Overcoming price pressures in the European tissue market

The European tissue retail market continued to expand in 2007, with total revenue up by almost 3%. However, many manufacturers experienced difficulties due to retailer strength, private label products, rising raw material costs and a deteriorating economic situation, particularly in Western European countries.

Magdalena Kondej, Research Manager, Euromonitor International

Growth potential still exists in Eastern European markets as greater affluence results in larger numbers of individuals being able to afford non-essential or better quality paper products, and it is in these areas that manufacturers must seek out new opportunities. At a category level, kitchen towels continue to outperform all other tissue products, with retail revenue growing by almost 4% in 2007 to reach US$2.9 billion. However, the size of European kitchen towels is only a fraction of that of toilet paper, with total sales in 2007 amounting to US$8.9 billion, according to Euromonitor International. Tissues and paper tableware continue to lag behind both in terms of growth and revenue, accounting for US$1.9 billion and US$1.4 billion accordingly.


EUROPE’S TOP GROWING MARKETS. According to Euromonitor International, the best performing European markets in 2007 were Ukraine, Romania, Belarus and Macedonia. They have all seen significant growth as a result of higher penetration levels for toilet paper. In Romania, for example, the total retail tissue market has grown by 22% in the last year alone. Toilet paper is seen by consumers as the most essential, as well as being able to be used for a multitude of applications. Initially, opportunities for multinational manufacturers are slightly limited because of the cost advantages available to local manufacturers due to local production facilities and consumer interest in basic products.

As markets start to expand and retail channels develop, per capita rates will increase not only due to rising usage, but also as more affluent consumers start to purchase more luxurious, weighty papers. The market will then start to consolidate in favour of international brands. Similarly, the Ukrainian tissue market, which grew by 24% in 2007 saw a consumer shift to higher-quality variants, with price losing its paramount importance, a trend especially observed in cities. The trend largely evolved because of new product developments from domestic manufacturers, in the premium price segment in particular. There were a range of innovations on offer (especially in napkins and toilet paper), unlike previously, when local producers were known for cheap disposable paper products. More multi-layered products, with various fragrances and moisturising elements, were launched on the market in 2007/2008. The growing range of products helped boost consumer demand, with the ongoing premiumisation of sales.


RUSSIA OFFERS UNTAPPED POTENTIAL. To date, the average Russian uses only one tenth of the tissue products of his or her Western counterparts, reported at 2kg in 2007. The latent potential of the Russian market has been enough to see SCA invest something in the region of EUR230 million in a new manufacturing plant in the Tula region close to Moscow, designed to drag domestic tissue manufacturing, which still lags far behind accepted Western standards, into the new millennium. The relative under-development of the Russian market, even compared to its Eastern European neighbours, can be seen in the dominant position toilet tissue commands, accounting for 90% of volume sales in 2007 at 210,000 tonnes, which contrasts markedly with the 60% or so which is typical for Western Europe. Although household penetration rates are as high as one would expect in any other market, the key to future success must come from the development of a wider portfolio of products as well as a more value-led focus. In particular, value development will be key to leading the market away from the low-quality, single-ply tissue paper which currently accounts for the lion's share of volume sales, the stock and trade of the majority of small to medium manufacturers at present. The development of more advanced products is brought into sharper focus when considering Russia's demographic structure - its population is both rapidly ageing and in decline. In addition, the consuming middle-classes are anything but evenly distributed throughout Russia, with its European part housing the vast majority of consumers with the purchasing power necessary to be able to buy brands such as Lotus and Zewa, which lead the premium branded section of the market.


WESTERN EUROPE SUFFERS FROM WEAKER GROWTH. Western European markets, on the other hand, are constricted by high levels of product penetration in the toilet paper sector, which accounts for the greatest proportion of sales. In 2007 the retail tissue market in Western Europe grew by only 1.6%, according to Euromonitor International. On a global scale, in markets where penetration levels are high, manufacturers rely on population growth in order to boost volume sales and this is another area where Western Europe suffers in comparison to the US, for example. Euromonitor International's latest research shows that while a higher birth rate and immigration helped push up the population size in the US by a full 1%, in Western Europe the figure was only half that in the past 12 months.

Brands operating in Western Europe have also suffered in recent years from the emergence of discount retailers which offer larger pack sizes, a trend driven by a consumer quest for better value, both of which have had a detrimental effect on unit prices. In Germany, for instance, toilet paper values have only grown at an average annual rate of 1% since 2002, whilst the share of revenue taken by discounters increased by seven percentage points to 50% over the same time period. The trend for discount shopping is spreading, with its popularity growing across Europe and into countries such as Poland, where retailers like Germany's Aldi are looking to expand into new markets. Even in the US, discount shopping is becoming increasingly popular, particularly as consumers look to cut spending on everyday items as a result of a deteriorating economy.


