Where Did They Come From?
On March 26th, 1872, five Wisconsin businessmen pooled $30,000 to buy a paper mill. The initiator of the scheme, Charles Clark, who part-owned a hardware store, had heard a paper mill-owning neighbour boasting of his profits. So he corralled John A. Kimberly, Havilah Babcock, Frank Shattuck and George Whiting to come up with the necessary funds to get in on the act. The neighbour’s boasts were seemingly well grounded. In mid-to-late nineteenth-century America, both population and literacy levels were rising fast. These trends fuelled a steep rise in newspaper and magazine circulations, and consequently increased demand for newsprint and finer grades of printing paper. So when the partners opened their first paper mill on the Fox River in Neenah, Wisconsin, a few months later, their prospects seemed promising.
This was a Gilded Age, when virtually all consumer markets were mushrooming. The partners, like many businessmen, knew that success went mostly to the biggest and boldest thinkers. Their mill, at 210 by 88 feet, was large compared too more established set-ups. Only eight years later, having already opened a second mill and substantially upgraded both, the firm was incorporated as Kimberly, Clark & Co. It had a capitalisation of $400,000, a thirteen-fold increase. Clark’s neighbour hadn’t been exaggerating. By 1892, Kimberley, Clark & Co. had expanded into bond and ledger paper production through a new subsidiary. They were now by far the largest paper company on the Fox River. Their success had come, not from breakthrough innovation or some compelling new feature to their product, but from having a bolder and better-financed expansion strategy than their peers.
In 1893 they were making 55 tons of newsprint a week from one centralised large mill. They converted their other mills to the production of a wide spectrum of products, from cheap rag-based wrapping papers to the best manila grades and bond papers. Further expansion plans were put on hold as the good times in America came to a shuddering halt. During a three-year depression; paper prices dropped by 40%, and radical action was needed just to stay afloat. Wages were cut by 10% and John A. Kimberley organised his competitors into a Paper Makers Association. This cut back production through a coordinated mill shutdown programme across all manufacturers in the region.
By 1895, fifty paper companies had gone bankrupt. Profits at Kimberly, Clark & Co. had plummeted by over 70%, but they survived the crisis due to their aggressive response. As soon as a recovery was half-glimpsed, expansion plans were dusted off and mills were snapped up at rock-bottom prices. The company was now poised to resume its growth strategy, but success in the new century had to be based on more than buying up failed mills. The key differentiator for Kimberly, Clark & Co was to be innovation, driven by a state-of-the-art technical department.
How Did They Evolve?
In 1912, the company set out on a deliberate path of recruiting professional engineers and scientists to set up a properly organised technical department. Its role was primarily to codify the company’s quality-testing procedures, which was a common enough practice amongst their competitors. But Kimberly, Clark & Co was to take the concept much further. In 1914 they recruited an Austrian chemistry graduate from the Darmstadt Institute of Pulp and Paper Technology, Ernst Mahler. The need for Kimberly, Clark & Co to innovate was clear. They were one of the country’s biggest producers of newsprint, but newsprint prices had never recovered from the low point of 1895, and pulpwood costs were continuing to rise. The killer blow to the newsprint business, which was the mainstay of the company, was the passage of the Underwood Tariff Act in 1913. This opened the country to cheap Canadian imports of newsprint.
All American paper companies were in the same boat and all paddled the same way. They changed over their mills to tariff-protected products, such as paper for books, magazines, wrapping and toilet paper. However, the sudden massive rise in production capacity for those products simply depressed their prices. No one was any better off. Kimberly, Clark & Co managers had seen this coming as early as 1908, but it needed their Austrian paper genius to explore completely different possible products that could be made on their machines. He had to come up with something quickly as the company was already planning to exit newsprint altogether. The answer to their prayers came from a combination of a fact-finding trip to Germany by Mahler and Kimberly in 1914; and the devastation of the American cotton crop by the Boll Weevil. Mahler explored German scientists’ latest ideas on bleached groundwood pulp, and also enquired about the possibility of making a cotton wool-type product out of cellulose. This could be an alternative for sanitary-wound dressings. The consensus of opinion was that it was possible, although complicated, to turn tree trunks into ersatz cotton wool. Within a few months of his return, Mahler had mastered the process and had a product: Cellucotton.
The outbreak of war in Europe clearly indicated there might be a demand for such a product. The first samples of Cellucotton wound dressings were ready for testing in hospitals in 1915. The tests were a developer’s dream: not only did the product more than meet the required sanitary standards, it proved to be several times more absorbent than cotton. The dressings required changing less frequently, which was a big plus in busy hospitals. Meanwhile, the Boll weevil had decimated the American crop and driven up raw cotton prices. So Cellucotton cost 60% less than raw cotton. This looked to be a winner. Kimberly-Clark contacted the Surgeon-General of the War Department, and gave him a hard sell on the many benefits of Cellucotton wound dressings. The deal was swung when the company patriotically agreed to forgo all profits on supplies sold to the War Department and the Red Cross. By the end of 1917, the company was shipping wound dressings as fast as they could make them.
The end of the war in November 1918 brought matters to a shuddering halt and almost saw the end of Cellucotton. Huge orders were cancelled, forcing the company to immediately shutter one of its two mills devoted to the product. A second was kept going to supply hospitals who had latched onto the product. However, even this outlet disappeared. The Red Cross donated their stocks of wound dressings to hospitals free of charge; and the War Department dumped theirs to jobbers at rock bottom prices.
Cellucotton now seemed a commercial dead duck. Kimberly-Clark’s rivals, Scott Paper, had had a similar wartime experience. They had also developed a cellulose derivative, called Zorbik surgical dressings, which, after the war, they dropped completely. They could see no peacetime application for it. Thinking along the same lines, most of the senior management at Kimberly-Clark were keen to get back to the day job of making and selling paper. However, Mahler and Kimberly wanted to give Cellucotton one last go. They met with Walter Luecke, the Chicago representative of Sears Roebuck (to whom the company sold paper for the catalogue) and discussed possible alternative markets. The outcome was that Kimberly-Clark, made Luecke an offer he couldn’t refuse: to accept the specific brief of finding markets for Cellucotton.
Luecke reviewed all the correspondence the company had received about Cellucotton from France during the war. He noted letters from nurses who mentioned that the wound dressings also served as very serviceable sanitary napkins. Luecke saw immediately that here was a market of sufficient potential size to make it worthwhile starting up the factory again. But he failed to convince jobbers to buy his Cellucotton and make the napkins. They declared the project hopeless: such a product could never be advertised. Nevertheless, Luecke convinced Mahler and Kimberley to start production again to make a newly-designed sanitary napkin, while he went out to drum up some sales.
