Toilet Issues

As three top managers arrive in the UK to rescue Kimberly-Clark from a European nightmare, the paper company is about to face the stiffest test yet in its most profitable European market – the UK.

Robert van der Merwe, Thomas Falk and Kathi Seifert are seen by K-C as the answer to some of the problems which resulted in it losing 64m on sales, down 244m to 1.5bn in Europe in 1997 (MW April 2).

Between them, the trio will be responsible for operational and marketing issues but their combined presence may not be enough to win the impending battle with Procter & Gamble in the UK paper products sector.

P&G has earmarked 300m to invest in plant to break into the UK’s buoyant toilet tissue and kitchen paper market, where K-C remains market leader with Andrex. It is poised to announce a 200m spend on building a tissue factory next to its Pampers nappy plant at Trafford Park in Manchester.

It is expected to use the plant for the UK launch of toilet paper brands such as US brand Charmin or German brand Bess, and kitchen paper products such as Bounty, already being rolled out across Europe. P&G invested a further Fr800m (80m) in buying K-C’s plant in Orleans, France, from where initially it is expected to source these products for the UK, in advance of the opening of the Trafford plant.

This could be bad news for K-C and its key brands Andrex toilet and kitchen paper and Kleenex tissues in the UK. In 1997, K-C’s European business made an operating loss of $105m on sales of $2.5bn, down from operating profits of $164m on sales of $2.9bn in 1996.

Two days after Marketing Week revealed K-C’s plans to sort out its European problems, the company’s chairman and chief executive Wayne Sanders flew into the UK to give a briefing on them.

Management of the European operation, previously handled by John van Steenberg, is to be broken into two product groups and integrated into the US structure. Van Steenberg becomes president of global development, working in developing markets.

Sanders has put Van der Merwe, head of North American feminine care, in charge of European operations. It is suggested that he will be responsible for running K-C’s factories across the continent.

But K-C’s European strategy will be run by two of Sanders’ top marketers: Falk, head of North American paper products and Seifert, head of North American personal care.

Falk will take over K-C’s European tissue business, and Seifert will run European personal care. K-C corporate affairs director Sarah Portway says this has been done “to ensure we bring all the resources we can into the European business by aligning Europe with the US”.

The UK is K-C’s most, and some say only, profitable European market. It’s home to K-C’s most successful plants, such as the Huggies nappy factory at Barton-upon-Humber. The Andrex brand leads the toilet tissue sector, increasing value market share for the first two months of this year to 27.5 per cent from 23.6 per cent last year according to industry figures.

But K-C does not perform so well in continental Europe, where it faces tough competition on all its products from P&G, as well as an array of smaller manufacturers.

The importance of the UK market is underlined by one observer: “The UK is being looked at to prop up the rest of Europe. It is a high-price market, and has the biggest margins with the most high fallutin’ products. KC will concentrate on the UK.”

K-C corporate affairs director Sarah Portway responds: “The UK is one of our profitable markets but not the only one. We will not focus solely on the UK.”

Part of K-C’s European problem lies in its production of own-label tissue. It has been squeezed on price by retailers, and increasing competition from own-label competitors. In K-C’s 1997 annual report, Sanders says: “In Europe, intense tissue competition has created more uncertainty than we’ve seen in a long time. Aggressive price-cutting by competitors, following considerable new capacity coming on line in early 1997, resulted in lower tissue volumes and prices, as well as higher promotional spending and production curtailment.”

Jim Brucculeri, vice-president at New York analyst Merrill Lynch, says: “Some 20 per cent of K-C volume was in private label, but it has lost share to Italian producers. The strategy was to build up the branded business, but this has not panned out.”

Observers suggest K-C may pull out of own-label altogether, though the company denies any decision has been made on this. Portway adds: “We are looking at the own- label side of the business, given what has happened, but we are not necessarily going to get out of it.”

Loo roll, tissues and kitchen towels account for about half of K-C’s global sales, and nappies account for a third. Since K-C introduced its Huggies nappies into Europe in 1994 it is thought to have taken up to 25 per cent of the European disposable nappy market, compared with the 50 per cent held by P&G’s Pampers. K-C is staking a lot on the expansion of its nappy business.

