Is a Shrinking World a Good Thing?

Reuben is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Bloomberg BusinessWeek's Charles Kenny recently opined that an aging population could actually be a good thing. While that may be true with regard to some social issues, it certainly isn't true for economic growth. However, a shrinking world will definitely be a long-term headwind to some stocks.

The Good and the Bad

Kenny's list of benefits from an aging world is interesting, but rooted almost exclusively in the social realm. He pinpoints things such things as gender equality, higher rates of infant survival, and increasing rates of education as major pluses that have come along with, or perhaps caused, the declines in birthrates around the world. Moreover, he notes that having more people doesn't ensure prosperity, people working smarter does. He also notes the possibility that the world could be less violent, as older people tend to be less prone to start wars.

He's correct on all points, of course, but that doesn't mean that an aging population is a good thing. For example, his comments suggest that he's not seeing the big economic picture: “A significantly declining global population will, of course, mean lost opportunities. Every child born might be the next Picasso or Einstein.” Sure, any one child could be the next genius, but every mouth has to be fed and creates demand. Moreover, what greater push toward efficiency and progress is there than the responsibility of caring for a child?

Business Problems

Of course arguing over whether a declining birthrate is good or bad doesn't do much good for the world. The problem is that it is happening no matter what people think of it. In fact, some companies are already dealing with the headwinds and more could be soon, too.

Kimberly-Clark (NYSE: KMB)

Kimberly-Clark is the owner of several diaper brands. In late 2012, it made the choice to “exit the diaper category in Western and Central Europe...” The company had been struggling in these markets for years and the reason isn't necessarily a function of poor management. Indeed, European nations have among the lowest birthrates in the world. With fewer and fewer births, a spiral that feeds on itself, there is simply less of the diaper pie to go around. In short, the company chose to get out of what will be an increasingly competitive and smaller market.

That's not a bad plan. Of course that has implications for other markets as well. For example, while China may seem like a huge growth market in many ways, it isn't one for babies. The country is still living under the cloud of the ill-fated one-child policy. Thus, in 20 years, the country is also going to start to shrink. Japan has been shrinking for years. Where are companies that are so tied to birthrates supposed to go for growth if the vast majority of the world is shrinking? This is an issue to keep in mind with Kimberly since it is already moving on the front.

Procter & Gamble (NYSE: PG)

Procter & Gamble's Pampers brand has performed much better in Europe than Kimberly-Clark's brands. The fact that P&G is big in the diaper business in Europe helps explain why competitors would find it difficult to get a good footing. However, having a good position in a shrinking market is only so beneficial. With the United States getting to the point where its birthrate is barely at, or sadly below, replacement rate, means that even the best competitors could find the diaper business challenging over the longer term.

Interestingly, part of Kimberly-Clark's decision was that it would be able to push growth in emerging markets instead of floundering in mature ones. This makes sense since many emerging markets still have very high birthrates. Procter & Gamble, meanwhile, has suffered notable stumbles in emerging markets. In this, Kimberly-Clark could be setting itself up for a bright diaper future, while P&G is left to dominate declining markets.

Hasbro (NASDAQ: HAS) and Mattel (NASDAQ: MAT)

The two giant toy makers have been experiencing divergent results of late. Hasbro seems to be struggling while Mattel appears to be doing quite well. For example, Hasbro's Preschool segment saw sales fall more than 10% in the fourth quarter, while the Fisher Price segment of much larger competitor Mattel saw sales jump over 5%. While Hasbro's results probably aren't a direct impact of a slowing U.S. birthrate, it should stand as a warning that toys targeting the very youngest children could become increasingly competitive.

Taking that to the next step, however, should prove even more disconcerting. Once the market for toys targeted to the very youngest children starts to shrink, the impact is likely to continue moving through each age group. That will make every segment of the toy industry increasingly competitive.

That doesn't mean that Hasbro and Mattel are horrible companies to own. Both are working to expand in international markets. Getting into emerging markets with still high birthrates could clearly make a big difference to the future of these entities. Three factors, however, are worth watching.

The first is how well each company's brands resonate in emerging markets. Mattel's Barbie is a big brand in Western nations, but will it work as well in India? The second issue to watch is rising wealth in developing nations and the impact that has on the overall sales volume of toys. If more people can buy more toys, the markets will provide notable growth that could offset the declines in developed markets.

Third, and perhaps more important, is the increasing push toward high-tech toys. This makes the plastic dolls and cars that both Hasbro and Mattel make much less desirable. Interestingly, Hasbro's push to create content around its toys, such as television shows and video games, could prove a long-term winner strategically, as it draws in new customers for its “old school” toys by enticing them with “new school” technology.

Keep an Eye on the Population

There is a saying that demographics is destiny. In so many ways this is true. Investors need to keep an eye on birthrates because they will help to highlight which market segments are at risk of difficulty. For example, infant toys could be an important harbinger of what's to come. While expansion in emerging markets can clearly help there are no assurances of success when big companies enter new markets.

Yours,
 

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Reuben Gregg Brewer has no position in any stocks mentioned. The Motley Fool recommends Hasbro, Kimberly-Clark, Mattel, and Procter & Gamble. The Motley Fool owns shares of Hasbro. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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