This was a classic example of a production-led strategy: ‘Here’s something we can make, now go and find a market for it’. This should of course have doomed it to failure, especially as the market experts who were consulted wouldn’t go anywhere near the idea. But Luecke’s background in Sears-Roebuck had given him a good grounding in the art of selling to the American housewife. His first priority was to hire an advertising agency, to come up with a good name and ads that would not offend the delicate sensibilities of the time. In a September 1919 meeting with the agency, they were playing around with the product descriptors. They latched onto its cotton-like texture, and out popped the name, Cotex. This was soon changed to Kotex to make sure it would be pronounced correctly. Later that month a few dozen boxes were shipped to a branch of Woolworth’s as a test market.
The problem from the start was how to sell the product. Most women used homemade towelling pads. This involved no embarrassment for buyer or vendor in a sales transaction. The difficulty with Kotex was how to avoid the inherent embarrassment of a transaction for a product that had only one possible use, for an unmentionable topic. The problem was not unlike that faced by condom manufacturers in less enlightened times. Indeed, so big an issue was the embarrassment factor that Walter Luecke got an edict from on high that in no way could the Kimberly-Clark name be associated with such a product. So he set up a subsidiary, the Cellucotton Products Company (CPC), to be the name on the box. Needless to say, nowhere on the box appeared the dreaded term, ‘sanitary napkins’.
Perhaps unsurprisingly, Luecke test marketing was not an immediate success. Here was a brand no-one had heard of, that did not mention its function on the package, and was for a use people found too embarrassing to ask for. Shopkeepers were equally embarrassed and kept the product out of sight. When people did find out what it was all about, the company was bombarded with letters strongly objecting to them selling the product at all. However, consumer pressure groups did not have the pulling power they do in today’s social media world. Luecke binned the letters and pressed on. He was going to solve the manifold problems of selling Kotex.
Luecke experimented with direct marketing: he sent free samples to women whose addresses he had found in the phone book. That failed - not one contacted the company to take up the offer of regular supplies by mail. Luecke reluctantly concluded that the only viable means of selling Kotex would be through jobbers and wholesalers, backed by a two-pronged advertising campaign. Trade advertising would come first, to establish the wartime and medical credentials for the brand with the retailer. The consumer campaign would follow, again full of medical terms and imagery, with the primary aim of building name recognition. The idea was to reach a point when the customer would simply ask for a box of Kotex, rather than mutter sanitary napkins under her breath. But it was an uphill struggle. Luecke was battling deeply ingrained social taboo.
The turning point is legendary. The president of the company’s advertising agency arranged a face-to-face with the editor of the widely read and highly influential Ladies Home Journal. The editor flatly refused to run the Kotex ad. In desperation, the agency president pleaded to show it to the editor’s secretary, a white-haired lady in her sixties. If she didn’t like the ad, he would accept the editor’s judgement. But if she did, then the editor ought to run it. A coin-toss. The editor took the bait. He presumably thought his secretary to be the epitome either of upright, or uptight, American womanhood, and support his editorial policy. Her pronouncement could not have been more emphatic. Not only was Kotex a good thing, and something that women deserved to be told about, but also the Journal had to run the ad. The editor meekly complied.
Was Kotex now off to the races? In 1921, $172,000 was spent on advertising across a range of women’s magazines. Few sales resulted, so Luecke’s request for a further $200,000 for 1922 occasioned a good degree of boardroom nervousness. Nevertheless, the board bravely bore down on their investment, as the only hope of getting back a penny of what they had put in so far. The missing piece of the sales puzzle fell into place during 1922. The company hit on the idea of making the product a self-service item. This way the embarrassment factor could be avoided. While it may seem an obvious answer today, in 1922 self-service was almost unheard of. Shops were staffed by clerks who went and got what the customer asked for. A few pioneers, such as Clarence Saunders’ Piggly Wiggly chain, had been experimenting with self-service stores with just a cashier at the exit. Otherwise, the concept was seen as being very raw, if not downright odd. Not least because it required a host of other, as yet unrealised inventions - such as the shopping cart and pricing guns - to make it function well.
Retailers were now bombarded by trade advertisements encouraging them to place Kotex’s box on the counter by the till. The box was now shorn of everything but a large Kotex logo and a medicinal-looking white cross. This was now an integral part of the design. A coin box next to the Kotex would avoid the need for any interaction with store clerks at all. With consumer advertising going full steam ahead, and creating awareness and demand, sales turned the corner. By 1924 the company was converting more mills over to Cellucotton and Kotex production. Sales were further improved by Luecke’s brainwave: sell the product via vending machines in ladies rest rooms. There he decided to sell singles rather than full boxes. He was not going to upset the retail trade that he had worked so hard to win over.
The corner had been turned but it had been close run. It was based on two remarkable insights. First, that a wound dressing could be adapted to a completely different use. Then, that a handful of throwaway comments from consumers could be a compelling basis for a new product. At the time no one was knocking down the doors of paper companies demanding disposable sanitary towels. Equally, manufacturing-led strategies are not always a bad idea when you have a breakthrough technology, and the ideal application isn’t immediately obvious. Scott gave up and lost out on a goldmine. Kimberly-Clark could very easily have given up on the whole idea at several points, but went on to reap enormous benefits from their perseverance. Within five years of Luecke begging for a $200,000 spend on advertising; he was lavishing $3 million on the brand. Kotex was well on the way, not only to creating but owning a new and fast-growing category. Although paper was to be the mainstay of company sales for many years to come, the future of the business was now in the arena of branded packaged goods. This put them into a new realm of direct competition. The success of Kotex attracted a host of competitors, manufacturers and retailers alike. They piled into the market with cheaper versions. CPC responded by reinforcing their high ground position: improving the base product and beginning to segment the market with different pads for different needs. This maintained the value of their price premium. Their advertising featured men in white coats warning darkly of the dangers of; unsafe and unsanitary makeshift methods’.
The game changed in 1926 when Johnson & Johnson entered the fray. They launched Modess and Nupak pads, which, by being thinner, claimed to be less visible under clothing. Kotex responded with a thinner version of their own, rounded and tapered at the ends for even greater invisibility. They hired a fashion model, Lee Miller, who was the first real human used in their ads, to demonstrate the point - wearing a series of swish evening gowns and apparently little else. By 1929, CPC was delivering nearly $2 million profits a year into the parent company.
Meanwhile, the company had been developing the product that would become its next blockbuster, Kleenex Tissues. In true company style, they invented the tissues with an intended use that was completely different to the one that would make the brand famous. The origins of Kleenex go back to 1917, when company researchers developed exceptionally thin sheets of Cellucotton as potential filter linings for gas masks. The Armistice saw the end of that project. It languished for a few years until a bright laboratory assistant observed the rising use of makeup (previously restricted to loose women and in the theatre), and suggested the product might be marketed as something to remove makeup at the end of the day.
In 1923 a project was given the go-ahead to market the already-named Kleenex (which was priced at 65 cents a box of 200 sheets sized 5 by 6 inches) as a cold cream remover. Advertising highlighted the product’s close association with Kotex but to disappointing effect. Sales were sluggish. Consumer research revealed the product was too small for its herculean task. So, in 1926, it was upsized to a 9 by 10 inch sheet. This, along with a pop-up box, which left the next tissue standing, was the turning point for the brand. Sales almost doubled in the next two years, to just under $1 million a year.