Brucculeri says K-C was unable to keep up with demand for Huggies last year, and needed to upgrade its Barton-upon-Humber factory, and increased capacity by 50 per cent. But this heavy investment was one factor which hit European profits last year. Brucculeri says it could be three years before K-C starts to break even on nappy production in Europe.

In feminine care, K-C has failed to make such a splash. It relaunched the Kotex brand at the end of last year. It had been considered as a bulky, old-fashioned tampon but has been updated and made more slimline. Kotex is expected to benefit from marketing support as

K-C converts it into a bigger global brand. But it still has a tiny market share compared with P&G, which has been bolstered by its Tambrands acquisition last year.

K-C’s problems are not only related to the way the market progresses. There are still some important implications stemming from K-C’s merger with Scott Paper in 1995.

Even Sanders admits that some aspects of the deal were misjudged. He says: “If we made a tactical error when K-C and Scott Paper were merged, it was in thinking that we could protect some of the older or less efficient facilities, which are among our most costly to operate.”

To address some of these problems, K-C announced at the end of last year an $800m (487m) restructuring package designed to cut 5,000 jobs, or seven per cent of its workforce, and close or sell off 18 production plants. The aim is to save $200m (121m) in costs each year. Sanders says there will be fewer, but larger, factories after the restructure.

But there is other fall-out from the Scott Paper merger which has harmed K-C in Europe. Competition authorities forced the company to sell its Kleenex loo roll and kitchen towel business, and it handed over the running of these brands to Swedish rival SCA.

As part of the deal, K-C also sold SCA the Prudhoe Tissue Mill outside Newcastle, which was developing advanced loo roll technology, such as the “Through Air Dried” (TAD) system. This allows the production of thick, but soft, loo paper. SCA has been able to transfer this technology to other markets, and has just built a new TAD machine in Germany, giving SCA a greater competitive edge over K-C across Europe. As part of the Prudhoe Mill deal, K-C acquired SCA’s Peaudouce nappy plant in France, one which had lost money for some time.

As if all this wasn’t bad enough, K-C now has to cope with P&G’s plans to bring its paper brands to the UK, the key market in K-C’s recovery plan. P&G’s traditional strategy is to enter a new market in a limited way, keeping product prices low before building distribution and advertising in earnest. It takes a long-term approach, and after ten to 20 years can end up dominating a category, as it has done with Ariel in washing detergents.

Observers believe P&G may use the Orleans plant to enter the UK paper market with limited supplies of toilet or facial tissue. This would prepare the ground for the opening of the Trafford Park paper mill, which could be built by 2001.

For Falk, the task will be to steer K-C out of the problematic own-label tissue market and build up the company’s branded tissue business. Andrex last year ploughed funds into marketing and promotions, and some observers see this as a defensive move before P&G’s entry into the UK market.

SCA UK’s vice-president of sales and marketing Harry Tintner says: “P&G will bring its kitchen towel and loo paper into the UK. Andrex has increased market share, but at a cost – it has been sold on promotion all year. K-C has started to behave as a challenger to P&G even though it is market leader.”

Tintner believes the arrival of P&G could benefit SCA as it will require a heavy advertising spend to get consumers comfortable with the new brands. This extra ad spend could benefit the whole sector. But it will be worrying for K-C in the long term, as it could see the strong performance of its UK market undermined by P&G encroachments.

Europe is the worst of K-C’s problems, though the picture is not so rosy in other parts of the world either. Its global net sales plunged $500m (305m) in 1997 to $12.5bn (7.6bn), with a similar $500m sum wiped off gross profits of $4.6bn (2.8bn).

But turning loss into profit in Europe will be fundamental to K-C’s general recovery. Much will rest on Falk’s ability to solve the own-label crisis, and also on how he can prepare for P&G’s onslaught in the UK.

Seifert will have to ensure that Kotex builds market share across Europe, and to make sure K-C has the capacity to cope with demand for the Huggies nappies, and that the division moves into profit as soon as possible.

K-C is likely to announce further restructuring of its European management over the coming weeks, and outline exactly how Falk and Seifert intend to turn round the European businesses. They are likely to invest heavily in promotion and marketing for the three product categories.

But it could be some years before K-C’s problems are sorted out, by which time the European landscape may be very different. The three new directors will have to take the axe to excess capacity and head off the threat from P&G with some sharp marketing activity.

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