Today I will share on the topic 'Breaking Through in a Difficult Environment.' This is a broad topic and hard to explain clearly in a short time, but I will try to combine Kimberly-Clark's practices in the Chinese market to offer some inspirational thoughts. Before starting, I'd like to share a piece of communication knowledge and my own insights. Since ancient times, before the rise of the internet, information and knowledge were often transmitted through bamboo slips, clay tablets, or books. These methods share a common characteristic: the medium of transmission is heavy. Here, 'heavy' does not refer to weight, but to the difficulty or obstacles in spreading information. Therefore, before the internet, we preferred to think or obtain information along the vertical time dimension. But after 2010, with WeChat, Weibo, and Douyin, the medium of information transmission became light, and everyone could share their insights and knowledge. This leads us to rarely think along the vertical time dimension now; instead, we think horizontally from the spatial dimension. So, when we encounter operational difficulties, we often look for something or a method that can solve these difficulties immediately, especially against the backdrop of this year's difficulties. My category is baby diapers. I estimate that no consumer goods category in China is as difficult as diapers, with such intense competitive pressure. Therefore, my sharing today aims to look at how Huggies has navigated through time cycles and continued to grow, from a long-term vertical time perspective. 1. Changes in the diaper industry over the past decade 2. How Huggies emerged from these changes Changes in the diaper industry over the past decade Before introducing the development of the diaper category, let me briefly introduce Kimberly-Clark. Kimberly-Clark is a global company that entered China in 1994. Currently, it has five major brands: Huggies, Scott, Kotex, Poise, and Depend. Kimberly-Clark was founded in 1872, with a history of over 150 years. Currently, its business in China mainly focuses on Huggies diapers and Kotex sanitary napkins, which together account for over 95% of total business. There is a global bestseller 'From Good to Great,' which lists 8 companies that crossed from good to great, and one of them is Kimberly-Clark. It entered China in 1994, and by 1999 its business was only 200 million yuan. 2012 was a turning point, reaching 2 billion yuan. Why was it a turning point? In 2011 and 2012, many foreign companies had a similar business scale to ours, around 2 billion yuan. But 10 years later, now, our business has reached 12 billion yuan, while companies that were at the same level then are still at 2 billion, with no growth in ten years, and many have shrunk to 1 billion or even several hundred million. Out of the 12 billion yuan business, Huggies has exceeded 7 billion yuan. Behind the 7 billion yuan business, how did we get here? Let's return to the diaper industry. Over the past decade, the diaper market landscape has undergone earth-shaking changes. In 2011, the top four brands held about 70% of the market share. Hengan's Anerle, P&G's Pampers, Unicharm's MamyPoko, and at that time Huggies ranked fourth. By 2014, due to changes in upstream technology and raw materials, the industry saw many opportunities and changes. In 2014 alone, there were over 1,200 local brands. At the same time, Japanese diapers represented by Kao rose rapidly. By 2022, the market changed again. Huggies returned to the top spot, while Kao, which had risen the fastest, now holds only a single-digit share. Ten years ago, Kao diapers were priced at 159 yuan daily, with promotions at 139 yuan, but during the 2022 Double 11, Kao diapers were sold on platforms for over 40 yuan, with prices rapidly declining. The above shows the changes in the competitive landscape of the diaper market. Now let's look from a macro perspective. Why is the diaper market a very unique and difficult market? Because the main users of diapers are newborns. Obviously, China's birth rate is declining rapidly. The usage cycle of diapers is generally 3 years, so calculating the target user number is simple. Adding up the birth population of the previous 3 years gives a rough estimate. The average birth population over the previous 5 years is about 18 million, multiplied by 3, that's 54 million. Looking at last year, with a birth population of over 9 million, multiplied by 3, that's 27 million. This means that in just 5 years, the user base has halved. I think no other category, unless there is strong policy intervention, can see its user base halve in 5 years. Furthermore, from the production side, if you are not in the diaper industry, you might not be familiar. The raw materials for diapers are non-woven fabric and absorbent powder, which are basically petroleum derivatives. Plus the outer plastic bag, and the gasoline for transportation, all costs in the chain plus logistics and warehousing costs, maybe only the wooden box is not related to petroleum, everything else is closely related to petroleum. Before 2014, the diaper industry had extremely low profits because oil prices were very high. In 2014, oil prices fluctuated dramatically, with a high of $130 per barrel and a low of $28 per barrel. The drop in futures prices also meant that the diaper industry quickly generated huge profits because raw material prices fell sharply. Also, equipment: before 2014, a diaper machine cost $10 million to $18 million, but in 2014, a new composite core technology emerged, reducing equipment costs from $18 million to $1 million, lowering the industry entry barrier by 90%. This was a huge technological change for the industry. With such technological change, the so-called trillion-yuan maternal and baby market attracted a flood of 'gold diggers,' and production capacity soared. Before 2014, the brands holding 70% of the market share had fewer than 50 production lines in total. But in just 2015, production lines exceeded 100, more than doubling capacity. With raw material costs falling and capacity rising, price wars naturally followed. Of course, there was also a typical event: around 2015, WeChat business (micro-commerce) emerged in the diaper category. In my understanding, WeChat business usually appears in high-profit, low-cost industries, like facial masks. The above chart shows diaper production capacity and utilization rates. Over the past many years, the industry's utilization rate has been only 30% to 40%. With so many machines sold, but only 30% to 40% utilization, it can only mean that manufacturers are not considering profits, only variable costs. They sell their products as long as they cover worker wages and raw material costs, without considering equipment depreciation and fixed cost allocation, just to maintain current scale. This has led to extremely fierce competition in the diaper market. After