Then consumer surveys revealed that the sales growth had nothing to do with cold cream removal. 61% of buyers were using the product to blow their noses. Once again, the consumer had done a better job of positioning a product than the CPC marketing department. To their credit, CPC managers immediately latched onto this killer fact. They changed the name from Kleenex Cleansing Tissues to Kleenex Disposable Handkerchiefs. CPC threw a whopping $548,000 behind a new ad campaign in 1930 to announce the news, then doubled the spending for the following year. These were bold moves in the middle of the Great Depression. Wary of the way low price competitors had impacted upon Kotex, CPC initiated the production of lower-priced, private or own-label versions for most of the big retailers.
Throughout the Great Depression, sales of both Kotex and Kleenex continued to grow. Kotex was marketed to the trade as a business builder: every woman who came in to the store to buy them would invariably buy something else just to mask the residual embarrassment factor. The argument was similar to that of stocking condoms in pharmacies: it would have the positive effect of stimulating toothbrush sales by young men who suddenly became dentally aware. Kleenex sales grew simply because it was a breakthrough product. People saw it as far more hygienic than using and reusing fabric handkerchiefs which could spread infection far and wide. No doubt memories of the postwar Spanish Flu pandemic helped to fuel such sentiments. Kleenex sales were to increase seven-fold in the decade. Not only had the brand been repositioned, and then dominated market share, but the brand name became the descriptive noun of the entire category. This was the second time CPC had achieved this rare feat.
However, nothing lasts forever. Kotex experienced a much greater challenge than low-price competitors when in 1932 Earle Haas, a family doctor but working in his garage, developed Tampax tampons. In a story familiar to inventors even today (such as James Dyson), Earle touted his invention around the sanitary napkin manufacturers and was shown the door. Dispirited, he sold out to a Denver businesswoman, Gertrude Tenderich. She was made of sterner stuff. In 1934 Gertrude incorporated the Tampax Sales Corporation, and prepared to battle the big boys. Kimberly-Clark saw that their world had been changed in one fell swoop, yet tried to adapt. Fearful of missing this new market, they immediately developed their own version. This was launched in 1935 under the brand name Fibs. Not a promising start, especially as the company pulled its punches on positioning. Fibs was advertised as an adjunct to Kotex, to be used on the lighter days at the beginning and end of the period, or for hot summer days when wearing a sanitary napkin would be more uncomfortable. Worse, Fibs was flawed. It wasn’t as absorbent as Tampax. To their credit, the company did not throw good money after bad and gave up on Fibs. They worked instead to consolidate Kotex’s appeal with the very large market of women who were wary of using tampons.
CPC realised that their best chance of long-term success with Kotex was to be the first sanitary protection in a girl’s life. Hopefully she would then stick with it until menopause. They were aware that every year, due to the effects of Mother Nature, approximately 2.5% of their loyal consumers would stop using their products forever. The aim was to replace these consumers by another 2.5% who had no experience whatsoever of the category. Their first effort at moulding young female minds had been a booklet they published in 1932. Marjorie May’s 12th Birthday was designed primarily as a guide for mothers on raising the topic – a difficult task in those days. In 1940, the company changed tack. They produced ’From One Girl to Another’, which replaced the fictional mother-daughter dynamic with a more conversational tone, with the style and language used between young friends.
The next step towards establishing early brand choice was much more ambitious. The Walt Disney Company was hired to make an animated film that would be distributed to high schools across the country, along with mountains of free promotional literature. The Story of Menstruation was very innovative for the time. However, being Disney-made, it was somewhat less than graphic in its depictions of the questionable delights of menstruation awaiting the young audiences. The film also relied on politically correct language rather than using terms in common parlance in high school girls’ washrooms.
Encouraged by the success of The Story of Menstruation, CPC commissioned Disney to produce How to Catch a Cold for Kleenex. Costing $150,000 and released in 1951 in full colour, the film would not only be shown for years in schools; but was adopted by NBC as a demonstration of the benefits of colour television and shown nationwide throughout the 1950s. At the end of its run it had been seen by 200 million. This was more people than had seen any of the classic Disney movies to that point, and the airtime didn’t cost CPC a penny!
During the 1950s, Kleenex’s market share, in a still-growing market, hovered around the 50% mark. Much of the rest consisted of store brands also produced by CPC. But the wolves were circling this increasingly fatted calf. Scott Paper had launched the Scotties brand in 1955, spending heavily to promote its improved softness versus Kleenex. Scotties was unable to break through, gaining less than 10% of the market. However, Kleenex would fare less well when the Death Star of consumer packaged goods companies, Proctor & Gamble, entered the fray in 1960. They launched two dramatically better products: White Cloud toilet paper was bad news for Scott Paper; and Puffs facial tissues was equally disastrous for CPC.
Although CPC had developed two powerhouse brands in Kotex and Kleenex, parent company Kimberly-Clark was still primarily in the pulp and paper business. It was therefore under-equipped to battle the mighty Proctor & Gamble, toe-to-toe on the grocery shelves. By 1965, Kleenex’s market share, which peaked a decade earlier at 53%, was down to 32% and with no sign of the floor being reached anytime soon. This trend had not been helped by the parent company devoting much of its time and resources to a series of acquisitions in the commercial paper part of the business. They purchased the Schweitzer Inc. cigarette paper business in 1957 and the American Envelope Company in 1959. As they already had a large industrial products division, developing such areas as new envelope glues and impregnated papers to cover plywood sheets, Kimberly-Clark’s R&D resource was diverted from fighting the Proctor & Gamble monolith.
The company added to its troubles during the first half of the 1950s by spending virtually nothing in developing Kotex. This was despite the brand accounting for 35% of company profits. As a consequence, it became vulnerable to competitive attack. Between 1951 and 1957, the brand lost a full ten share points, albeit down to a still dominant 62%. The aggressor was Johnson & Johnson who developed a markedly superior pad, Modess. Kimberly-Clark fought back belatedly but made a serious misstep when they introduced a completely new brand. Fems was targeted at the larger woman, but only achieved a paltry 5% market share, and further diverted precious advertising funds away from Kotex.
To make matters worse, the changing consumer culture of the 1960s saw a slow but inexorable shift in the sanitary protection market from pads to tampons. This was led by the now thriving Tampax. In 1959 Kimberly-Clark started to develop a new tampon and realised they had no new technology with which to trump Tampax on the absorbency front. So they focused their efforts on improving methods of insertion and removal. They resolved to insert the tampon with an attached ‘slim inserter’ stick in place of Tampax’s bulky cardboard applicator and used, for removal, a presumably more reliable knotted double string rather than Tampax’s single. These solutions were pushed hard in advertising campaigns and desperate price-cutting tactics were adopted, but the brand failed to make a dent in Tampax.
