China and Russia fuel growth in the tissue industry

At a time when developed geographic markets are plagued by overcapacity, volume saturation and intense price pressure, emerging markets play an increasingly crucial strategic role for consumer goods manufacturers. The tissue industry, too, is pinning big hopes on two markets in particular – China and Russia.

Maria Lindahl, Euromonitor International

CHINA. It is easy to see why China has caught the eye of foreign investors - with its 1.3 billion population, it is a massive potential consumer base. Following continued double-digit GDP growth in 2005, China displaced the UK to become the fourth largest economy in the world, after the US, Japan and Germany.

THE RAPID DEVELOPMENT OF THE CHINESE RETAIL INFRASTRUCTURE has improved drastically over the past decade; supermarkets have surged from just one outlet in 1990 to over 60,000 in 2003. But while about 80% of Russia’s population is concentrated in big and medium-sized cities, the majority of the Chinese population still resides in rural areas, characterised by a severely underdeveloped distribution infrastructure and low disposable incomes, making it difficult for manufacturers get the products to the retail outlets and persuade consumers to buy.

Consequently, foreign multinationals are focusing on the coastal East, South and North China, leaving local players with strong regional brands in control over inland areas.

2005 – YET ANOTHER STRONG YEAR. The Chinese tissue market grew by over 7% in 2005, to a value of US$3.3 billion, according to new research by Euromonitor International (EI). Toilet paper still accounts for the overwhelming majority of tissue sales in China, close to 90%. Affluent regions have been the key driver in this rapid development, with penetration rates well above 90%. The growing number of middle-class households in urban areas has further spurred demand for high-quality goods, with convenience and comfort replacing price as the key determining factors in purchasing decisions. The high-end segment has shown strong growth in recent years, with premium brands such as Hearttex (Hengan International) and Vinda 3-ply (Guangdong Vinda Paper Co) registering impressive growth rates, aided by growing brand awareness and consumer loyalty.

Consumption levels show great regional disparity between urban and rural areas. In Shanghai, volume/capita consumption has reached 8 kilos/year, whereas in the mid- and western parts of China the level is still below 1 kilo.

Prices have also remained stable in 2005. Maintaining market share has been the key priority for most manufacturers, and they have chosen to take the hit in their profit margins rather than seek compensation through price increases.

TISSUES GAIN IN POPULARITY. Boxed and pocket-sized tissues comprise the second biggest product category in the Chinese tissue market, with a value share of about 10%. Boxed tissues, perceived as a high-end product, have gained in popularity among urban consumers, and manufacturers have focused on developments in packaging.

Tissues have already experienced significant product segmentation in China, despite the sector’s relatively low maturity. Pocket handkerchiefs aimed at different genders, mini-packs, travel packs and tissues with fragrances and therapeutic benefits have appeared on the market. The category is still fragmented with no company holding a share over 15%. Trade sources indicate that regional brands pose little threat to national leading brands, except in some smaller cities. Plagued by rising raw material costs and threatened by continuous geographic expansion of leading players, local low priced products are finding it increasingly difficult to survive.

KITCHEN TOWELS AND PAPER TABLEWARE STILL IN THEIR INFANCY. While toilet paper and tissues have an established consumer base in China, kitchen towels and paper tableware are still rather negligible sectors, the former concentrated to the AfH channel, with the retail side only registering sales of US$2 million in 2005. The same is true of kitchen towels, accounting for less than 1% of sales. Marketing efforts were stepped up in 2005, with manufacturers promoting their brands heavily in Shanghai and neighboring areas. Currently, only leading brands such as Virjoy, Nepia, Kleenex, Vinda and Breeze have extended their product lines into kitchen towels. While for the average Chinese consumer it is still a relatively new product concept, it can be found on supermarket shelves in more affluent Chinese regions.

RUSSIA. Russia too has become a key focus for manufacturers wishing to capitalise on growth prospects in emerging markets. In the last 8 years, Russia has experienced strong GDP growth, with rising consumer purchasing power. The volume of retail sales has doubled between mid-2002 and mid-2005 and the growth pace continues to be robust. Russia is now the world's twelfth largest retail market. While Moscow and St. Petersburg account for the majority of retail sales, the growing middle class in other cities has encouraged domestic and foreign manufacturers to expand their focus to other regions. Retail chain consolidation across the country remains low; areas outside the major cities constitute a largely untapped market. Despite considerable rates of growth (more than 20% annually) the majority of Russian retail outlets does not meet the definition of classic shops. Figures from EI reveal that for consumer tissue products, super/hypermarkets only account for about 20% of sales.

Tissue manufacturers have also stepped up investments recently. Georgia-Pacific, for example, is to start construction on a new plant for its Lotus brand in Russia’s Tverskaya region. The 300 million Euro project – the company’s second mill in the country – is to be completed by 2008. With growth rates of 9% in 2005, the Russian tissue market certainly offers big potential.

HIGH-END MARKET RAPIDLY EVOLVING. Research from EI shows that the Russian retail market for toilet paper grew by over 8% in 2005, to a value of US$285 million. The market can be divided into economy, medium and premium price segments. The economy segment is controlled by foreign manufacturer brands produced locally, partially made of recycled paper, such as Lotus, Zewa, Soft & Easy, and Mola. The battle for the medium segment consists of 2-ply paper sold under the brands of Lotus, Zewa, Regina, Kleenex and Aster. The premium segment covers 3- and 4-ply toilet paper, where Lotus, Regina Excellent and Zewa Soft dominate. Increased purchasing power and brand awareness have boosted the share of mid-to premium ranges, with single-ply economy products losing out to 2- and 3-ply paper. This shift in consumer preference was highly visible in 2005, with standard and luxury toilet paper registering growth rates of 19% and 25% respectively.

KITCHEN TOWELS AND PAPER TABLEWARE. Kitchen towels upped their sales by 25% in 2005, according to EI figures. While the product category is still growing from a relatively small base, this represents a significant development from the early 1990s, when retailers would often refuse to stock such products, believing that no one would buy them. It was only in 2000 that the market began to show movement, with international brands such as Lotus, Veltie, Classic and Aster alongside the locally-produced Komplekt-2 taking off. Cloth substitutes are still the main product choice for most Russians. Kitchen towels are still mainly an impulse-buy, with low brand loyalty.

Unlike in China, paper tableware is one of the most developed tissue categories in Russia, with over 99% of sales coming from napkins. The market is split between unbranded, low-cost, single-ply products, making the bulk of sales, and decorative, high cost, multi-ply brands, of which over 90% is imported. Due to high costs for imported raw materials, domestic companies use local sources produced by one operator – Syassky CBK. Instead, manufacturers tend to focus on packaging design or embossing to differentiate their brands.

FUTURE PROSPECTS. EI projects continued strong growth in the tissue markets in both countries over the forecast period, albeit at slightly lower rates than at present. On a macro level, China is expected to continue to benefit from the influx of foreign direct investment. The Chinese market for tissue products is worth over US$3 billion. Positive consumer confidence trends in Russia are also expected to continue, especially if oil prices hit new records. However, the Russian government has proposed that the next state budget not rely only on revenues from oil exports, but look for other opportunities.

For tissue manufacturers, the biggest value gains are expected in toilet paper. China is anticipated to be the fastest growing market, forecast to grow by close to 8%/yr over the next five years, benefiting from further increases in household penetration levels and a continued rise in purchasing power. In Russia, the premium end of the toilet paper market will remain the fastest growing category. Further competition and consolidation is also to be expected in both geographic markets, with smaller players eventually being squeezed out of the market by multinationals and medium-sized firms. •

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