Euromonitor International’s 2014 data, published on 13 January 2014, reveals that over 2012-2013 sales of nappies/diapers/pants in China grew by an astonishing US$1 billion to US$6 billion, generating more than one third of global incremental value growth. Nappies/diapers/pants manufacturers have certainly nothing to complain about and with the lifting of China’s strict one-child-policy it appears there is no slowdown on the horizon.
Not all manufacturers stand to benefit equally from the potential increase in birth rate, however. Different regions and social classes will see different dynamics.
In 2012, China’s birth rate stood at 12 births per thousand people, comparable to the UK. But there are regional disparities, with urban centres seeing significantly lower birth rates than rural areas. In fact, Shanghai has the lowest birth rate globally with only four births per thousand people. Often, it is not governmental regulations that affect a couple’s baby-making decisions in these affluent regions of China, but the high costs of raising a child. Chinese parents are devoting a large sum of their income to their child’s education and a larger family would translate into fewer financial resources for each child, consequently lowering its educational progression, a trade-off many parents are not willing to take. Additionally, a second child often means that parents have to look for larger homes, a costly and difficult adventure in cities where there is high pressure on housing.
The disposable income per capita in those first-tier cities is, however, significantly higher than in more rural areas. In Shanghai, for example, the average annual disposable income has surpassed US$10,000, whereas the average income in China stands at about US$4,000, which is considered as a threshold for nappies/diapers/pants to become mainstream. These income disparities suggest that in the China first-tier cities, penetration of nappies/diapers is slowly reaching maturity. Coupled with a low birth rate, manufacturers may have to expand their scope and focus on the up-and-coming lower-tier cities.
China has about 160 cities with a population over one million. Kimberly-Clark, for example, one of the key players in the category, currently operates in about half of them, giving local manufacturers, who are already supplying the more rural regions with their nappies/diapers, a head start.
Another disadvantage international manufactures face in lower-tier cities is that their product portfolio doesn’t cover diaper liners, which currently make up about 20% of volume sales in China. Diaper liners are inserted into a cotton diaper and are up to 50% cheaper than disposable open type nappies/diapers, making them affordable to consumers with lower incomes.
Those lower income parents might also be the ones considering having a second child, feeling less pressure than aspirational urban dwellers who are trying to raise high-flyers. This could translate into faster growing demand for cheaper nappies/diapers or liners from local manufacturers.
Prioritise Lower-Tier Cities
In a nutshell, the lifting of the one-child policy is not expected to bring an imminent baby boom to China. This is especially true in urban areas; governmental regulations have transformed society, and affluent parents are likely to continue to choose to devote their income to a single, well-educated child instead of having to compromise financially with a second child.
Nappies/diapers/pants manufacturers should prioritise expanding to the lower tier cities and rural areas where penetration is far lower than in urban centres. Over the short term, these areas will surpass the income threshold for nappies/diapers resulting in strong demand. Additionally, these regions are more likely to see an increase in their birth rate, with less pressure on housing, and an increasing inclination to educate their children to the highest standard.