K-C Makes an Upscale Zag as Competition Focuses on Value Plays During Recession

Organic Sales Rise, but Share Falls and Retailers May Balk at High Prices

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BATAVIA, Ohio (AdAge.com) -- A recession seems like a funny time to move your product mix upscale, but Kimberly-Clark Corp. has been doing just that of late, focusing more on premium and super-premium offerings and brands such as Cottonelle, Viva and Huggies Pure and Natural, while watching distribution of its Scott value brand shrink.

SHRINKING VALUE: Distribution of K-C's Scott value brand shrank as it focused more on premium brands.
SHRINKING VALUE: Distribution of K-C's Scott value brand shrank as it focused more on premium brands.
It's a bold strategy to zag upscale as most of the market, including archrival Procter & Gamble Co., have been zigging more toward value products and private-label sales have been rising.

But the results have been surprisingly successful for dollar sales, if not volume or share. Kimberly-Clark's organic sales rose 3% in the third quarter, beating results of P&G's family and baby-care unit for the first time in years. (P&G's unit, which includes tissue and baby products, saw organic sales rise 2%.)

K-C's gross margin also rose six percentage points last quarter from a year ago at a time when the recession has been squeezing profits for many companies. Lower commodity costs accomplished part of that, but a shift in mix toward higher-price, higher-margin products helped.

Of course, the unemployment rate in the U.S. is still near 10%, and private label remains the fastest-growing brand in K-C's categories. Training-pants sales have declined in the U.S. this year as parents keep their children in diapers longer to save money. Despite continued population growth, diaper volume is down too, suggesting some parents are changing diapers less or switching to cloth to save money too.

Testing retailers
In that environment, conspicuous margin expansion -- like conspicuous consumption -- may not be a good idea. Retailers will likely take note of K-C's improved margins, said Sanford C. Bernstein analyst Ali Dibadj, and while they've been patient about price hikes amid rising commodity costs, their patience may be running out as they look to fund promotions in many of K-C's traffic-driving categories.

The divergence between the reported market shares of K-C and P&G in diapers and shares measured by Information Resources Inc. and Nielsen suggest K-C lost some share last quarter at Walmart, whose sales aren't captured by syndicated services.

Retailers also have been giving more space to the value-priced Basic versions of P&G's Bounty and Charmin, partly at the expense of Scott, which has lost distribution at Target, CVS and Walgreens.

But that doesn't seem to much bother K-C Chairman-CEO Thomas Falk, who on an Oct. 22 conference call said, "We still think there's a role for Scott towels to play ... but we're probably going to focus more of our innovation resources on how do we drive Viva, where there's more revenue opportunity, more opportunity to differentiate."

Likewise, while retailers have been stepping up promotion in K-C's categories and even its brands, K-C has been trying to hold the line on funding discounts. "We're going to be competitive, obviously, where we need to be," Mr. Falk said, "but that's not a good way to differentiate yourself."

Losing volume
That strategy helped K-C win in dollars, at least last quarter, but it's losing consumers. Its volumes have declined for seven straight quarters. In a high-capital-cost industry, K-C may yet face pressure to crank up the volume again eventually. But Mr. Falk said K-C also still has plenty of plans to cut costs -- just not in marketing, where the company's reported "strategic marketing" outlays were up $50 million globally last quarter and $120 million on the year.

K-C's strategy makes sense in several ways, Mr. Dibadj said. Given that retailers such as Walmart increasingly are segmenting categories and assigning space based on margin and growth potential, he said, "maybe [K-C] is going down this innovation path to make it a sexier business."

But he said getting tissue categories beyond commodity status will be a substantial challenge. "If you can imagine a big technological advance in paper towels, maybe," he said. "But I'm not sure there's anything like that." P&G moving mops and brooms beyond commodity status with Swiffer is an example of how such a move is possible, but it's rare, he said.

It's harder to see such opportunities in K-C categories, with Deutsche Bank analyst William Schmitz noting in a recent report that the company's most novel patent was for a doggie diaper.

