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.
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.
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. KMB has seen enormous sales growth in developing and emerging markets.
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 majority of KMB's revenue arise from sales of diapers, wipes, feminine products, tissues, paper towels, toilet paper, and other related paper tissue products. 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. 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.
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.
Kimberly-Clark operates into following four operating business segments. These business segments are based on product groupings.
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:
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.
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.
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.
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. 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.
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. 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.
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. nmnnhhhh
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.
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.
Pulp prices are a significant input factor into Kimberly Clark's cost of goods sold. Tissue products are almost 100% pulp, either tree-based or recycled. Therefore, producers are highly exposed to the price of pulp. KMB purchases about 2.5 million metric tons of pulp annually. A $50/ton price change translates into a $125 million a year movement in EBIT, or about $0.20 per share after taxes.
Privately owned SCA Tissue North America (SCA) manufactures washroom paper, tabletop sheets, tissues, and other paper products. It is one of the three largest producers of away-from-home tissue products in North America, supplying restaurants, schools, convenience stores, and stadiums.
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.