The global baby diaper market is huge, and offers big diaper businesses lots of room for growth. According to a report from Transparency Market Research, this market is expected to grow by around 46.6% in the period of 2011-2017 to reach $52.2 billion, driven by increasing birth rates and rising hygiene awareness in developing economies. Big global players like Procter & Gamble (NYSE:PG), Kimberly-Clark (NYSE:KMB), and Kao Corporation (NASDAQOTH:KCRPY) will certainly benefit from this favorable trend.
Procter & Gamble with its Pampers brand
Procter & Gamble has the market-leading position in baby care, including diapers and baby wipes, with around 35% of the global market share. Pampers, the company's biggest brand, is the main driver for its baby-care business around the world. Pampers alone generates more than $10 billion in sales and accounts for around 12% of the company's total revenue.
While Pampers has premium positioning, the company also introduced Luvs, a mid-tier diaper option for consumers. Recently, it has been trying to drive the diaper bottom line by simply raising the price by 5%-7%. However, the price increase will not be visible for consumers at retail; instead, the price at retail will be kept steady, but there will be fewer diapers in each box. That was a pretty good move to boost the overall company's profitability by focusing on the company's biggest brand.
Kimberly-Clark focuses on innovation and emerging markets
Kimberly-Clark is also in the diaper business with its famous Huggies brand. The company considers diapers to be Kimberly-Clarks biggest opportunity to grow internationally. It will focus most of its efforts on innovation, including an expansion into diaper training pants. When a baby starts to move around, it can wear Pull-Ups, a pre-fastened diaper, which parents can just slip on without having to make their children lie down.
Geography-wise, the company has given up hope in most of Western and Central Europe for its diaper business, shifting its business focus to higher growth markets that include China, Russia, and Brazil. In the past 18 months, Kimberly-Clark's diaper business has experienced more than 40% organic sales growth in China and 20% growth in Brazil. The company reported double-digit growth in 2012 and 2013.
Kao's international business expansion
Kao Corporation, the second-largest diaper player in Japan, owns around 30% of the total Japanese market. With its presence in Japan it has an advantage over Procter & Gamble and Kimberly-Clark in penetrating the Asian emerging markets.
The company is expanding its business internationally, especially in China. Last year, it built a diaper factory in China that helps it sell its product at a price around 50% lower than Japanese-made products. At the end of 2013, the company will also begin to operate its $102 million diaper factory in Indonesia. One of its strongest diaper brands, Merries, has performed well in Japan, growing market share and increasing sales in China and Russia.
My Foolish take
The battle between Procter & Gamble and Kimberly-Clark will be fierce in the diaper business, especially in the emerging markets. In Asia in general and in China in particular, Kao has emerged as the rising player in the global diaper market. However, Kao is the most expensively valued among the three at around 20.6 times its forward earnings valuation, while the forward P/E ratios of Procter & Gamble and Kimberly-Clark are lower at around 17.7. With dividend yields of 3%, both Procter & Gamble and Kimberly-Clark can be considered long-term income investment opportunities for income investors.
Anh HOANG has no position in any stocks mentioned. The Motley Fool recommends Kimberly-Clark and Procter & Gamble. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.