Renova toilet paper case study

INS131

Renova Toilet Paper Avant-garde Marketing in a Commoditized Category

09/2017-5685

This case was written by Raquel Seabra de Sousa, INSEAD MBA 2009 and consultant with BCG, under the supervision of Yakov Bart, Assistant Professor of Marketing, Pierre Chandon, Associate Professor of Marketing, and Steven Sweldens, Assistant Professor of Marketing, all at INSEAD. The video material was produced by Shellie Karabell and Julian Boudier from INSEAD. It is intended to be used as a basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation.

Additional material about INSEAD case studies (e.g., videos, spreadsheets, links) can be accessed at cases.insead.edu.

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Las Vegas, New York-New York Hotel and Casino:

Paulo Pereira da Silva, the Swiss-trained physicist and CEO of Renova, a privately-owned Portuguese paper company, was attending a performance of Zumanity, the for-adults-only Cirque du Soleil production, together with Luis Saramago, the company’s marketing director. Watching the trapeze artists holding on to black fabric stripes, Paulo Pereira da Silva thought about Renova’s own artsy advertising campaigns showing nude men and stripes of Renova toilet paper. This is how he first came up with the idea of black toilet paper.

Black toilet paper? To see how far-fetched the idea is, bear in mind that toilet paper is a highly commoditized category with sluggish growth and little innovation. Even though Renova is a relatively strong brand in Portugal (its home country), it is just a medium-size family business facing fierce competition from such consumer goods behemoths as Procter & Gamble, as well as from multinational paper manufacturers such as Kimberly-Clark and Georgia-Pacific. Moreover, in a category where private labels are beginning to outsell national brands, Renova also has to deal with powerful retailers who are both customers and competitors.

Although the strategic challenges facing Paulo Pereira da Silva are common to all medium- size companies facing giants in commoditized consumer markets, it does not make them any easier to resolve. Without a clear cost advantage, distinctive brand positioning or unique product features, how could Renova grow the business in its current markets or expand into new markets?

The Tissue Industry

Industry Overview

Western Europe

In 2005, disposable tissue and hygiene is a $26 billion category in Western Europe equally split between disposable tissues and hygiene products (diapers, sanitary protections, etc.). The $13 billion disposable tissue category includes toilet paper ($7.6 billion), kitchen towels and rolls ($2.6 billion), facial and pocket tissues ($1.6 billion), and table napkins ($1.3 billion). Between 2002 and 2005, the market grew by a mere 2.4% per year due to a stagnant customer population and market saturation.

As Exhibit 1 shows, Renova’s share of the Western European market in 2005 is less than 1%. Its main competitors in the tissue industry are $57 billion Procter & Gamble (which entered the market in 1994 with Charmin toilet paper and Bounty kitchen rolls) and $16 billion Kimberly-Clark (owner of Kleenex facial tissue, Scott toilet paper and kitchen rolls, and Cottonelle toilet paper). Competition also includes giant paper companies such as $21 billion Georgia-Pacific (owner of Angel Soft, Lotus, etc.) and €13 billion SCA (Svenska Cellulosa Aktiebolaget, owner of Velvet, Tempo, etc.). Retailers are the third group of competitors, with the added twist that they are virtually Renova’s sole customers. Leading European retailers include Carrefour (€64 billion sales in Europe), Lidl (€40 billion), and Tesco (€37 billion). There are also a number of medium-size European paper producers that could potentially enter the Portuguese market. Prominent among them is €800 million company Sofidel, the

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fourth largest tissue company in Europe and the owner of the Nicky and Regina brands. Although the company is strongest in its domestic market in Italy, it is expanding rapidly in Spain and other countries. Another potential competitor is €200 million company Tronchetti (also Italian) that produces Foxy toilet paper.

The profitability of the tissue sector is low and strongly affected by energy prices, which have doubled between 2003 and 2005, and by the cost of paper pulp, which has remained stable after substantial fluctuations in 2000-2001.

Portugal

In 2005, total sales of the disposable tissue paper category (excluding diapers and other hygiene products) are approximately €220 million, of which €135 million come from toilet paper, €37.2 million from table napkins, €35 million from kitchen rolls, and €12.8 million from facial tissues. Renova’s value share of the disposable tissue category is 35% (17% if we take into account hygiene products as shown in Exhibit 1). Its market share in each sub- category is 34% for toilet paper, 37.6% for table napkins, 29% for kitchen rolls and 29.5% for facial tissues.

