Eastern European tissue products market review

Much is often said about potential new opportunities throughout Eastern Europe for the tissue industry; however not all countries and segments offer the fantastic growth potential one would expect.

Adrian Atterby, Euromonitor International

The total Eastern European tissue products market grew by 12% in 2006, reaching a total value of US$1.6 billion, according to Euromonitor International’s latest research. However, there were significant differences in growth rates, not only when comparing individual sectors, but more specifically when comparing different countries both in terms of historic and forecast growth.

It is also not the case that countries that have joined the EU will see the highest levels of growth. Both Bulgaria and Romania entered the EU on 1 January 2007; however, while Euromonitor forecasts that Romania will see growth of 75% across the four tissue product categories between 2006 and 2011, Bulgaria in contrast is forecast to experience a loss in value of more than 6%.

Therefore, if manufacturers are to fully exploit the opportunities for growth in Eastern Europe, which will exist as the total market expands by almost US$300 million between 2006 and 2011, it is vital they understand the different dynamics which are driving the markets at country level.

TOILET PAPER SALES DOMINATE. The Eastern European tissue products market is dominated by toilet paper, which saw sales increase by more than 10% in 2006, and now accounts for two thirds of overall revenues generated in the region, according to Euromonitor International. This is not surprising as, whilst toilet paper is considered a staple product, tissues, kitchen towels and paper tableware are a distinct luxury.

Even in this ‘established’ category, quality is often low, with many markets dominated by local players, which have little interest or ability in producing innovative new products. Indeed, less than 30% of the Eastern European toilet paper market is controlled by global brands, with the remaining 70% shared out amongst smaller regional and local players.

There are, of course, exceptions. The Slovakian company Tento, backed by Metsa Tissue, launched its premium Hemo-Roll during 2006, which claims to aid sufferers of haemorrhoids by reducing swelling and alleviating burning and itching. This luxury paper comes complete with an herbal micro-layer containing oak bark, marigold and common yarrow, all of which have a soothing effect.

In some markets, however, foreign brands have been quick to invest. During 2003 Kimberly-Clark purchased International Paper’s Klucze tissue business in Poland, giving it greater access to not only the Polish market, but also surrounding countries. Poland is an ideal place for companies to base their businesses due to the availability of an educated workforce, the advanced nature of its retail environment and the fact that consumption levels are higher than in many other parts of the region. However, products such as facial tissues and kitchen towels are still considered impulse purchases by the vast majority of consumers, meaning sales are vulnerable to even the slightest changes in disposable income levels. In addition, as these products are bought on an ad-hoc basis, extensive television advertising campaigns are unlikely to prove successful in luring new customers to their products. Instead, brands need to focus on developing more attractive shelf displays, supported by point-of-sale material and 2-for-1 offers in order to stimulate interest and boost sales.

This is true across the whole region where the majority of consumers still make purchasing decisions based solely on price. As such, they will quickly abandon products for cheaper alternatives if such an opportunity arises. Companies need to invest in brand support and other promotional activities in order to increase allegiance to brands. As a way of maintaining consumer interest in their products, manufacturers need to continually update them, using new fragrances, package design, sizes and colours. By refreshing the look and feel of their products, as well as improving the quality, they also emphasise the brand name.

Despite being considered an extravagant purchase by much of the consumer base in Eastern Europe, sales of kitchen towels proved to be the most dynamic of all tissue products in 2006. Euromonitor International’s research shows that kitchen towels posted revenue growth of 19% across the entire region, resulting in an overall market worth US$140 million. Some markets have even seen the launch of premium quality kitchen towels, such as the scented ‘Sensitive’ line launched in Russia in 2006, which is manufactured by Roto-Cart in Italy and distributed by Aster.

Sales of facial tissues also grew during 2006, although at a slower rate of 9%, resulting in total revenues of slightly less than US$130 million. Although still a luxury, the region has seen a number of more lavish products launched in the past year, such as SCA’s Zewa Deluxe range, featuring chamomile, in the Czech Republic, and Kimberly-Clark’s Kleenex Velvet Balsam featuring marigold extract, launched in Poland.

URBAN VERSUS RURAL SPLIT AFFECTS CONSUMPTION. One of the major challenges facing manufacturers is the low average level of usage seen throughout the region. Whilst usage in urban centres is not yet at similar levels to those seen in Western Europe, it is improving. However, the main predicament is due to the large rural populations which still exist and which have inadequate access to modern retail facilities. However, as income levels in these rural areas are much lower than in urban centres, potential ‘consumers’ will initially only be interested in staple items such as toilet paper and are likely to pay little attention to more luxurious products.

Rural areas have so far been bypassed by the retail revolution, whereby Western retail chains have concentrated on building stores in the major metropolitan centres and only now have started to branch out into areas with less than 100,000 people.

This in itself will present new challenges and opportunities for brands, as smaller stores will require different pack sizes to those currently present in larger hypermarkets.

In those areas currently not being served by modern retail facilities, there are usually only one or two small, individually owned grocery outlets, while some areas have no retail facilities at all. This situation is particularly problematic in countries such as Romania where roughly half the population lives in rural communities and is, therefore, outside the reach of manufacturers.

