Analyst Insight by Rob Walker.
Emerging markets are on course to dethrone developed markets as the dominant consumption base for retail tissue and hygiene as early as 2015, according to new data from Euromonitor International. It will be a defining moment for the industry, and will have major strategic implications for the leading multinational companies.
US$36 billion in incremental retail tissue and hygiene sales during 2005-2015 for emerging markets
In 2005, emerging markets accounted for 37% of worldwide spending on retail tissue and hygiene products (at constant US dollar prices). Fast forward a decade, and that share is on course to break 50%.
What is more, emerging markets will have achieved this milestone without any significant contribution from India, the world's second biggest country by population and a growth powerhouse in most other fast-moving consumer goods markets.
Anything the West can do, China can do better
It is little wonder that multinational companies are eagerly competing to take a larger share of the Chinese market. At the same time, homespun companies, such as Hengan International, are digging in to retain their own positions of strength.
China is a gripping competitive battleground between Asian and Western companies, and the latter are far from having things their own way, In fact, not only can China's biggest domestic companies hold sway in their home market, they also see themselves as long-term leaders globally, eating into the market shares of the likes of Procter & Gamble and Kimberley-Clark.
Their strategic vision is not simply confined to China. They want their brands to be ubiquitous on supermarket shelves around the world.
It is an interesting twist to the evolution of business culture in emerging and developed markets. In a twist to the widely held view that emerging markets are, first and foremost, rich opportunity terrain for multinational companies from the West, China, the biggest of the emerging markets, is nurturing a breed of domestic companies with expansionist plans for the West.
It is as though the tables of corporate global expansion have turned. When one looks historically at product development in Latin America, for example, it was always the richest Western companies that yielded the biggest growth stories, from Coca-Cola to McDonald's to Wal-Mart. National companies rarely got a look in. The difference in China is that homespun companies are not only ambitious. They also have the financial muscle and competitive flair to take their products global.
A stronger flow of mergers and acquisitions is in the strategic pipeline
The rapid growth of emerging markets in staple tissue and hygiene, together with the potential for growth in more niche categories, underscores the importance for strong ongoing investment to 2015, not only in first-tier emerging markets, but in a raft of second-tier emerging markets too, such as South Africa, Turkey and Argentina.
It is a huge strategic challenge for multinational companies, not least because emerging countries often throw up unforeseen risk. The crisis in the Middle East and Africa, for example, has put the brakes on investment in key second-tier markets such as Egypt, Algeria and Saudi Arabia.
More mergers and acquisitions activity is expected to 2015, because this is often the most secure and effective way for a multinational company to gain a firm foothold in the key growth categories of emerging markets. It will, though, be less about mega deals, and more about smaller micro deals, such as SCA's recent decision to purchase 50% of the Turkish hygiene company Komili. Smaller scale purchases can broaden portfolios overnight, while providing new distribution platforms for existing brands.
Equally, the world's biggest tissue and hygiene companies will need to channel stronger support behind their flagship brands in those markets where they are weak. Huggies, for example, will need to raise its game in Asia Pacific, while Pampers will be keen to improve market performance in Latin America.
If companies leave new strategic investment initiatives too late, it may prove extremely costly. Without a shadow of a doubt, emerging markets are setting the agenda for the bottom line growth prospects of multinational tissue and hygiene companies now and well into the future. Crucially, as the scales of consumption shift more heavily toward these emerging markets, so the case for channelling stronger investment into riskier ventures will become ever more compelling.