Due to almost universal market penetration (above 90%) and limited population growth, the toilet paper category has grown by just 1.5% per year over the previous three years and is expected to grow at the same pace in the foreseeable future. Competitors in this category are the same as in the rest of Europe, except for retailers, which are mostly local. The number one FMCG retailer in Portugal is Sonae Distribução (€2.2 billion sales, owner of €2.9 billion Modelo Continente), followed by Grupo Jerónimo Martins (€1.7 billion in sales with Pingo Doce and Feira Nova supermarkets), by, €2 billion Os Mosquereiros (Intermarché) and by €1.8 billion Auchan group (Jumbo). Although not as strong as in other parts of Europe (e.g., Germany), hard discounters (such as €1.4 billion Lidl) are present and gaining market share.

As shown in Exhibit 2, private labels and Renova each have about one third of the market. Renova’s sales come mostly from Renova Super, the oldest and best-selling brand with a 25% market share. Renova Progress has a 5% market share, but the shares of all other Renova brands (Renova Fraîcheur, Renova Fragrance, and Renova Húmido) are below 2%. For more information, see Exhibit 2, which shows the value market share of the main toilet paper brands in Portugal, and Exhibit 3, which shows the typical package sizes and prices of Renova’s brands in Portugal.

According to Euromonitor data, the number two company in the Portuguese toilet paper market is Kimberly-Clark which has a 22% market share thanks to its two main brands Scottex and Kleenex (with 10-11% market share each). Georgia-Pacific is in third place with Colhogar (7% market share). The Portuguese company Pampi-Lar is fourth with 2% of the market. Exhibit 4 shows the main competitors’ products as well as sample ads.

Toilet paper prices in Portugal are relatively high compared to other European countries, partly because of the relatively low market share of private labels (that is, relative to other European countries, caused by lower retail competition and fewer hard discounters) and partly because of the strong power of the domestic brands (including Renova).

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Industry Trends

Toilet paper has a rich and interesting history (see Exhibit 5 for details). The current market segmentation in Western Europe is based on quality and price. In Portugal, toilet paper prices range between €0.10 and €0.70 per roll (see Exhibit 6). There is also a substantial variance in package sizes. Although toilet paper is mostly sold in packs of 12 or 24 rolls, packs of 6 are common, and some jumbo and promotional packs can have up to 48 rolls (see Exhibit 6). This variation in size helps companies to disguise up to a seven-fold difference in unit price, allowing them to price their products according to customers’ sensitivity to value and quantity.

When asked about the most important attributes of toilet paper, 60% of Portuguese consumers mention price, 30% quality, 8% the brand, and 2% the format. In terms of quality, the three most important attributes are softness, strength, and absorbency. 55% of Portuguese consumers report checking the price of toilet paper on the shelves before making their choice, whereas 35% said that they do not check the price beforehand. 46% of Portuguese consumers say that they take between 15 and 30 seconds to choose their toilet paper, with 28% taking less than 15 seconds, and 24% taking between 30 seconds and one minute.

Private Labels

The Western European toilet paper market is experiencing the classic phenomenon of polarization, with strong growth for premium brands, stagnation for standard and economy toilet paper, and rapid growth for private labels. In Spain, for example, premium brands grew by 16% in value between 2003 and 2005, private labels by 12%, whereas standard and economy brands grew by only 3%. The growth of private labels in Europe is driven not only by improvements in the quality and marketing of their products, but also by the growing power of European retailers which are strongly consolidated and, consequently, able to impose relentless pressure on every supplier.

In Portugal, private labels are the fastest-growing category, gaining market share thanks to their superior quality/price ratio. Although they started by offering a basic toilet paper product, they are expected to expand into a wider range, including more premium products, as they have done in other product categories. Lidl’s toilet paper Floralys, for example, already has a superior quality reputation. Most shoppers (especially the younger ones) strongly believe that private labels perform just as well as national brands.

Retailers typically carry only three or four toilet paper brands: their own private label, the leading brand, and one or two additional national brands. This makes it very difficult for second (and lower) market players to secure reliable distribution and good shelf placement, especially if they do not have any unique features. In this context, retailers have enormous power and use it to extract higher trade margins from national brands, increasing the price gap between national brands and private labels.

