Consumer Proximity in Emerging Markets Could Lift Kimberly Clark's Market Share


Kimberly Clark ( KMB ) is a world-leading producer of diapers, sanitary pads and tissues. Its portfolio of popular brands includes Huggies and Pull-Ups in baby care, Kotex and Depend in feminine care, and Kleenex and Scott in personal and professional tissues. The company traditionally competes with Procter and Gamble ( PG ) across a variety of business lines.

Kimberly Clark sells to consumers in over 150 countries, with manufacturing facilities spread over 41 countries. Localized operations are key to the company's success, and the company maintains one of the top two brands in its respective product segments in over 80 countries. However, almost 53% of its sales still come from the US and 15% from Western Europe, with developing markets contributing less than 32%.

Here we explore how proximity to consumers affects Kimberly Clark's business and how a greater presence in emerging markets could impact the company's stock value.

Low Usage of Tissue Products in Developing Markets

We estimate that tissues are the second largest product segment within Kimberly Clark after baby care, and constitute 28% of our estimate stock value. Our $74.48 prices estimate stands roughly 17% ahead of market price.

A close look at global trends in the consumption of tissues reveals a notable growth opportunity for Kimberly Clark. The per capita consumption of tissue varies from over 23 kilos in the US to as low as 0.48 kilos in Vietnam. Even within Asia, consumption varies from Japan's 14.25 kilos per consumer to Thailand's 1.08 kilos.

Even more encouraging than the opportunity to reduce this usage gap is the double-digit rate at which consumption is increasing in Asia. In mature markets such as North America and Europe, growth is effectively limited to an increase in the number of consumers and gains in market share from competitors. Unfortunately, growth of consumer base in these markets is limited to population growth and market share gains involve aggressive marketing and advertising, putting strain on operating margins.

Given low usage in emerging markets like Asia and Latin America, Kimberly Clark could focus on driving usage of tissues by communicating health and hygiene benefits or the importance of preserving water. The company could also strategically launch more specific tissue products (such as car tissues, summer tissues with enhanced sweat absorbent properties for the tropical climate, etc). This does not necessarily warrant increased advertising spending, but rather effective communication of a targeted message in order to increase consumption per user.

Such strategic initiatives, combined with high population growth rates and an expanding middle class in emerging markets like China and India, could provide Kimberly Clark with sizable long-term volume growth rates.

I mportance of Local Manufacturing

To fully benefit from emerging market growth, Kimberly Clark must not only sell to these markets, but also be able to manufacture locally. These consumers are often highly price conscious, so to compete with local and private labels, Kimberly Clark must price its products accordingly.

Tissue products are relatively voluminous, i.e. occupy more space for a given weight. The same truck can carry higher weight of detergent than toilet paper, for example, since the latter occupies more space and consequently requires more trucks for transport. Hence, moving tissue supplies over long distances could burden operating expenses with relatively higher logistics and warehousing costs. A positive here for Kimberly Clark is its already geographically dispersed manufacturing footprint.

What is the Upside for Kimberly Clark?

We currently estimate Kimberly Clark's share of consumer i.e. use-at-home tissues will decline slightly in the years ahead, from an estimated 11% in 2010, due to loss of sales volume to local competitors in emerging markets. If Kimberly Clarks were to increase its emphasis on these markets, however, the company could generate upside to market share beyond our forecasts. We note that our $74.48 price estimate already stands well ahead of market price, so any further upside in global market share would further solidify our bullish projections.

Drag the trend line in the modifiable chart above to see the impact of various global tissue market share scenarios on Kimberly Clark's stock value.

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See our detailed analysis for Kimberly Clark's stock here .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , Investing Ideas , Stocks , US Markets

Referenced Stocks: KMB , PG



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