Country Report

Turkey: gateway to the east appears temporarily closed

Turkey has long been seen as the gateway to the East. More recently, the country has been deemed as something of an economic backwater and its exclusion from the European Union continues to suggest that at least politically it is still viewed with at least a modicum of suspicion. Fast forward to 2012 and political tension across the near and Middle East appears to have begun to close the door on the Turkish gateway, although Turkey is now regarded in its own right as a tempting economy in which to do business.

With the Eurozone still under significant financial strain, rapid economic growth in a secular society with a significant Islamic influence could well be regarded as a key developing market opportunity. Certainly in the context of its close proximity to faltering western European markets this is true, but, equally, Turkey might be viewed as a territory where international players can cut their teeth if they are to develop the skills in terms of product innovation and marketing required to operate successfully in the wider region, which boasts close to one billion consumers.

THE DOOR CLOSES ON WESTERN INVOLVEMENT

It is, then, a little surprising that given its undoubted potential the tissue industry in Turkey has lacked any external involvement since Georgia-Pacific’s decision to pull the plug on its European tissue operations in 2011. The sale (currently pending) of its 50% stake in its joint venture in Turkey’s leading tissue manufacturer Ipek Kagit to Turkish industrial group Eczacibasi means that by the end of 2012 there will be no significant international representation in the Turkish tissue market for the first time in over a decade.

‘With the Eurozone still under significant financial strain, rapid economic growth in a secular society with a significant Islamic influence could well be regarded as a key developing market opportunity.’

Lack of international representation is unusual in the developing world where Kimberly-Clark is typically a major player in developing markets around this region and further afield. There are no particular laws pertaining to international operators being precluded from the Turkish market, and in hygiene both Procter & Gamble and Kimberly-Clark are well represented. The Turkish tissue market resembles that of Iran, with a handful of medium-sized domestic players accounting for the lion’s share of sales.

A TEMPTING PROSPECT

Although Georgia-Pacific’s withdrawal from Turkey was part of its abandonment of the whole of Europe, it does seem surprising that other international players, including SCA, have not looked to expand their influence in the Turkish market. While the wider western European market is generally in the doldrums, saved in terms of value growth by material-driven unit price growth, volumes in 2011 were little more than static as economic problems, market saturation and ageing populations across the continent converged. The Turkish market, in contrast, remains robust, with a growing economy, westernisation and low household penetration of tissue products all combining to make Turkey a tempting proposition both now and in the future.

Over the last decade Turkish tissue volumes have been increasing at a consistent and rapid rate, registering a CAGR of 6% since 2001, 10 times the level reported across western Europe. Over this period a further 200m tonnes of tissue were added across the continent, with Turkey and its population of 70m accounting for a third of this total on its own. The prospects for further rapid and sustained growth appear positive as nationwide household penetration of most products is still only around 30%, with many consumers in more outlying areas to the east of the country still very unfamiliar with tissue products. Perhaps the required investment in education is putting some international players off the Turkish market, although with the national government investing heavily in education it would seem that at least part of the work is being done for manufacturers. There is a need, however, for manufacturers to take on some of the education burden themselves; Ipek Kagit, for its part, claims to have reached 5.5m students through its own education initiatives since 2002. These campaigns, in conjunction with investment in education and rapid urbanisation, look set to dovetail nicely with a strengthening domestic economy to deliver further retail tissue growth likely to be in the region of a 7% volume CAGR to 2016.

VALUE GROWTH HARDER TO COME BY

Perhaps somewhat expectedly, added-value growth generation will be a more difficult prospect as consumers are very much fixated on lower-quality paper products which offer passable quality at an affordable price. To this end, economy and standard toilet paper formats are by far the most prevalent across the country and there is already a healthy private label category which accounted for 14% of domestic sales in 2011. The rapid development of private label in the country has come from within Turkey rather than as a result of the internationalisation of the Turkish retail channel. Turkish retailers dominate chained grocery and have stepped up their private label operations in country report a bid to better establish themselves among consumers either lower down the income chain or in non-core product categories.

‘Tissue can still be seen as a huge opportunity not just locally but across the Middle East.’

In both cases, this has proved a popular tactic, with X5 in Russia as well as Aditya Burla in India following a similar policy. That said, there are signs that in the most developed westerly regions of Turkey, typically the most urbanised, the tissue market is showing some signs of maturity, with a Turkish flavour. Kitchen towels, for example, continue to take a relatively high share of sales thanks to the popularity of this product among housewives, particularly in urban areas. The health and hygiene message has certainly spread among Turkish urban households and kitchen towel sales have benefited as a result. The industry has also responded to this heightened interest by producing a wider range of product formats, offering different designs and promotions to attract consumers. For instance, the kitchen towel category since 2008 has seen 3-ply, half-size sheets as well as printed designs all make an appearance in the marketplace.

AN INTERNATIONAL FUTURE

While international involvement in the Turkish tissue industry is non-existent in 2012, the signs that multinationals are looking to do business in Turkey are clear, with Kimberly-Clark and Procter & Gamble both operating in the Turkish hygiene market, along with SCA through its investment in Yildiz Holding in 2011. While retail hygiene is a more lucrative area and has also seen a rapid 15% CAGR since 2006, tissue can still be seen as a huge opportunity not just locally but across the Middle East, where local manufacturers still hold sway. In order to challenge and make the right M&A choices across this region, international tissue manufacturers could do worse than taking another look at Turkey as it is still the gateway to the East and the skills learnt in developing the Turkish market could well be applied to the wider region, where even in the Islamic world tissue sales are increasing and represent a very lucrative opportunity, although perhaps needing some cultivation.