Kimberly-Clark bucks the trend and aims high in China

Author: Magdalena Kondej

Date published: 15 Jul 2009

While many manufacturers are looking to drive growth in the booming Chinese disposable paper products market through low prices and increased penetration, Kimberly-Clark is planning to further focus on the high end of the price spectrum.

China's disposable paper products market grew by 11% in 2008 to reach RMB102 billion (US$14.6 billion), according to Euromonitor International figures, making it the world's second largest disposable paper products market. Furthermore, strong growth is set to continue with a CAGR of 10% predicted to 2013, driven by rising disposable incomes, increased hygiene awareness and growing consumer demand for convenience.

Fragmented market sees locals and multinationals in competition

The Chinese disposable paper products market is highly fragmented, with a multitude of local and multinational manufacturers vying for share. Kimberly-Clark currently ranks third in China with a 3% share of the market, based largely on its Comfort & Beauty, Huggies, Kotex and Kleenex brands, all targeted at higher-income consumers. Local player Hengan International currently takes the number one spot with a 9% share, while Kimberly-Clark's biggest global rival Procter & Gamble lies in second place with 8%, with all three companies gaining share in 2008.

As with many emerging markets, there remains a vast divide in China between the rich urban and the poorer rural areas. While the multinationals with recognised brands and higher price points tend to focus on and do well in first- and second-tier cities, local players generally focus their attention on third- and fourth-tier cities and gaining wider rural penetration, profiting from a vast number of sales at low prices. Although the current low levels of penetration in sanitary towels, nappies/diapers/pants and toilet paper in rural areas offer plenty of potential for growth, targeting the rural consumer also brings increased distribution costs and a lower price threshold, which can be a barrier to the major multinationals. As a result, leading domestic players are competing with the multinationals in terms of market share by expanding their production capacity and targeting untapped cities and provinces across China.

Tactics have grown Kimberly-Clark's share so far

The high-end strategy that Kimberly-Clark will further focus on during 2009 has been at the forefront of the company's plans in China for a number of years, and has so far stood the company in good stead. Kimberly-Clark entered the Chinese market in 1994 by acquiring local sanitary brand Shuermei. However, it wasn't until 2003 when the company's focus changed to upgrading its products, launching its global brands and concentrating on the higher-income consumer, that Kimberly-Clark saw any real breakthrough.

In opting to further focus on the urbanites of first- and second-tier cities, Kimberly-Clark is targeting a growing group of young consumers that are aspirational, affluent and willing to spend more on buying into Western brands. In line with this strategy, in 2008 Kimberly-Clark launched Kleenex pocket handkerchiefs decorated with a picture of Mickey Mouse to both appeal to these young consumers and coincide with the year of the mouse. As a result, the brand, which is the company's top performer in the country and the highest-ranked international tissue brand, gained market share.

Procter & Gamble prices appeal to all

Procter & Gamble entered the Chinese market four years before Kimberly-Clark and has made much bigger inroads in sanitary protection, nappies/diapers/pants and wipes in particular. Although this is partly down to being first to build brand loyalty, Procter & Gamble has also steadily grown its market share as a result of taking a different approach to Kimberly-Clark, positioning brands across the price spectrum. Procter & Gamble's main sanitary protection brand, and Chinese sector leader, Whisper, was initially slow to take off as it was perceived as being too expensive, so Procter & Gamble introduced a lower-priced cotton version of the product in 2006 to appeal to lower-income consumers. Likewise, Procter & Gamble's leading nappy brand Pampers is priced at three levels, appealing to parents of all incomes. This pricing strategy not only widens Procter & Gamble's penetration, but also means that loyal consumers are likely to trade up through the range when their financial situation allows, further driving value growth.

Locals also look to lower prices

Leading local manufacturer Hengan has over the past few years adopted a strategy similar to that of Procter & Gamble, diversifying its portfolio to offer products across the price spectrum. In 2008 the company launched the Pino brand of tissues, which is 10% more expensive than the company's existing brands and targets young professionals. At the opposite end of the spectrum, Hengan also launched Youxuan tissues, aimed at increasing rural penetration and priced at around 10% cheaper than the average tissue product.

Hengan's main local rival Guangdong Vinda Paper Co Ltd holds a 2% share of the Chinese market, and is a strong player across all tissue categories, again with products across the price spectrum, including luxury brands. Unlike Kimberly-Clark, the company is currently focusing its efforts lower down the price spectrum. The company launched its Yazhi and Yahui tissue products range at the end of 2008, targeting third- and fourth-tier cities. Local players are in a prime position to enter these areas and establish brands, having a definite advantage over the multinationals in terms of establishing distribution. Although Vinda will have to reduce unit prices to target these rural areas, the move comes at a time when raw material costs are falling, and being the first company to establish real brand loyalty in these areas will reap long-term rewards.

Aiming high brings potential risks

Although focusing further on premium products may be considered risky, as it means Kimberly-Clark is limiting its potential consumer base, pricing many out of the market at a time when the Chinese economy is feeling the effects of the global financial crisis, the tactic also means that the company is removing itself from the scrap for mass-market share and the price pressures that brings. With Procter & Gamble and Hengan making steady gains with wide-ranging price policies, it remains to be seen if Kimberly-Clark's high-end tactic will prove the right move.