Even when distribution is secured, the retail environment presents other hurdles. Disposable paper aisles are often the blandest and least differentiated areas in the store, leading consumers to focus their attention on price (see Exhibit 7). As a result, price and sales promotions (usually offering larger packs, but also deploying “buy-one-get-one-free” offers, price discounts and coupons) are heavily used to boost sales. Consequently, a large part of the

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marketing budget in the toilet paper category is devoted to trade promotions, temporary price reductions, slotting allowances and other in-store marketing actions. The net result is that a large segment of the population has become accustomed to buying toilet paper from deal to deal.

Premium Products

To counteract the growing popularity of private labels, national toilet paper brands have experimented with a number of technological advances over recent years. Most innovations are designed to improve the most important physical attributes of toilet paper: absorbency, strength, and softness.

In 1981, Georgia Pacific launched the premium segment with Moltonel “thick, strong and soft” toilet paper in France. Over the last two decades, the premium segment had come to account for a quarter of the total category growth, and now represents 15% of all rolls consumed in France, generating a segment value share of 20%. This innovation success was largely due to a strong support from retailers who quickly took on the product and provided high in-store visibility. The introduction of 3-ply and 4-ply papers was also successful because it demonstrably improved the strength and absorbency of the paper. Initial fears that this would lead consumers to use fewer sheets per usage occasion (hurting volume sales), were not borne out by the sales track records. Apparently consumers do not measure the number of sheets used on a regular basis. The number of sheets used is more likely dependent on consumption habits. As such, consumers tended to use as many sheets of the 4-ply paper as they used from the 3-ply paper, so contributing positively to volume sales.

Other brands have innovated by improving shopping and usage convenience. In Italy, Sofidel’s Regina Rotoloni (“big rolls”) introduced rolls with a much greater paper length than its competitors. This “10 rolls in 4” product gave consumers both the security of a longer- lasting roll and the advantage of having the same quantity of tissue in less space. In addition, it provided easy storage, quick delivery, lower stock outs, and thus higher profitability per shelf space for the retailer. The “never ending roll” segment represents 35% of the Italian market and continues to grow (but not currently available in Portugal). Ironically, the “big rolls” that look so innovative today are not bigger than the rolls that were sold 40 years ago. Rolls have shrunk over the years because unit prices in Portugal are computed on a “per roll” basis (instead of, say, per kilo, linear meter, or square meter), which obviously encourages firms to reduce the size of the rolls. The same problem has occurred in countries such as the UK where unit prices are computed per sheet, as the length of toilet paper sheets has considerably declined over the years.

One of the most significant innovations in the toilet paper category in Europe was the launch of moist toilet paper. This was prompted by research showing that a significant proportion of consumers were wetting toilet paper before usage. Moist toilet paper was particularly popular in Germany and Switzerland, where it accounted for 8% and 10% of revenue generated, respectively. Renova was the first to introduce moist toilet paper in the Iberian markets. Still, in Portugal, moist toilet paper accounted for less than 0.1% of the market.

Another successful innovation was the development of toilet paper rolls impregnated with lotions and balms, again featuring Renova at the forefront of innovation. In September 1998, Renova was the first manufacturer in the world to introduce such impregnated toiled paper.

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This product, Renova Fraîcheur, was very instrumental to Renova’s brand penetration of the French market in 2002. In the same year, Kimberly-Clark introduced in the UK market Andrex Aloe Vera with “soft ripples enriched with extracts of Aloe Vera and vitamin E”. The instant success of this product triggered competitive reactions, and in 2005 Georgia-Pacific launched Lotus Freshness luxury toilet paper targeted at women. The product claimed to use new technology to incorporate a cleansing balm into a three-ply tissue and was based on research findings that women find it inconvenient to use moist wipes and toilet paper together.

Not all functional innovations have been successful. For example, Kimberly-Clark’s Cottonelle Fresh Rollwipes had a refillable beige plastic dispenser that clipped to the standard toilet paper spindle and held both a roll of dry toilet paper and the wet Fresh Rollwipes. The idea was that consumers would use a wet wipe along with their regular tissue. However, partly because of delayed shipment, but mostly because the marketers failed to communicate the product benefits effectively, the product was a failure.