MORE ROOM FOR CONSOLIDATION. P&G's decision to abandon the Western European tissue market in order to concentrate its efforts on higher-growth opportunities in Latin America and Asia highlights the difficulties facing even major manufacturers. SCA, however, believes that increased scale - its market share expanded from 6% to 11% thanks to the takeover - will enable it to better compete. Control of a larger share of the market will also place the company in a stronger position when negotiating with retailers, ensuring they stock a larger number of SCA brands, as well as leading to products being merchandised in more advantageous positions. Additionally, SCA believes that it will be better placed to combat the gradual erosion in value of the market due to continual price decreases as a result of fierce competition. With fewer players fighting over share it is less likely that companies will resort to deep price cuts.

Moreover, although the penetration of toilet paper in Western Europe is almost 100%, it should be possible for brands to drive per capita volume usage even higher, particularly in the kitchen towel categories, where North American usage is 200% higher.


TISSUE PRODUCTS MOVE BEYOND CORE FUNCTIONS FOR GROWTH. However, in order for companies to increase value growth in mature Western European markets, they will need to rely on inventive product development strategies. In facial tissues, brands should work with OTC manufacturers, developing products containing decongestant solutions and allergy relief. Combined, these markets are currently worth more than US$1.5 billion in Western Europe and offer manufacturers a great opportunity to provide consumers with added value. Furthermore, if they use branded OTC ingredients, significant co-marketing and merchandising opportunities exist, with products being placed next to each other in order to drive consumption. In the toilet paper category, brands should look to take advantage of consumers' increasing concerns about their personal health by developing products which provide preventative benefits through the inclusion of natural ingredients such as oak bark, marigold and common yarrow. A great example of this type of product is Metsä Tissue's Hemoroll toilet tissue, which aims to alleviate discomfort from haemorrhoids.

Companies have also tried to alter their marketing strategies in order to grant additional value to their product ranges.

In a similar fashion to Kimberly-Clark, P&G offers package personalisation for its Puffs tissue brand. Kimberly-Clark has also looked to revitalise the facial tissues market on both sides of the Atlantic through increased investment in its 'Let it Out campaign', which moves its Kleenex brand away from being simply a functional item into something with which consumers connect emotionally.


SUSTAINABILITY A GROWING ISSUE IN EUROPEAN TISSUE. Claiming green credentials has become key for both manufacturers and retailers alike, and a number of companies are eyeing new opportunities for creating extra business by shifting to eco-improved product alternatives. With a greater focus on sustainable resources, as well as recycled products, the sourcing of raw materials for tissue products is coming under increasing consumer scrutiny. In May 2007 Sainsbury's became the first UK supermarket chain to source all of its private label tissue from sustainable sources, with every piece of toilet roll, kitchen towel and tissue it sells made from sustainable wood fibre with the Forestry Stewardship Council (FSC) seal of approval. As part of Wal-Mart's overall environmental strategy, Asda is now promoting its tissue products in the UK as an affordable and yet sustainable purchase. 45% of the fibre used to make Asda toilet tissue is sourced from FSC-certified plantations in Brazil. In terms of major tissue product manufacturers, SCA Tissue promotes the highest environmental and social standards in forest management. In fact, the company attained second place in the Green Leaders Global Top Ten list, published by the Independent newspaper in conjunction with Ethical Investment Research Services (EIRIS) in 2007. SCA was the only paper company to be ranked in the list and was only surpassed by Vestas Wind Systems, the world's leading manufacturer of wind turbines.

SCA and WWF became partners for the environment in 2006 and work in close collaboration on various forest management projects across the world, led by WWF in Austria, Switzerland and Germany. Five cents from every Danke pack of tissues, toilet paper or kitchen roll sold goes towards funding these project initiatives. Another notable example is Portuguese company Renova. ISO-certified according to the most demanding environmental standards and long-known for its eco-policy, the company has successfully tapped into the premium end of the market with its environmentally-friendly tissue products range, Renova Green, rolled out in Spain and Portugal last year. The products are made from 80% urban forest paper (used paper in cities) and 20% from industrial used paper. Italy's Cartiera Lucchese has made similar developments by expanding its Grazie line of eco toilet tissue with what it terms “a new and innovative model” - a package containing two maxi-rolls one above the other. Again, the environmental credentials of the product evolve around its more compact nature, resulting in more efficient and easier transportation. In addition to this, the company has started to sell its Grazie products on the internet, making them available for home delivery to consumers in Italy. It claims to be the first company to offer such a service, which according to Cartiera Lucchese comes as a result of increased demand from a number of cooperative groups of Italian buyers which are particularly keen to purchase eco-friendly products.

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