During the 1960s sales of tampons in America trebled to around a third of the market. Sales of sanitary towels remained static. Kotex had a strong but somewhat precarious share of a static market. This was bad enough but almost a highlight compared to the disaster befalling Kleenex. Procter & Gamble’s onslaught caught Kimberly-Clark in a vice, resorting both to hefty price-cutting and increased promotional spending. The only way this could be paid for was by job cuts. Kimberly-Clark seemed set on a strategy of shrinking to greatness through leaner headcount and margins. One glimmer of light came with the 1968 launch of Kleenex Boutique. It featured stylish designs upon oval boxes, and aimed to brighten up the nation’s bathroom shelves. Despite lavishing 22% of the entire tissue category’s advertising spend on the launch; the outcome was a first year market share of 2%. It rose to 6% the following year, but two-thirds of this came at the expense of the main Kleenex brand.
Kimberly-Clark turned increasingly towards other paper markets, but even that side of the business wasn’t going very well after a few ill-judged acquisitions. Between 1957 and 1970, the company’s net earnings, as a percentage of sales, declined slowly and inexorably from 8% to a shade over 4%. This was significantly worse than their archrival, Scott Paper. In 1972, earnings dropped again to 3.4%, their worst year since 1934. It looked like the consumer packaged goods side of Kimberly-Clark would turn out to be a glorious but ultimately futile chapter in the history of a commercial paper company that was increasingly shaky anyway. Both their key brands seemed to have a future of decline and despair, and the company was making next to no money elsewhere. Their strategic muddle was illustrated when the company set up K-C Aviation to service planes: they also transformed their executive airplane fleet into a scheduled airline. If you assessed company chances of quintupling its share price in the 1970s, Kimberly-Clark would be least likely. Yet, they did it, and by accomplishing a seemingly impossible feat: vanquishing Procter & Gamble.
How Did They Build The Modern Business?
The turning point for Kimberly-Clark can be traced back to the appointment of Darwin Smith as chairman and CEO in 1971. A bleak future awaited as a paper company with a couple of fading consumer brands. In his in-tray lay a bold plan: essentially to exit many of their pulp and paper businesses and to channel the funds into building resources and capabilities to become a fully-fledged consumer business. Now a packaged goods powerhouse beckoned.
Only hindsight makes this plan look obvious. Selling off a collection of paper mills would provide more funds for the consumer side, but Kimberly-Clark’s problem was not simply a lack of funds. At the time, there was little evidence that Kimberly-Clark had the brands, the R&D expertise or the marketing capabilities to do anything different. For a decade or so, they had seemed capable of only an orderly management of declining brands. However, in the absence of a better plan and mindful that the company still had a 40% share of the feminine hygiene market, Darwin gave the go-ahead. Kimberly-Clark began the process by getting out of the coated paper business.
As the business re-orientated itself, there was more bad news. Johnson & Johnson, who now had a 25% share in the sanitary towel market, came out with a game-changer that they test marketed in 1969: the tab-less pad. Until now, Kotex and other pads had to be held in place via sanitary belts or safety pins. This arrangement was disliked by the consumer due to the fiddling around, and satisfactory to Kimberly-Clark who made a healthy profit on the sale of sanitary belts. This revenue stream had deterred the company doing much development work to solve the consumer problem.
Johnson & Johnson’s new Stayfree brand, launched nationally in 1971, used an innovative adhesive strip along the bottom of the pad to hold it securely to the underwear - no belts or pins required. As well as being more convenient, it also greatly reduced chaffing. Taken together, the advantages of Stayfree over Kotex were vast. Johnson & Johnson had not only improved a product, they had effectively invented a new category. In fifteen years the market for tabbed pads such as Kotex would disappear. Just to add to the pain, the Stayfree launch coincided almost exactly with the relaxation of the National Association of Broadcasters’ ban on the television advertising of tampons and sanitary pads. Stayfree now had the most powerful medium the world had ever seen to ram home its advantages over Kotex.
Kimberly-Clark’s sensible strategy at that point was to redesign Kotex as a tab-less pad as quickly as possible and then drown out Stayfree’s advertising with their own monster television campaign. Unfortunately, they did neither. They did design a tab-less pad in record time, having it ready only six months after Stayfree, but launched it as a completely new brand under the name of New Freedom. Meanwhile Kotex didn’t take to the airwaves to defend its position until 1974, by which time the game was as good as over. New Freedom established itself and steadily gained market share, but could not compensate for the precipitous decline of Kotex - even after the towel was thrown in with a belated redesign to tab-less format in 1975. By then, what was nearly a 60% market share in 1970 had declined to 35% and would eventually bottom out at 15% in the mid-1980s. In 1976, market leadership passed to the ever-growing, newly named Tambrands, who themselves were eclipsed a year later by the Stayfree-inspired Johnson & Johnson. How are the mighty fallen in the midst of battle!
However, this did not mean that Darwin Smith’s realignment strategy was a bust. While Kotex was heading for the rocks, the funds from the sales of various paper mills had been partly ploughed into beefing up the R&D function. This was in itself realigned away from paper, glue and laminates towards higher margins, innovative consumer products that used Kimberly-Clark’s base Cellucotton technologies. First out of the gate was the launch of the Kotex Lightdays Panty Liner in 1975. This both created a new category and also effectively kept the Kotex brand alive. However, the home run that would really change Kimberly-Clark’s fortunes was to come where it was least expected. They took on Procter & Gamble on their home ground; a market they created and completely dominated disposable diapers.
Soon after Proctor & Gamble bought the Charmin Paper Company, a researcher initiated a project to develop a disposable diaper. The result, after three failed test markets, was Pampers, launched in 1961. For reasons best known to themselves, the other paper companies initially gave Proctor & Gamble a free run, As a consequence they missed out on the fastest-growing consumer paper products market of the 1960s (the diaper fillings at that point being cellulose-based). Kimberly-Clark finally began work on their own version in the mid-1960s, using what their designer claimed was a superior folding pattern that better protected against leakage. That would prove somewhat debatable, but the product they test-marketed in 1968, Kimbies, did have an advantage over Pampers: adhesive strips rather than pins.
This advantage did not last long. Pampers redesigned in 1969 so they too used tape, and then the CPC research money for further improvements ran out as the company was hit by the twin disasters befalling Kotex and Kleenex. When Johnson & Johnson brought out a new diaper with fastening tape, Kimbies was all but dead. However, it would be revived by the cash influx coming from the sell-the-mills strategy. The board allocated $17 million to the project to see if something could be salvaged. By 1973 Kimbies was barely on the Proctor & Gamble’s radar; but it was a respectable performer in the second-tier of brands, making a modest profit off one billion units.
Until Kimberly-Clark scored another own goal. In this accident-prone phase, the company switched to cheaper glue on the adhesive tabs. The significant loss of adhesion caused anger and anguish for parents across the country. This sounded the death knell for Kimbies which was withdrawn in 1975. The company’s launch of Wypall industrial wipers in the same year did little to lift the gloom.