Finally, some manufacturers and retailers have tried to improve the aesthetics of toilet paper. “Limited editions” of decorative toilet paper rolls printed with Christmas or Valentine’s Day motifs are often available in gift shops but have never had significant sales. A variety of other gimmicky special editions have been tried, but never with any measurable success (Exhibit 8). One important exception was coloured toilet papers, which had been popular in the 1970s and were then available in a range of pastel pinks, blues, lilacs, and yellows. However, this trend was short lived because of environmental concerns (the dye in the coloured toilet paper rolls was perceived to be harmful to the environment) and some health concerns (some people were afraid that it could lead to skin irritation). Today, coloured toilet papers have almost entirely disappeared from supermarket shelves.

Renova FPA, SA

History and Management

The Renova brand was born in 1818 when it was used as a watermark for paper, but the Renova firm itself was founded in 1939 in Torres Novas, 120km north of Lisbon. The privately-held company switched its focus from office paper to disposable paper products in 1961 and quickly achieved a leadership position in the Portuguese market. In 2005, Renova has sales of €104 million (up from €80 million in 1990) and employs about 600 people in two industrial units in Portugal and in its commercial branches in Portugal, Spain, France, Belgium, and Luxembourg. Production capacity is about 100,000 tons of paper per year. As shown in Exhibit 9, toilet paper accounts for half of Renova’s sales, kitchen rolls for 20%, napkins for 17%, and tissue for 10%.

After Portugal joined the European Union in 1986, Renova started to expand internationally: first in Spain in 1990 and then in France in 2002. Renova does not emphasize its Portuguese roots and is seen as Portuguese in Portugal, Spanish in Spain and French in France. If pressed, most consumers think that Renova is Spanish. Still, the majority of sales come from Portugal.

Paulo Pereira da Silva joined Renova in 1984 directly after earning a degree in Physical Engineering from École Polytechnique Fédérale de Lausanne in Switzerland. Although his grandfather was one of the company founders, his parents were not involved with the

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company and he is just one of 200 shareholders in the company. After joining Renova as a production manager in 1984, Paulo Pereira da Silva rose through the ranks, was appointed to the board in 1991, and became CEO in 1995. A strong believer in the importance of branding and innovation, he put in place a flat and flexible organisation structure to foster creativity and risk taking. The company's headquarters feature open-space layouts and modern furniture, some of which Paulo Pereira da Silva designed himself. Art books and design magazines fill the space. His own office is filled with works of art and a large blackboard covered with Schrödinger and Maxwell equations, which he finds “incredibly beautiful”.

Branding and Marketing

Since becoming CEO, the ambition of Paulo Pereira da Silva has been to shift Renova from being a disposable paper brand to becoming a wellbeing brand. To achieve this goal, Renova spent about €1.5 million per campaign each year and worked with some of the most famous photographers to create beautiful unconventional images associating Renova with wellbeing. These are showcased on a website created specifically for that purpose.

As evidenced in Exhibits 10-14, the advertising gradually became less functional and more symbolic. The 1997 campaign by French photographer Jean-François Jonvelle was about personal care, featured only women and children, and prominently displayed the products. The 1999 campaign by German photographer Peter Lindbergh used actress Rachel Roberts to achieve a more sensual look, but still focused on close-ups of women’s faces.

The 2002 campaign by Portuguese photographer Pedro Claudio marked a clear break with its predecessors, featuring male nude models surrounded by toilet paper strips and rolls. The 2003 campaign by French photographer François Rousseau (“the pleasure of being clean”) elevated the brand beyond hygiene and personal care to communicate that Renova was about feeling clean, a pre-requisite to getting close. Its use of nude male models as well as stripping couples engaged in playful sexual games shocked some viewers and several images were censored in Spain and France. On the other hand, the campaign was featured in a special exhibit at the Museum of Advertising in Paris. The 2005 ads (again by Rousseau) marked another radical change. Shot in Rocinha, the largest favela in Rio de Janeiro, they were a contemporary re-interpretation of the Beatitudes1. Rather than showing the product, the ads focused on love and compassion. These ads were banned from outdoor displays in France.

Thanks to these campaigns and to its longstanding presence in Portugal, Renova has a strong brand awareness and image in its home market. According to a FoneBus study, its aided awareness in 2005 is 87%, well ahead of L’Oréal (78%) and close to brands like Sony (88%) and Danone (92%). Brand awareness is particularly high among younger consumers from higher social classes. Renova is also perceived to be a prestige brand and is rated 7.5 on a 1 to 10 “prestige” scale, on a par with L’Oréal (7.21) and not far from Danone (8.10). Other studies show that Renova buyers spend more time choosing toilet paper and care more about quality and less about price.