Eastern Promises

By Ian Bell, head of tissue and hygiene research, Euromonitor International | December 4, 2012

Russia is leading Eastern Europe’s diaper boom.

Where the East-West divide was once clear across Europe, this distinction has become less defined certainly in political and economic terms and, one could argue, culturally. The expansion of the European Union (EU), which took in the Czech Republic, Poland and Hungary in 2004, and again in 2007 with the addition of Romania and Bulgaria, has served to blur the lines. The close proximity of its Western fringe, the Czech Republic and Poland to the more developed EU block has seen these countries develop more rapidly along established Western lines, while more outlying areas have often followed a different path.
Although trade with the EU has been crucial to economic development, with the exception of Slovakia, Slovenia and Estonia, none of the recent entries to the EU are as yet part of the embattled Euro Zone. That said, many states are reliant on the EU for trade and—crucially—finance, which sees the wider Eastern European region experiencing difficulties, with the Czech Republic amongst others still in recession. That aside, the region as a whole is expected to see 4% gross domestic product (GDP) growth in 2012 compared to a decline in the Euro Zone, which by comparison appears to have morphed into something approaching a ‘basket case’ economy in places.
As such, the old distinctions of East and West appear redundant in 2012, and with them, the old norms of market development and investment paths.
Mother Russia and hygiene
Take Russia as an example. While it is the largest Eastern European market, dominating hygiene sales with $3.1 billion in 2012 (50% of regional value), it is also something of an archetypal developing market. Value growth has been rampant, reported at over 10% during the last five years, while Western Europe has struggled to climb above 1% over the same period. Growth has largely been fuelled by the Putin-era raw material-fuelled economic boom, which has stoked a rapid rise in disposable incomes—doubling between 2008 and 2012—to $8000, placing Russia in a rapid growth phase for hygiene category development.
While the key disposable income driver is in place, the Russian market has attracted still more attention due to its relatively low hygiene penetration rates. This has encouraged inward investment in terms of plants and technology.
Bouncing baby care
Rosy prospects forecast for the key nappies/diapers category on the back of current low per capita expenditure, which stands at just $250 compared to $370 in Germany, for example, have attracted much of this investment. This variance suggesting a further 30%-plus value sales increase, is possible on current per capita rates and could be further buoyed by a birth rate, which has shot up from 10.3 to 12.6 per 1000 people since 2008, and looks likely to stay above 12 through to 2020. These positive socioeconomic factors have triggered a surge in expenditures between 2007 and 2012, when the nappies/diapers market grew by $1 billion, with only China and Brazil able to demonstrate more rapid growth over the same period.
Russia’s diaper boom is not simply explained by an upward shift in the birth rate, as the category has also moved more upmarket, correlating with growth in the number of middle-class women having children later in life, especially in Moscow.
Much of this growth has been put down to government intervention, concerned with a looming ‘demographic crisis’, which has begun programs to encourage Russians to have more children. The most important of these ‘mother’s capital’ involves a payment of 365,000 rubles ($13,000) for mothers having a second or third child. The money can be invested into a mortgage, child’s education or the mother’s pension fund.
By comparison conditions in Western Europe couldn’t be more different with birth rates on the decline for the most part and have been reported as low as eight per 1000 people in Germany with only France and the U.K. matching Russian levels.
Russian mothers and hygiene
While belt-tightening in Western Europe has increased demand for cheaper products, Russia has been moving in the opposite direction. There has been a notable shift to added value and this has suited the positioning of Western brands illustrated by consistently strong growth posted by Pampers and Huggies. Much of this demand is associated with growing numbers of women in their mid-30s and 40s having children. These women are not necessarily having children for the first time and the difference is they are more economically confident than they were when they first started having children as many earned good salaries during Russia’s boom period from 2000-2008.
Recent changes to Russia’s maternity law suggest that the average age of women giving birth will continue to climb and continue to boost value growth. This is because women now need to have worked at least two consecutive years in a job before qualifying for state maternity support. During the recent downturn, many women found only sporadic employment creating pressure to put off having children. It is not always the case that women in their late 30s are financially better off, but it is more common than not. For example, the average income of Russians aged 25-29 is 10% lower than those aged 35-39.
