ↑ Reuters UK, "Kimberly-Clark profit falls; sees lower 2009 sales"
- ↑ "Kimberly-Clark Corporation Ranks No. 9 on EPA's Fortune 500 Green Power List" CNW Group
- ↑ Kimberly-Clark Y 2007 Annual Report, "Consolidated Operations by Business Segment," page 96
- ↑ Kimberly-Clark FY 2007 Annual Report, "Analysis of Net Sales," page 39
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