Struggling through the storm

A record postwar recession approaching two years has produced some big consumer behavior changes, everything from parents keeping kids out of training pants to people getting fewer haircuts.

Though a surprising 3.5% growth in U.S. gross domestic product last quarter broke a string of four down quarters, a 0.5% decline in consumer spending and unemployment nearing 10% mean the economy is still sputtering. So marketers are trying strategies to deal with or capitalize on recession -- some with great success, some with not so much. Here are some of the ways:

HAIR-RAISING RESULTS: People still have to get their hair cut and washed even in a recession; they just aren't doing either as much as before.

Salon sales have been sliding, with same-store sales at mega-operator Regis Corp. down 4.5% last quarter. Mass hair-care sales are down 3.5% in the U.S. over the past 52 weeks, Alberto-Culver Co. CEO James Merino said on a conference call last week.

Yet there's growth to be had in both places. Cyrus Bulsara, principal of consulting firm Professional Consultants & Resources, notes that the Great Clips and Sports Clips chains are seeing healthy same-store sales and franchise growth through a combination of value pricing and aggressive marketing. Great Clips, for example, has stepped up national advertising on ESPN's "Monday Night Football."

Meanwhile, Alberto's Tresemme delivered double-digit sales growth last quarter with its positioning of salon quality at mass prices. Procter & Gamble Co.'s Pantene started reversing more than a year of share declines late last year with a similar tack, comparing its results to salon products.

Wahl Home Products is capitalizing on salon avoidance another way. Its home hair clippers are in their second year of double-digit growth, ahead of the usual low-single-digit pace as more people try at-home barbering. Wahl is stoking the trend with a $10 million ad campaign launched earlier this year.

THE CRUELEST CUT FOR RAZORS: Men started shaving less even before the recession for fashion reasons. Rising unemployment has meant even less shaving both for men and women. Category volume of razors, refill blades and even cheaper disposables all have been down low to mid single-digits this year, per Information Resources Inc. data from Deutsche Bank.

P&G's Gillette has addressed the problem in part with ads pitching men on the benefits of changing blades more often. Sales have still been falling, though it's hard to tell how much worse they would have without those talking Fusion razor ads. Energizer Holdings' Schick and Edge, have seen rising volume and sales in razors and blades.

LASERS REMAIN ON TARGET: In an environment where more people are reluctant to fork over $3 to $4 per replacement razor cartridge, you'd think a home laser hair-removal gadget priced at $795 would be a non-starter. Yet Tria Beauty, which launched in the U.S. at the front end of the recession in early 2008, remains on plan.

UNLEARNING TRAINING PANTS: Executives of Kimberly-Clark Corp. and Walmart both have noted sales of training pants are declining as parents keep their kids in diapers longer, because they're cheaper. K-C's Pull-Ups has attempted to reverse the trend in the past year with ads and events highlighting the "potty dance," a celebration of independence both for tots and for their parents (with toilet training ending the cost of diapering). So far, however, the effort's been to no avail.

MANICURE EXTENDERS: Manicures were among the first luxuries to hit the chopping block in the recession as women look to extend the life of salon work they splurge on and create similar effects at home.

Mark Pollock, president of Barielle, said his company has been seeing double-digit sales growth as a result for its Nail Strengthener Cream, Intensive Nail Renewal Oil and the 60 Second Mani Pedi, which removes dead skin. Barielle, which isn't a big-time advertiser, has been focusing its firepower on blogs.

THE BIG CHILL: As consumers look to save by eating more at home and buying products in bulk, they also appear to be freezing more food. But they'll spend money to save. FoodSaver, which makes high-end vacuum-powered freezing systems, priced $39 to $173 (plus bags), saw sales increase 10% during the first three quarters of 2009. The products, best known for their infomercials, promise that food will stay fresh five times longer and provide up to $2,700 in annual savings.

-- Jack Neff and Emily York
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