In Romania’s urban centres product penetration has improved dramatically during the last few years, resulting in some of the highest levels across the entire region. Toilet paper (+74%), tissues (+148%) and kitchen towels (+177%) all grew significantly in 2006, no doubt helped by the influx of discounter outlets. Yet, as these discounters, and more importantly the major supermarket chains, increase their presence, it is likely they will introduce quality private label products, available at a lower cost than brands, thereby providing a further level of competition.

RUSSIA: A SLEEPING GIANT. In 2006 Russia generated a quarter of tissue products sales in Eastern Europe, having the region’s largest markets for toilet paper, tissues and paper tableware.

As of yet, few Western manufacturers have invested in Russia beyond the usual sales offices. One of the main reasons for this is the lack of quality raw materials which makes the manufacture of high-quality products very difficult. Furthermore, Russia is still considered to be somewhat of a risky business investment. Global brands are reliant on imported products, whose unit costs are kept high by transportation expenses, resulting in uncompetitive prices when compared to local products. As such, Euromonitor International’s research shows that global brands command only slightly over 25% of the Russian market by value, with locally based players securing the remaining share.

The Russian market has seen a number of new product launches in the past year as local producers have reacted to the growing demand for higher-quality products, boosted by rising income levels, particularly in Moscow. Sales of luxury toilet paper are rising rapidly, averaging 14% per annum over the past two years and expected to increase by an additional 13% per year (at real prices) in the period until 2011.

In response to these changing dynamics the company Aster launched a number of new products during 2006, including its Aquarell range of 3-ply coloured papers and its more luxurious Bouquet range, which offers a choice of different scents, including flower, sea, peach and strawberry.

Georgia-Pacific is one of a small number of Western companies which has manufacturing plants in Russia, having opened a tissue-converting factory outside Moscow in 1997. Recently the company has also announced plans to construct a EUR300 million tissue converting plant in the Tver region. The production site, together with a logistics centre, will become the largest producer and distributor of Lotus branded tissue paper, paper handkerchiefs and towels in the region.

Most products in Russia, aside from toilet paper, are priced at a premium and are therefore out of the reach of most consumers.

However, the introduction of cheaper alternatives, particularly in the kitchen towels category, should lead to increased usage with consumption rising to 5kg per person per year by 2011.

The packaging of products is of great importance in Russia for a number of reasons. Firstly, the penetration of cars is much lower than in Western Europe, meaning consumers have to rely on public transport when shopping. This means that smaller pack sizes are of great importance. Ensuring packaging has a high level of aesthetic appeal is also imperative due to the high visibility of such products when carried on public transport.

DEVELOPING THE FUTURE. As the Eastern European region continues to modernise, consumer requirements for disposable paper products will obviously increase. Growth, however, will not be uniform across all countries and segments, not even in staple product categories such as toilet paper.

In Bulgaria, for example, Euromonitor International predicts that the revenue generated through the sale of toilet paper will decline by 2% per year between 2006 and 2011. This is due to unfavourable demographics, with the population having declined by more than 500,000 in the last decade and expected to decline by a further 200,000 by 2011 (source: Euromonitor International’s Countries & Consumers). The rise in popularity of German discounters, such as Metro and Billa, will also increase the pressure on revenues, as will the growth of private label products.

Kitchen towels are predicted to offer manufacturers the best opportunities for growth in the next five years. Euromonitor International forecasts an average increase of 9% per annum throughout the region as the key markets of Poland, Romania and the urban centres of Moscow and St. Petersburg mature and consumers trade up from low cost or economy products.

Euromonitor predicts that the market which is set to offer manufacturers the best actual growth up to 2011 is the Russian toilet paper market, which is expected to see growth of US$70 million. Much of this growth will be in the standard sub-segment, which will see its share of overall revenue jump from 52% in 2006 to 57% by 2011. This will not only be as a result of increased wealth in Russia, allowing consumers to trade up, but also because of an expanded retail sector, meaning more consumers being exposed to higher-quality global brands for the first time. Sales of luxury toilet paper should also increase substantially, with revenues jumping from US$20 million in 2006 to US$37 million by 2011 and its share of the market increasing from 6% to 9%.

The business environment throughout Eastern Europe is also likely to improve in the coming years, as governments and local businesses adapt to global competition. For example, Slovenia recently reduced its level of corporate tax by 2% to 23% and plans to reduce it by a further 3% in order to make the country a more attractive destination for foreign investment. Other countries are likely to follow this example and cut their business tax rates, and when combined with an educated workforce that requires lower wages than other EU countries, European manufacturing plants are likely to shift eastwards in the coming decade.

CONCLUSION. Growth in Eastern Europe is not something that can be accepted as a fait accompli. Businesses need to identify those countries and sectors which offer the most promising opportunities, as well as identify new solutions to the problems associated with distribution.

They will also have to work hard to develop brand loyalty and to move consumers away from the idea that they should purchase products based solely on price. However, at the same time as brands are trying to raise prices, Western retail chains will be suppressing prices by launching high-quality private label products onto the market.

They should also look to develop more premium products which are increasingly popular amongst the more affluent members of society. The Russian market is already awash with scented toilet papers and even kitchen towels, and manufacturers should focus on increasing the desirability of these products among richer consumers to increase their attractiveness among lower-income groups.

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