“We all knew K-C was struggling in Europe, but not that they were planning to (completely exit the whole European continent except Italy),” says industry consultant Carlos Richer.
During its third quarter earnings conference Wednesday, K-C said it would exit the diaper category in the region, except for Italy, and would divest or exit some lower margin businesses in the consumer tissue market. The company will also streamline its European manufacturing footprint and administrative organization to align its cost structure with these decisions. The company's activities in Eastern Europe, including Russia, remain unchanged.
"The strategic changes we will be making in Europe should allow us to better focus on our best market positions and growth opportunities, improve our underlying profitability and enable more sustainable returns going forward in this part of the world,” says chairman and CEO Thomas Falk. “These moves are further evidence of the portfolio management approach we use to run our company and the financial discipline embedded in our Global Business Plan."
During the conference call announcing the results, Falk also suggested the company has a plan to carefully exit the markets where they have not achieved satisfactory profitability while preserving their strongest, most attractive market positions. This plan will be a challenge to execute, but if done well, it should deliver meaningful improvements to corporate profit growth rates and return on capital by 2015, he adds.
Five diaper plants will reportedly be closed under the plan, which will impact 1200-1500 employees, but no information was given on the location of the plants affected.
Pricie Hanna, principal of Price Hanna consultants, described the decision as an important strategic move for K-C because it frees up cash for continuing investment in higher growth emerging markets where the company has better scale, such as Latin America, and has experienced greater market success.
“The impact on the diaper markets that they are exiting will be positive for private label diaper producers,” Hanna adds. “The strength of retailer brands in these countries combined with the lack of category growth is the reason why K-C was not able to achieve attractive profitability. K-C entered these markets too late when they were highly penetrated and had little growth prospects.”
Like K-C, SCA exited the branded diaper market in Europe many years ago and now commands strong private label diaper positions in these countries. The Swedish-based hygiene manufacturer now maintains its own brands only in their strongly established markets in Scandinavia and Eastern Europe.
Richer says he thinks the move will mean great things for a number of players in the European diaper market. “The initial impact for competitors is great. It opens a new window where to sell products and it will ease up the current confrontation with diaper pricing, he says adding that new entrant Drylock will particularly benefit from the move.
“It will be interesting to watch who will fill the void, how much of it will be for Pampers, and how much for the rest. Will this be a good break for the private label business in Europe?”