The situation seemed hopeless, but CEO Darwin Smith was buoyed with the funds from selling the mills and with little else to go for anyway. He encouraged one more look at getting into the category, starting from treating the entire history of Kimbies as a learning exercise. A post review of the project identified five main weaknesses:
· The unique folding design had in fact caused more leakages than did Pampers
· The test marketing they had done had been insufficient
· Inadequate product research and engineering
· The glue fiasco had diverted R&D resource at a critical time
· Inadequate market research
Despite this indictment of the Kimberly-Clark marketing and technical departments, Smith channelled all of the proceeds of a 1975 mill sale and even diverted funds from Kotex and Kleenex into a last roll of the dice. He was effectively betting the future of the company that they could beat Procter & Gamble second time around.
The good news was that Procter & Gamble, while not exactly falling asleep at the wheel, did have a few chinks in their armour. Pampers was not a perfect product. They too had glueing problems with the adhesive strips, plus the rectangular shape of the unit inevitably caused bunching between the legs and some leakage. Procter & Gamble had acknowledged this by launching an elasticated, hourglass-shaped diaper in 1976 under the brand name Luvs. They were uncharacteristically hesitant about taking Luvs to a national coverage. Luvs were a super-premium diaper, priced 50% higher than Pampers. Darwin sensed an opening. Procter & Gamble were in effect admitting that Pampers was not the be all and end all of disposable diapers, yet were sluggish in pursuing the opportunity Luvs had identified.
The Kimbies post-mortem had identified three factors where any new brand had to excel to have any chance of succeeding:
· The dryer the baby’s bottom for longer, the better
· A reduction in, or elimination of leakage versus Pampers
· An adhesive tape that was reusable several times over without any danger of coming unstuck (something no manufacturer had yet achieved)
Achieve this excellence and consumers had indicated they would pay a substantial premium over Pampers. With an R&D budget four times that allocated to Kimbies, work commenced. The clock was ticking: if Procter & Gamble spent big to establish Luvs on a national footing, the window of opportunity would close.
As well as product issues, there was also a significant retailing issue to be solved. How to get on the shelves? Procter & Gamble had created a must-stock category that was as much a business builder as had been Kotex 50 years earlier. But the product was so bulky, and had such a fast turnover; it had to be allocated a disproportionate amount of shelf space just to keep in stock during the shopping day. Consequently, unlike most other product categories, retailers in even the biggest stores had a huge reluctance to stock any more than the top two brands, and maybe a cheaper private label. Therefore, for any new diaper to succeed, it had at the very least to knock the number two brand out (currently held by Johnson & Johnson). A huge challenge.
By December 1977, Kimberly-Clark was ready to go. As the name communicated, Huggies checked all the boxes – achieving a much tighter fit than Pampers and all but stopping leakage. The Kleenex name was tacked on the front to provide consumer reassurance that their beloved babies’ bottoms would be cared for as much as the nation’s runny noses. The brand was launched in Wisconsin and Michigan, an area of relative Pampers weakness. It was positioned not as a slightly better Luvs (which was not yet a significant player), but as a much better Pampers. The advertising was cleverly aligned. Huggies were helping mother’s battle leakage, rather than taking the credit, as Pampers had been doing. The tagline read: ‘Introducing a diaper that helps stop leaking’. This thought would remain communicated, in various expressions, for the next quarter century. Entering at a 30% premium to both Proctor & Gamble and Johnson & Johnson, Kleenex Huggies was racing to occupy and hold the ultra-premium segment identified by Luvs.
Within four years Johnson & Johnson, which was offering nothing better than Pampers, was decimated, and withdrew from the category completely. Proctor & Gamble finally woke up to what was happening and rolled out Luvs nationally, but now they faced the retailing space problem. With Pampers as number one brand and Huggies number two; there was no reason for anyone to find extra shelf space to display Luvs. It had no advantages over Huggies. Proctor & Gamble used all its muscle to replace Huggies with Luvs, and at one point did match market share. Theirs was a push strategy against Huggies’ highly effective pull strategy (which was highly appropriate), which meant there would only be one winner.
In 1983 Huggies achieved fully national distribution with a 21% market share and, even worse for Proctor & Gamble, kept gaining ground on Pampers. Huggies was not occupying a super-indulgent niche. It had staked out territory that was becoming the new standard. In 1985 Huggies overtook Pampers to lead the market. The gamble had paid off: Kimberly-Clark was now playing and winning in the big leagues of packaged goods.
The two manufacturers waged a super-absorbency war for the rest of the 1980s. Cellulose padding was replaced by polymers with many times the absorbency. There was no decisive winner. Kimberly-Clark edged ahead with the introduction of Huggies Pull-ups in 1989. This captured a respectable 9% share, as Procter & Gamble were again slow to respond. By the end of the 1980s, Huggies was accounting for the bulk of Kimberly-Clark’s sales and profits, along with a sleeper brand launched in 1980. Depend tackled adult incontinence: Kimberly-Clark deftly addressed another sensitive subject on the back of their vast experience regarding menstruation. The company also had fledgling operations in the industrial sector with a variety of wipes, masks and paper-based coveralls, and a small healthcare division.
The company had been successfully realigned behind consumer products - another newcomer was Poise pads (for adult light incontinence), which neatly extended the Kotex Lightdays technology. It had been saved from what would most likely have been a genteel slide into oblivion. Nevertheless, they were, not unlike Tambrands, essentially a one-brand company. As such, they were at risk of unforeseen technological breakthrough killing their golden goose. In a situation not dissimilar to that facing many companies today, they needed a step change in size and breadth. Otherwise, Kimberly-Clark and their Huggies brand were vulnerable to being snapped up by one of the industry goliaths such as Unilever.
The answer lay in a merger with their long-time foe in the paper business, Scott Paper. Scott’s consumer division had headed in a different direction to Kimberley-Clark. They had built up strong positions in paper towels, toilet paper, and with Scotties tissues still hanging on as a second-tier value brand. Scott had also been much more aggressive than Kimberly-Clark in expanding internationally. This would provide a quick and cheap way to internationalise the Kimberly-Clark brands. Scott had been America’s most profitable paper company in the 1960s, but had fallen on hard times - due mostly to a variety of disastrous acquisitions. By 1991 Scott was losing money. Nevertheless, with sales of $4.7 billion in 1993, it was a major player.
In 1994, Scott appointed Albert J. Dunlap as CEO, and he wasted no time in living up to his nickname of Chainsaw Al. Dunlap slashed every budget in sight, sold every building not deemed completely essential and cut staff numbers by 35%. Next, he began the search for a buyer. Kimberly-Clark was one of twenty-four candidates identified by the investment bankers. The $9.4 billion agreed merger between Kimberly-Clark and Scott in 1995 created a solid number two in consumer paper products behind Procter & Gamble. They had a sales presence in 150 countries and manufacturing operations in 33. To complete the deal, the Scotties brand in the United States had to be sold. Kimberly-Clark laid off 6,000 workers of their own to realise the cost synergies needed to make financial sense.
