The biggest economic power in Europe is facing a future of uncertainty with challenges that can already be felt in the tissue market.
By Ian Bell, Euromonitor International’s global head of tissue and hygiene research
Germany remains the driving force in Europe in 2013, being the EU’s largest member both in terms of population and economic output. Times are changing, however, in spite of a relatively buoyant economy which is the envy of many in a region still feeling the effects of the 2008 crash. Germany’s rapidly ageing population, one of the lowest birth rates in the world and relatively low immigration will see the UK emerge as the largest EU member in terms of population by 2050 if current trends continue.
Demographics, as the life blood of the tissue and hygiene industry, will certainly continue to put tissue sales under pressure over the medium to long term. Volume sales are likely to decline by a further 1% to 780,000 tonnes by the end of 2013, with value growth set to either stagnate or decline.
PER CAPITA CONSUMPTION AT A CEILING?
In terms of per capita consumption, the German market is somewhat unremarkable, sticking very closely to the per capita disposable income versus tissue consumption model. Germany is very much at the ceiling of this model, and as an advanced market German consumers purchase the full range of retail tissue products, consuming 13.7kg of tissue per year, this being a little above the Western European average of 11.9kg in 2012.
Where the German market does differ is in consumers’ price perception. A staggering 78% of tissue sales in 2012 were accounted for by private label compared to just 45% in the UK and 20% in the US, for example. Private label is a major barrier to growth for the German market, with brands having such a narrow position there is little room for investment in terms of innovation and product promotion. Private label products are rarely (if ever) promoted individually in the press but only as part of a wider retailer offer, meaning that for any innovation the burden is placed on brands to pay for promotion which will ultimately be undermined by a rash of ‘me too’ products.
‘Demographics will certainly continue to put tissue sales under pressure over the medium to long term. Volume sales are likely to decline by a further 1%.’
WET TOILET TISSUE LEADS THE WAY
The only category to really see any growth (+2% CAGR value over 2008-2013) has been toilet paper, which has registered a very modest performance on the back of the increased penetration of wet toilet tissue. This developing category is set to claim 10% of value sales in 2013 as consumers are being won over by a more stringent bathroom hygiene routine. In this sense, Germany leads the way in what is fast becoming a Central European block of wet toilet tissue usage, with Austria and Switzerland also reporting similar penetration rates. The trick for manufacturers is to try and apply the trends seen in Germany to the wider European market and convince new consumers to enter the category, particularly those who might be currently using baby wipes as a cheap alternative.
GREEN TISSUE OPTIONS
Other factors which could provide a boost to the German tissue industry appear to be heightened consumer sentiment revolving around sustainable and eco-friendly alternatives. To date, most companies and brands as well as private label manufacturers offer at least one “green” product in their range. Aside from eco-labelling and statements on the packaging, consumers have been able to find out about these products through a list created by Der Blaue Engel, a highly respected German eco organisation. While brands such as Kimberly-Clark’s Hakle Naturals are present on the list, so are private label products like Aldi’s Vitesse and Lidl’s Floralys toilet paper.
‘The trick for manufacturers is to try and apply the trends seen in Germany to the wider European market.’
While the retail value share of recycled toilet paper stands at 8% in 2013, its share of sales has actually fallen from the 10% it held five years ago. Economic concerns have certainly pushed the economy segment of late but there would still appear to be opportunities here as the environment regularly scores highly with German consumers and may be an avenue through which manufacturers of both branded and private label products can inject more value into the category.
HARD DISCOUNTERS A FORCE TO BE RECKONED WITH
Looking from the outside, the German retail market for tissue and fmcg in general represents something of a horror story for branded manufacturers, and the thought that other markets might follow Germany’s penchant for private label is something of a concern, especially in these less buoyant economic times.
The chief protagonists in the German market have mainly been Aldi and Lidl, both retailers developing from a niche position as ‘hard discounters’ in the 1980s to dominance in the grocery channel in the new millennium. Hard discounters have completely changed the retail landscape in Germany, and the site of Mercedes-Benz cars in Aldi car parks has become something of a cliché as well as a keen observation inthe German grocery channel.
WIDER GERMAN INFLUENCE
The German retail model is something of a threat to the tissue industry as well as other fmcg categories. While the spread of the hard discounting model westwards was curtailed by the move of indigenous chained retailers such as Carrefour and Tesco into private label and everyday low pricing (EDLP) initiatives, championed by Wal- Mart, since the recession in 2008 hard discounters have enjoyed an upward curve. Store numbers have increased, along with value sales, as low average wage rises, inflation and a general lack of consumer confidence have once again made German-type retailing more appealing in Western Europe.
While hard discounting is developing, of more concern to the tissue industry and brand owners in particular is the export of the German model eastwards. With low per capita consumption reported at around 4kg across the region, as well as rising income levels, the East should provide some respite from the harsh conditions found in the West. That said, a less developed retail industry has meant the German model has been adopted relatively readily across nearby markets such as Poland (discussed in last edition), whose close proximity to Germany has certainly seen consumer trends influenced.
Further afield, Russia’s X5 Retail Group and even Aditya Birla in India have set out a business model where as much as 40% of sales have been earmarked for private label, in keeping with the German model.
LOOKING TO THE FUTURE
The German tissue market is entering a slow and protracted period of volume and value decline, driven by demographic trends which will see on average 1% of volume leave the market on a yearly basis over the medium to long term, while the hope of value generation also looks to be limited given the stranglehold of private label. To what extent brands can win back consumers is open to question. This will rely entirely on the shoulders of brand owners to come up with meaningful product innovation which will likely have to satisfy consumers’ heightened interest in hygiene (both personal and around the home) and offer a point of difference against private label and German consumers’ price/quality fixation. Although this is not impossible, recent history would suggest it is improbable.
‘For branded tissue players the threat of German patterns of consumption and retail spreading far and wide should be much more of a concern.’
For branded tissue players which have largely given up on the German market, the threat of German patterns of consumption and retail spreading far and wide should be much more of a concern. While China remains the engine of global tissue growth and significant private label development is some way beyond the horizon, the sea change in German retailing and its effect on value sales should be a warning, encouraging the industry to continue to innovate and work harder to convince consumers that tissue is a worthwhile investment. Treat it as a commodity and it will be one.