discussing capacity, let's look at the channel side. When Chinese e-commerce rose in 2012, the three favorite categories for driving traffic were: 3C digital (the category JD.com started with), books (to compete with Amazon), and diapers. Why? When a woman becomes a mother, her shopping basket and household expenses typically increase by more than 30%, and the extra 30% is not contributed by maternal and baby products, but a mother after having a child will pay more attention to her quality of life. So, e-commerce uses maternal and baby diapers to drive traffic. To date, e-commerce accounts for about 53% of the diaper market. Besides e-commerce, another major channel is maternal and baby stores. Huggies' share in the maternal and baby store channel is 7.1%, but even with only 7.1% share, it ranks first. From this perspective, it means there are many brands in maternal and baby stores; we estimate there are over 2,000 brands nationwide. What is the logic of the maternal and baby store channel? I prefer to group maternal and baby, beauty, and pet together. They belong to consultative sales, characterized by the fact that consumers in the early or initial stage of category selection usually need professional services and knowledge to guide them on how to choose and purchase products. Because when a girl becomes a mother, she has a lot of parenting and product knowledge to supplement, and much of it comes from personal introductions. This is my omni-channel size analysis, which clearly shows that when about to become a mother, the preferred channel is maternal and baby stores. Therefore, maternal and baby stores are an important channel for our recruitment. How Huggies emerged from the changes After discussing the macro demographics, industry capacity, and channel positioning in the diaper industry, let me specifically talk about how Huggies broke through in such a difficult environment. Starting with the simplest 4P theory, different categories have different weights for the 4Ps. In the diaper category, the 4P weights are not evenly 25% each. For diapers, product alone accounts for 40%. Because for most families, maternal and baby expenses are significant within just three years. Diapers average 7,000 yuan per year, and formula averages 10,000 yuan per year. With such large expenditures, consumers place a high emphasis on product quality. Therefore, we have also spent a lot of time on products. From 2018 to now, product positive review rates have improved rapidly. In 2014 and 2015, we did one thing: we brought all R&D and production back to China. We firmly believe that China's supply chain is the strongest in the world, and we should not follow a globalized supply chain model but rather adopt China's own R&D and supply chain model. To this day, Kimberly-Clark's Australian and European diapers are basically supplied by China. Even for Australia, our supply cost is lower than their local production cost, and the quality is better. They sell Chinese diapers and achieved the number one market position in just over a year, which fully demonstrates the strength of China's supply chain. Therefore, the key factors for Huggies' success in China are: localized production, localized manufacturing, and localized R&D. If we can thrive in such a competitive market as China, we believe we can thrive even better in other markets. Now, regarding the maternal and baby channel, it is a channel with high costs because it requires professional staff. Everyone talks about cost reduction and efficiency improvement. For the maternal and baby channel, I think cost reduction should be placed at the backend, thinking about how to first improve supply chain efficiency and store efficiency. The average operating cost of the maternal and baby channel is about 25%. Before the transformation, a maternal and baby store made a 5% profit on each pack of Huggies diapers, which is like charity; for every pack sold, they lose 20 percentage points of profit. This cannot be sustained. Therefore, we launched a maternal and baby exclusive line that is completely different from e-commerce and hypermarket channels. It serves as a recruitment channel for Huggies, providing high cost-performance products to new mothers entering this channel. Additionally, we reconstructed the 4Ps. Besides exclusive products, we do distribution, but not extensive distribution. The maternal and baby industry is different from other industries; there is a phenomenon of diseconomies of scale, meaning broader distribution does not necessarily bring greater benefits. Price comparisons between channels and between stores, consumers are extremely price-sensitive and highly planned. Therefore, in distribution, we do 'one town, three stores.' Even in a town with an average population of 50,000, there may be seven or eight maternal and baby stores, but we always distribute to only three. We implement 'one product, one code' and delegate marketing capabilities to the channel, giving it full room to make money. Regardless of the category, making the channel profitable is always our biggest goal. In the e-commerce channel, we continuously improve efficiency through rich BII tools and digital tools. In hypermarkets, although the channel share is very low, we rapidly increase share through O2O methods. Over the past three years, our share in hypermarkets has continued to rise, and O2O has played a significant role. Summary: After years of practice, my insight is: to break through in a difficult environment, we should not immediately look for answers externally, but rather return to ourselves for answers, whether in the West or in China. There is a classic saying in the I Ching: 'As heaven maintains vigor through movements, a gentleman should constantly strive for self-improvement.' The information and answers we find externally should ultimately return to ourselves, and we should find solutions from within. Past successful experiences may not apply now, but we can make many changes and adaptations. In the future, those who survive will definitely rely on themselves, not on others. Finally, I want to say, what is the best way to break through? In one sentence: No magic moves in the overall game. If you want to go further and deeply cultivate the industry, there is no one-shot or one-size-fits-all method. It is always long-termism and long-term investment, with no stunning tricks. As long as we invest for the long term, we can achieve the results we want. Over the past 10 years, we have made Huggies the number one in China. In the next 10 years, our goal is to make Kotex the market leader. Growth can solve all problems, and growth is also a good means to overcome all difficulties and traverse cycles! [This article is based on the keynote speech by Guo Wei, Vice President of Sales at Kimberly-Clark, at the 5th China FMCG Conference, organized and edited for readers (with some deletions and modifications)].