“Premiumization” broadens
For very similar reasons to nappies, sanitary protection in Russia has also made some significant progress in terms of value sales, seeing double-digit growth. This is in spite of the number of women ages 14-54 stagnating; the category has seen even seen some volume gains made on the back of widening use of panty liners, but most significantly it has been driven by ‘premiumization.’ Sanitary protection added approximately $250 million of incremental value growth between 2008 and 2012, roughly 20% of total growth for the hygiene industry as a whole. This trend is set to continue, however, unlike nappies/diaper sales, a declining population of suitably aged women in Russia will mean that product development will be key to maintaining premiumization without the help of an upswing in consumers.
Baby wipes in particular and personal care wipes in general remain largely underdeveloped in Russia and given incomes and fondness for branded goods as well as convenience this should be a category to watch. Also in the longer term, incontinence will be a key development category, although there is much work to do to introduce this product category as a normalized part of retail and break many of the social taboos associated with this product type. In both cases, there is a clear need for investment in consumer education and product promotion in order to break open this untapped potential, which will grow as disposable incomes climb to and beyond the $10,000 mark by 2020.
Western European comparisons
Compare this positive scenario to Western Europe and the wider Euro Zone, where despite numerous, ongoing bailouts, The Sword of Damocles still hangs overheard. This has translated into a poor showing for hygiene sales, with $1.3 billion incremental growth for 2008-2012. Of this, Turkey accounted for 40% alone. While Russian consumers have increasingly looked up the value chain, Western Europeans are looking decidedly in the other direction and even looking to trade out in many of the worst hit economies. Greece, for example, saw hygiene value decline by 10% in 2012 alone.
Huggies let go
Against this background, the October 2012 announcement that Kimberly-Clark would be ceasing production of its Huggies open nappies/diapers—pull-up pants will continue—across much of Western Europe, perhaps came as a surprise, albeit no great shock. Georgia-Pacific had set the trend for manufacturers a year earlier, following its decision to sell its pan-European tissue operation, which while perhaps signaling the end of one period of development for the industry in Europe also marked the likely emergence of a new market structure.
Perhaps the greatest surprise following the Kimberly-Clark decision was the fact the company had not reached this slightly uncomfortable conclusion, or at least acted on it earlier. With just a quarter of chief rival Pampers’ value share and squeezed by private label, the writing was on the wall for Huggies for a number of years. Western Europe, with typically low margins on nappies/diapers, is no longer the kind of place where a stagnant value share holds much hope.
Emergence of localization?
With the economic, demographic and competitive environment all counting against Huggies, it is no wonder then that the company has looked to focus on its strengths in Western Europe, seeing opportunities to further develop its leading position in added value pull-up-pants for example. Pull-up-pants take a 15% value share of nappy/diaper in Western Europe compared to 20% in North America and 30% above in developed Asian counties such as Japan.
Although losing the Huggies brand from Western Europe may seem unusual for consumers, the idea that international manufacturers need to have their brands represented in all categories in all major markets is perhaps misguided. There are examples from the soft drinks industry where good money has gone after bad in a vain attempt to establish a particular brand or improve a competitive position with little to show for it in the end.
In the wider global context, Kimberly-Clark is seeing the lion’s share of its growth coming from emerging markets, as with other companies. With the threat of economic malaise and already high penetration rates, more companies are likely to follow, choosing to jump before they are pushed. Looking further afield, there are clear similarities in Japan and even North America and it will be interesting to see how long the current status quo will last. From a retailer’s point of view, market rationalization and a smaller inventory with fewer SKUs sounds like a popular scenario but the Huggies open nappies brand could be licensed, however, only local players would likely be in the running if this somewhat unlikely opportunity did arise; which tells its own story.
Whichever the final outcome for Huggies, the wider European market is heading in two distinct directions. The West is seemingly in the process of localizing while the latent potential in the East is driving internationalization. These are two distinct trends for still two distinct markets at different stages of socio/economic development.

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