It took a couple of years to get to grips with this vastly expanded business and repair the damage of Chainsaw Al’s slashing of 50% of Scott’s R&D budget. By 1999 Kimberly-Clark was turning over $12 billion a year. They introduced new and improved Scott’s bathroom tissue products, supported by advertising for the first time in a decade.
The same year, the new company went on the acquisition trail to beef up its healthcare lines of surgical gowns, drapes and disposable face masks. They purchased Ballard Medical Products for $774 million, which added higher-value lines: such as Trach Care, the number one line of respiratory suction catheters; enteral feeding tubes; endoscopy devices and disposable defibrillator pads. This was soon followed by a range of purchases: including Safeskin, a leading maker of disposable gloves for hospitals and scientific institutions; the makers of Italy’s second-largest diaper brand; and a Polish tissue business. They also bought, where they could, rights or partnerships to market their brands abroad. Then in November 2004, the company spun off a newly created subsidiary, Neenah Paper. This was specifically created to divest the company of its remaining paper and pulp mills businesses. The transition to packaged goods was now complete, albeit with much enlarged healthcare and professional divisions.
The International Dimension
As with many US companies who transitioned into packaged goods, international expansion was not a priority for a long time. The first port of call was Canada, where the company began selling its products in 1925. They opened a newsprint mill there. They also formed a UK subsidiary to market Kotex and Kleenex but it was little more than an import office. In 1955, the company took the UK more seriously, yet still shied away from building any overseas factories. They signed up a British contract manufacturer to make Cellucotton under licence, with the products being distributed by a Kimberly-Clark subsidiary. Two years later a new British factory was built in a joint venture with their partner, but was managed by Kimberly-Clark as they gradually took full control of their British outpost. Meanwhile in 1956, Scott Paper had entered into a British joint venture with Bowater Paper Mills, forming Bowater Scott. Their key brand was the highly successful Andrex toilet rolls.
1955 saw Kimberley-Clark venture south of the border into Mexico, buying LA Aurora Paper Company. Renamed Kimberly-Clark de Mexico, it would flourish into one of the country’s leading consumer products companies, and used its factories to supply selling operations in Central and South America. In 1957 the British venture was used as a springboard into West Germany, but this three-way joint venture enjoyed limited success. Two years later, a ten-year deal was agreed with South African Pulp and Paper. They would make Cellucotton for Kimberly-Clark, which enabled the company to become a dominant player in that country’s sanitary napkin market.
Things then went quiet on the international front until the 1960s when overseas expansion was seen as a major growth opportunity. The company invested $200 million beefing up its European and Latin American set-ups while also expanding into Australia and the Philippines. During the 1970s, 20% of the company’s operating assets were located outside the US, primarily in Europe and Mexico. Unfortunately, Kimberly-Clark’s British operation was far less successful than the Bowater-Scott venture and then Mexico became a problem during the 1980s. A devaluation of the Peso decimated profits. In 1984, the Canadian operation was given a shot in the arm with the launch of Huggies, but overall their international expansion had been very limited. Kimberly-Clark lagged far behind Procter & Gamble and Scott Paper despite now having operations in Korea and Japan.
During the late 1980s and early 1990s, the company tried again. They invested over $500 million in Western Europe, launched diapers into Germany via a joint venture and built major new plants in Britain, Korea and Australia. As only second-tier marketing and distribution capabilities existed in those countries, these investments failed to pay back. Tentative ventures into Argentina and China did nothing to change the dynamic. Kimberly-Clark was mostly an also-ran in the rest of the world – a realisation that partly drove the merger with Scott Paper in 1995.
Following the merger, the company used Scott subsidiaries as routes to market for the main Kimberly-Clark brands. They also made acquisitions in Switzerland (serving Germany and Austria), Spain and Portugal. In Taiwan the company bought out the Kimberly-Clark and Scott Paper joint venture partners, and merged the two to form Kimberly-Clark Taiwan into one of the country’s biggest consumer goods companies.
Subsequently, the company has focused on expanding its presence in developing and emerging markets, especially the six BRICIT markets: Brazil (entered in 1996, with several subsequent acquisitions); Russia (first factory opened in 2010); India (a joint venture was formed in 1994 between Kimberley-Clark and Hindustan Lever); China (first entered in 1994 and now with four factories); Indonesia (entered in 1991 and now with 800 employees); and Turkey (joint venture established in 1999). Today, slightly under 50% of Kimberley-Clark sales are generated outside the US but less than 30% of operating profit. This reflects a company that is still in development mode in many parts of the world.
How Are They Structured?
The evolution of the company structure has been mostly straightforward. The US market has predominated and there has been a relative lack of a robust acquisition strategy for the larger part of the company’s history. The first major change was the re-incorporation of CPC back into the Kimberly-Clark main hierarchy in 1955. Shares in CPC had been sold to managers and employees and needed to be bought back. Following the change, marketing of CPC brands was taken over by the Kimberly-Clark marketing department.
Four years later, there was a major reorganisation aimed to decentralise what had become a cumbersome, top-down structure. Separate divisions were created for Schweitzer cigarette papers, Newsprint, Canadian operations and Consumer Products, with a small International Division tacked onto the latter. The next major change came with the merger with Scott Papers. The structure eventually settled into three divisions: Personal Care; Consumer Tissue; and Business-to-Business. Each of these, to varying degrees, was sold in four regions: United States & Canada, Europe, Asia, Latin America and Other. By 2004, United States, Canada and Europe were consolidated into a North Atlantic Group and by 2006 Business-to-Business had been split into two groups. Professional and Healthcare reflected the increasing size and specialisation of the healthcare business, and had little in common with Scott Towels and Kimberly-Clark industrial wipes.
What Have They Been Doing Recently?
2004
After the November 2004 spinoff of Neenah Paper Inc., Kimberly-Clark had annual sales of just over $15 billion. A consistent record of decent annual growth stretched back to the post-merger period. Innovation was less blockbuster and more incremental: such as Kotex Lightdays; a new folding design for Scottfold washroom dispenser towels; Huggies Convertibles; Goodnights Youth pants; Andrex with Aloe Vera and Kleenex Anti-viral tissues. The Huggies brand was extended laterally into bath and body products, using third-party manufacturers. The company recognised that greater R&D resource was needed to develop more breakthrough innovations. Other highlights included a 35% sales increase for Poise panty-liners and the company gaining number one position in the US in medical products such as face masks and exam gloves.
At this point, 58% of sales were coming from the US. Business was split fairly evenly between the three divisions of Personal Care, Consumer Tissue and Business-to-Business. All regions and divisions were recording growth, with the non-US regions growing at a significantly faster rate. This partly reflected the company’s different levels of development - domestic versus overseas - and was also due to significant competitive challenges in the US markets. Of the eight main consumer product categories in which they competed (Diapers, Training/Youth/Swimming pants, Feminine Care, Adult Incontinence Care, Baby Wipes, Facial Tissue, Bathroom Tissue, and Paper Towels), Kimberly-Clark had gained share over the previous two years in only two of them (Adult Incontinence and Bathroom Tissue). This resulted in a need to discount and lower selling prices.
