When Emerging Markets Develop – The Effect of Rising Incomes and Declining Birth Rates on the Hygiene Industry
As in most other FMCG categories, income is a crucial factor for development in retail hygiene. But, income requirements for disposable sanitary protection and nappies/diapers are relatively low, standing at US$1,500 and US$3,000, respectively, according to Euromonitor International’s estimates. Therefore, hygiene products are some of the first fast moving consumer goods to become ‘mainstream’ staples in developing markets because of the importance of personal hygiene and the lack of substitution.
However, the relatively low income requirements for these hygiene products also mean that while volume growth accelerates quickly in early development stages, market saturation tends to set in at relatively low income levels compared to other FMCG categories. Additionally, hygiene products suffer from the law of ‘diminishing returns’, meaning that for every unit of income increase, ‘marginal’ consumption decreases.
In other words, it only takes a per capita income of US$6,000 before half of all babies wear disposable nappies/diapers regularly, but it requires four times that income for full penetration. Therefore, it can be predicted that future growth, in relative terms, is always lower than past growth rates. Manufacturers should be mindful of not being blinded by previous rapid volume growth rates, which can often be found in many emerging markets, but analyse penetration rates and focus on innovation and value growth to generate sustainable business growth.
Although income is a key driver of category development, conversely it also hampers volume growth over the long run because of the ‘demographic-economic paradox’. Wealth and fertility are often inversely correlated, meaning that with higher incomes and better education, birth rates are decreasing.
Despite economic theories often being far from reality, the ‘demographic-economic paradox’ has proven to be a very relevant contemporary phenomenon. By 2024, 53% of all countries will see a fertility rate below 2.1 births per woman. This means, disregarding immigration and a longer life expectancy, that these countries will see sub-replacement fertility, and eventually a declining population. But a low birth rate will not just affect developed countries but also emerging markets, such as Brazil, Mexico, Indonesia and Turkey, countries in which international hygiene manufacturers are still heavily investing.
Given the theory of diminishing returns, an already high penetration of around 50-70% in nappies/diapers and sanitary protection, at least in Brazil, Mexico and Turkey, and a declining birth rate, volume growth in these markets is set to slow to low single-digit figures over 2013-2018.
Incontinence, the Saviour
However, it would be premature to say that the glory days for hygiene manufacturers in these markets are over, despite volume growth slowing. On the one hand, there are a number of opportunities for value growth. With growing incomes, consumers will look for more premium products, hence manufacturers should continue to invest in innovation and also focus on establishing niche categories, such as disposable pants and pantyliners.
On the other, an ageing population will increase demand for incontinence. In Japan, incontinence sales have already overtaken nappies/diapers sales, showing that the demographic transition will eventually result in a change in consumption patterns but not necessarily a decrease in overall hygiene sales.
Therefore, it is somewhat surprising that Procter & Gamble has disinvested in most of its incontinence operations, apart from light incontinence under its Always moniker. Over the long run, Procter & Gamble might have to reconsider its strategy in retail hygiene so as to not lose ground to competitors Kimberly-Clark, SCA and Unicharm, which have already positioned themselves well in incontinence.