From Mexico to Argentina, the Latin American region has for more than a decade been busy establishing itself as something of a powerhouse of the world economy, with the days of boom and bust and political instability seemingly in the past.
Ian Bell, Head of Tissue and Hygiene Research - Euromonitor International
While this view of Latin America appears to have become a little tarnished of late, with the economy slowing in Brazil and instability apparent in a number of other states, the region still represents the most dynamic prospects for tissue outside of China.
That said, there is a sense that, in spite of a very favorable economic and demographic profile, Latin America may have missed an opportunity over the last decade to really engrain tissue consumption amongst consumers. While international comparison with Eastern Europe, for example - which has a similar income profile but a rapidly aging population - reveals something approaching parity in terms of per capita consumption, with its more youthful population, the opportunities for tissue may well have been much bigger during the boom years in Latin America but are now more difficult to grasp as the economy cools, even if temporarily.
Tissue a bellwether of development. While tissue consumption may not be any scientific measure of economic development, it does have something to say about the spread of income and tends to be a bellwether for how successfully new wealth has been distributed in society. This could be in terms of job creation or rising personal incomes but also in terms of infrastructure projects, which can see housing and sanitation improve markedly as a result. While there are territories like India where cultural and religious norms are very much a break on tissue development, none of these are particularly evident in Latin America.
If one looks at per capita consumption in Latin America as a whole, a figure of 3.6kg in 2013 appears a low return considering income levels. This compares to a figure of 1.8kg in Asia Pacific in the same year; considering roughly half the region’s population (largely found in South Asia) consumes relatively little (if any) tissue products, then per capita consumption of tissue consuming nations is in fact quite similar. Comparing the economic giants in each region, Chinese per capita consumption actually surpassed that of Brazil in 2012 in spite of Brazil having by far the stronger income profile and no shortage of resources when it comes to making pulp.
Pricing and penetration. While demand appears to be strong in Latin America, part of the issue is certainly pricing. Retail prices remain high both across the continent and by international standards, with retail tissue products costing US$4.40 per kg on average. This compares unfavorably with Germany, for example, where the same kilogram of tissue is more likely to cost US$3.50; the preponderance of private label and strong chained retailers is a key reason for this unexpected difference, but the high inflation economies of Venezuela and Argentina may also be forcing up the regional average, although prices are similarly high in Brazil.
The Latin American market for tissue is very polarized, which is also true of income distribution. This plays out in purchasing patterns, which means average prices are beyond what many consumers in developed markets would find acceptable. In a region blessed with natural resources, investment in new manufacturing technology from the likes of CNPC in 2013 may be welcome news and help to lessen the price influence of its fragmented distribution structure on pricing.
Supply problems. The sight of empty supermarket shelves where toilet tissue was once stacked high in Venezuela is an interesting example of how bad pricing problems can get. Government price controls have literally made tissue production unviable for most if not all producers in 2013. When tissue does appear on shelves, it seldom stays for long, illustrating there is demand strong enough to call for emergency toilet roll imports and even the Venezuelan army being drafted in as new tissue producers.
While the situation in Argentina is not as bad, tissue has taken something of a battering in 2013, at least in part due to pricing controls introduced during the year. These have levied maximum pricing levels on 500 leading fmcg brands in what is increasingly seen as a vain attempt to hold back the tide of ‘real’ inflation, which was running at over 30% in 2013. This has again led to shortages in some cases, and manufacturers taking the opportunity to rebrand or start producing private label in order to get their products off the price control list. In both the case of Venezuela and Argentina, tissue has become somewhat politicized, which is reminiscent of how Japan faced the oil shock and the UK’s winter of discontent in the 1970s, when a lack of tissue products generally and toilet paper in particular was a clear indication of the severity of problems faced at that time.
Internationalization ahead? While there are clear divisions in Latin America in terms of income, there are also divisions that exist in the wider context of international trade, such as the Pacific Alliance, which promotes free trade and focuses on fast-growing Asian economies as an alternative to the protectionist policies championed by Mercosur members, including Argentina and Venezuela. While the influence of late Venezuelan President Hugo Chavez, the champion of leftist nations that rejected US “imperialism” and free trade, would appear to be on the wane, a combination of high, if not hyper, inflation and empty shelves may well be enough to encourage a change in policy.
While changes in the Mercosur group may only come slowly, the Pacific Alliance could well bring about some interesting changes in the tissue market. While Chinese manufacturers have run headlong into something of an arms race in terms of adding new production capacity over the past five years, all this new capacity has led to something of an internationalization of the tissue industry. Whereas shipping tissue was once almost unheard of, the movement of parent (jumbo) rolls and even converted products around the Pacific Ocean is on a fast upward growth phase. Closer ties with Asia could well open up the Pacific side of Latin America to this internationalization, and with the pull of high unit prices could ultimately see a fundamental change for the industry across Latin America as a result. *