Outside of the US, the European business, although recording level sales for personal care products, was struggling badly. Volume was down 7% and selling prices another 3%. The region was only rescued by a 10% favourable shift in currencies.
2005
The year was dominated by two announcements: a new focused growth strategy, and a major downsizing to pay for it. The growth strategy did not contain any real surprises:
· Strengthen leadership positions in baby and child care, adult care and family care
· Build on regional strengths in feminine care (Americas and parts of Asia)
· Accelerate growth in BRICIT markets
· Extend Professional portfolio into higher margin segments (workplace, safety, do-it-yourself)
· Expand Healthcare globally, adding higher margin products to portfolio
It is hard to argue with any of this, but it was easier said than done. The bill would be met by closing twenty factories and shedding 10% of the workforce. The attractiveness of the BRICIT markets was clear. These markets contained half the world’s population, most of the population growth and low but rising penetration of key Kimberley-Clark categories such as disposable diapers. The company was employing a fairly standard, multi-tier strategy in these markets. They offered: a range of low price, affordable products; mid-tier increased performance at good value; and premium priced products for the wealthy. In 2005, company sales grew by 30% in these markets. Elsewhere, the Healthcare strategy towards higher priced, higher margin products was boosted by the acquisition of Microcuff GmbH, for its proprietary endo-tracheal tube technology.
Company sales increased a respectable 5.4% to just under $16 billion, with volume growing 3% and net pricing up by 1%. Matters improved in the problematic US market, as a slew of innovation advanced sales by 4%.
2006
With another 5% sales increase the new growth strategy seemed off to a reasonable start. But, as usual with multi-faceted growth strategies, some things go better and others not so well. Virtually all the volume growth in the year came from the Personal Care and Healthcare divisions. Consumer Tissue moved backwards: a 1% volume decline was probably caused by a 3% increase in net selling prices. On the profit side however, things were not quite so rosy: cost savings of $265 million was more than swallowed up by input cost increases of $385 million.
What were the highlights of the current the growth strategy?
Strengthen leadership positions in baby and childcare, adult care and family care
Things seemed to be on track, with good volume growth in diapers in North America and Europe. The company had significantly reduced the time taken to get a range of incremental innovations to market. In tissues, the Scott brand’s sales in the US topped $1 billion - primarily via a strategy of competing in the value segment of the market - and more than $2 billion worldwide.
Accelerate growth in BRICIT markets
Without explanation, this had been promoted from being the number three strategic priority since 2005. Sales were up over 20% in these markets, led by an impressive 35% increase in China thanks to Huggies now being distributed in 40 cities (although the company lagged far behind Pampers in market share). With disposable diaper penetration in the country only reaching 10%, the future looked bright indeed.
Build on regional strengths in feminine care (Americas and parts of Asia)
The mystery attached to this priority having been relegated a place was resolved. News came that their US feminine hygiene business was in the doldrums with continued share losses.
Extend Professional portfolio into higher margin segments (workplace, safety, do-it-yourself)
More bad news. The division was essentially flat, year-on-year: despite bringing Wypall microfiber cloths to market in only eight months, and launching Kimtech Pure clean room wipers for the electronics industry.
Expand Healthcare globally, adding higher margin products to portfolio
A big success story. Global volume grew 7%, led by the company’s Sterling brand of exam gloves which, being made from nitrite, were proving to be a very successful, affordable alternative to latex gloves.
2007
Aided by a strong following wind on currencies, Kimberley-Clark had its best year for some time. They recorded a 9% sales increase, of which 6% came from volume, pricing and mix improvements. The stars of the show were the Personal Care division, where a volume increase of 8% contributed to a total sales increase of over 12%; and the non-North Atlantic markets, which delivered $1 billion of the total company growth of $1.5 billion. Highlights in Personal Care included a Huggies turnaround in North America, helped by a $50 million increase in the company’s total marketing spend; and growth of 21% in the Developing and Emerging markets. China again led with sales growth exceeding 40%. Since 2004, sales in total Developing and emerging markets had increased 25%, powered by a 50% increase in the BRICIT markets. Elsewhere, Consumer Tissues had a decent year, growing sales by 5% in the difficult North American market. However, the Healthcare division stuttered as the company withdrew from the latex gloves business.
2008
In a difficult year for all consumer businesses, a sales increase of 6% (up to a new record of $19.4 billion) was not to be sniffed at. Rapidly rising commodity costs meant that the company focused more on achieving price increases (up 4%) than driving volume (up 1%). Within the categories there were quite different dynamics: particularly in North America, where Personal Care sales inched ahead despite significant price increases. Consumer Tissue volumes were much less able to support higher prices, and volumes plummeted 7%. The situation was worse in the price-conscious paper towels category - volumes were down double-digit. In Developing and Emerging markets the same differences in category robustness were evident, but from a much higher baseline. Personal Care sales volumes increased by 10%, despite price increases, but Tissue sales remained flat. The BRICIT markets were again the highlight, as sales advanced another 30%.
The company was still putting cost savings money behind their brands. The marketing budget was again increased, by $95 million. One of the more notable innovations introduced was Kleenex Facial Tissue with Lotion, made using a proprietary technology. This benefited from the largest sampling campaign in the history of the brand. The company’s Healthcare division continued its transition away from its heritage. Paper-based disposable items gave way to still disposable but hi-tech medical devices, such as their new enteral feeding tube introducer kit and an expansion of their range of InteguSeal microbial sealants. This part of the portfolio was now becoming quite attractive, but at 7% of total company sales and 8% of operating profits, it was a long way from being a corporate game-changer.
2009
Perhaps 2008 had imbued an over-confidence that price increases could be pushed through relatively painlessly. The company increased prices by an average of 4% in a year when commodity input costs actually decreased and in a year when national economies, particularly the US and Europe, were sluggish to say the least. The outcome was a decline in total volumes of 1.5%, compounded by adverse currency rates. These wiped out the benefit of the price increases and more besides. The vibrant Personal Care category managed to grow volume by 2% and Healthcare had an exceptional year, growing volume 14%. However, fully one-third of this growth was in facemasks due to the H1N1 influenza virus. Hence it could not be counted on as anything other than a blip. Consumer tissue sales were down another 5% as was the Professional division.
Kimberly-Clark was now more reliant than ever before on the Personal care division for its profits: it accounted for 62% of operating profit compared to 44% of sales. But even within that, it was tough to extract consistent growth from the large US market and the European businesses, with exceptions like the UK and Italy, were something of a problem. In the rest of the world, organic sales of Personal Care products were up 15% as Kimberley-Clark expanded its reach, but few commanding positions were built. General nervousness about prospects was not helped by an end-of-year announcement of another 1,600 job cuts.
2010
Personal are once again effectively carried the business. Volume grew 3%: Health Care again provided the cream with a 7% increase. After several years of price increases and volume declines, it was difficult to escape the conclusion that the Consumer Tissue division was being milked. Its operating margin was half that coming from Personal care and clearly should be improved. The tissue category was much more commoditised than the various personal protection markets in which the company operated. Price increases that the market would not absorb and cutting headcount (another round of sackings and plant closures was to be announced in January 2011) was not looking like a viable long-term strategy for the division. Continued volume declines in a division that accounted for a third of company sales made overall progress difficult to achieve. This was in the absence of breakthrough innovation, and in truth, the company had not managed this since opening up the adult incontinence markets. The core problem was that the merger with Scott, while it had brought international and cost synergy opportunities, had not brought many strong brands into the portfolio. Nor had the R&D department pulled up any trees in the meantime.
2011
Another year and more of the same. Sales increased by 3% to $20.8 billion, with none of the trends changing. Personal Care was still driving volume growth along with the Health Care division, while Consumer Tissue was still putting up prices and losing volume. A change came in the international businesses outside of the North Atlantic. Dollar sales were up an apparently healthy-looking 8%, but volume actually declined by 6%. This was due to aggressive price increases of 7% and some minor divestments and market exits. These international businesses were now not managed regionally, but via a management group, K-C International.
The changing fortunes of the business now led the company to a revision of its growth strategy:
· Grow strong positions in personal care by using our brands and providing innovations
· For Consumer Tissue: bring differentiated, added-value innovations to grow and strengthen our brands; while focusing on net realised revenue, improving mix and reducing costs
· Continue the shift to faster-growing, higher margin segments within the Professional and Health Care divisions
· Drive growth through K-C International by deploying our strong brands and innovation capabilities
The real change from the past was a clear, increased emphasis on innovation. Kimberly-Clark had excelled at incremental innovations, particularly on the Personal Care brands with, for example, Huggies Little Movers Slip-On Diapers. However, in such established categories when facing well-established competitors, that kind of innovation is required just to stand still. It is difficult to think of a Kimberly-Clark major success that could not trace its roots back to Cellucotton, which had been invented during the First World War. Something needed to change in the R&D function. Also, the company’s self-set challenge in Consumer Tissue looked more like a wish list than a strategy: more and better innovation while reducing costs and putting prices up. Good luck with that one!
During the previous five years, Kimberly-Clark had increased top-line sales by an average of 2.8% a year, barely keeping up with inflation. Gross Profit had increased by an average of 1.6% a year, due mainly to increases in raw material costs outstripping sales growth. Operating Profit had increased by only 6.7% across the entire five years, due to endless restructuring changes being taken to chase down fixed costs. Kimberly-Clark was beginning to look vulnerable.
2012
At the time of writing, the first three quarters of 2012 showed precious little change from the previous few years. Volumes were up in Personal care and Health care. There was a mixed bag in Professional; and prices were up and volumes down in Consumer Tissue. Geographically, North American sales were sluggish, Europe a mess and K-C International powering ahead. In the first three quarters of the year, K-C International sales were up 9%: including stellar performances in the Chinese, Russian and Brazilian diaper markets.
In many of Kimberly-Clark’s European operations, the company had been so late to the market that their diaper business had never really got off the ground despite two decades of effort. As a consequence, the company announced it would be exiting the diaper category in western and central Europe, along with the poorer performing tissue markets in some countries. This involved the sale or closure of five factories, the loss of around 1,400 jobs and a reduction in annual top-line sales of approximately $500 million. This left just a few European strongholds for Kimberly-Clark - UK, Italy, Spain, and Switzerland. These had mostly been developed from the Scott merger or subsequent acquisitions.
What is Their DNA?
A Kimberly-Clark DNA is quite difficult to define. Both Kimberly-Clark and Scott Paper built their businesses by understanding paper and the company still has much expertise in the area with Kleenex, Scott paper towels, Andrex and the like. However, the fact is that the growing parts of their business today have little to do with paper or its derivatives; it’s been a long time since Huggies were filled with Cellucotton. Nevertheless, there are interesting spikes of excellence among the spread of Kimberly-Clark’s businesses.
Trust
This might seem something of a given. In the world of consumer-packaged goods, every brand is a bond of trust between brand owner and brand consumer. However, Kimberly-Clark operates in areas that both require and engender a very strong bond of trust. We have a much more intimate relationship with many of their products than we do with, say, a can of Coca Cola. Most of the company’s large and thriving brands are in the fields of sanitary protection, incontinence protection, diapers and medical devices. We really need to know that these products do what it says on the pack and have been made to the highest standards.
The strength of Kimberly-Clark is that we completely trust their products on and in our bodies, dealing with issues that are a huge problem if the product fails. You cannot get more intimate than that. It is interesting that the parts of the company portfolio that are not doing well are ones that, by and large, do not have the same degree of trust dependence. If a Scott washroom towel doesn’t quite dry our hands, we can live with that. If we can’t depend on Depend, or an enteral feeding system, that is a deal-breaker.
Embarrassing Subjects
Another corollary of the company’s product fields is that, over the decades, they have built up an institutional expertise talking to consumers about difficult or embarrassing subjects. This requires an in-depth body of knowledge on how to do these things well: and to adapt the conversation over time to reflect changing social norms and differing cultures. Kimberly-Clark can be depended upon not to be tone-deaf in dealing with difficult subjects. At the moment, they may not have markedly superior products to the likes of Proctor & Gamble, but they have the capability to have more intimate conversations with consumers. Can they achieve sufficient leverage with this advantage? That is the issue.
Absorbency
If something needs mopping up in the workplace, soaking up from some bodily function, or wiping off something delicate, be it a sore nose or a computer component, Kimberly-Clark has the answer. It makes one wonder if there are other areas in which such expertise could be applied – soaking up oil spills in the Gulf of Mexico, for example.
Summary
Kimberly-Clark is a good example of how understanding the company’s history and development can illuminate issues in the business today. The company is built on three major events: the invention and propagation of Cellucotton; the bet-the-farm strategy of selling the mills and taking on Procter & Gamble in diapers; and the merger with Scott’s. The first move got a paper company into packaged goods. The second got a struggling packaged goods company into a dynamic set of new and growing categories. The third got the company into a dynamic and growing set of new countries.
However, the latter two came at a price. To compete head on with Proctor & Gamble over a long period of time demands that they be at least matched on R&D resource and sales and marketing umph. This is expensive. Equally, the Scott merger really saddled the business with an increasingly commoditised tissue business they could probably well do without. While the company is turning in decent enough increases in top-line sales, it is the source of the sales growth that is concerning. Too big a part of the portfolio is in volume decline, which, once entrenched, can be very difficult and expensive to stop. The company is chasing after the costs, the latest being named FORCE (Focus On Reducing Costs Everywhere), yet is constantly restructuring as tissue volumes decline further. Consequently, profit performance in recent years has been completely underwhelming. One cannot help thinking that what the company needs is a bold move #4 and to get rid of the tissue business completely. The proceeds could then be spent on really ramping up its international division.