The Toilet Paper Curve
The empty shelves and scarcity of toilet paper (TP) we are witnessing are not frenzied consumer buying, but rational behavior. It’s not obvious, but we consume a lot of toilet paper when we’re at the office/jobsite (where we spend a lot of our day). With quarantines in place, this means you use more toilet paper at home – 40% more, in fact, per Georgia Pacific (large TP producer). Thanks to Will Oremus at Medium for cluing us in on this.
So, a key driver of the surge in pandemic-buying is we all began to overnight basically consume 40% more TP. The second driver is that Americans typically hold about 2 weeks of TP inventory at home (so you don’t have to run out and buy the bulky packages or have them delivered so frequently). Recent trends suggest with the uncertainty/desire to leave the house less, people are targeting about 4 weeks of supply. This seems like rational behavior.
How does the data stack up? When we model actual TP demand in the recent period and compare it to what we should see if people are consuming 40% more TP and seeking to expand their in-home inventories to 4 weeks from 2 weeks, it seems like the American consumer has done a fantastic job. So good job everyone.
When does it stop? Right now, we estimate the average person is sitting on 3.85 weeks of supply (assuming the increased consumption rate) versus the targeted 4 weeks – pretty darn close. Now, retailers’ inventory is depleted, and it takes time to convert the commercial production lines at TP plants to domestic use (office TP comes in giant rolls and are thinner). Given this constraint and assuming quarantines remain in place, we model that TP in-home inventory will dip to ~3.3 weeks in May-2020 from 3.85 weeks currently as we wait for this converted capacity to come online, then gradually rise to 4 weeks in July-2020. Importantly, the TP curve above assumes the quarantines remain in effect all year; if they end, consumers shift back to consuming some TP in office and lowering inventories, and we’ll see a decline in purchases sooner.
So, we’re close, but people will look to replenish their inventory, and it’ll take some time to get to a full average 4 weeks of in-home inventory. But you’re not going to run out.
Which countries use the most TP and which have sold the most recently
Americans consume more TP per person than any other nationality
TP-usage is correlated with how developed is a country, so it’s not surprising that we see the U.S., Germany, U.K., and Japan at the top of the list. But what is surprising is French people use half the amount of TP as Americans. This could be because of bidets. If you want to learn more (I don’t), here’s a BBC article on the topic.
Italy has seen the largest increase in TP purchases
Not surprisingly, countries hit hardest by the pandemic have seen the largest increases in toilet paper purchases, especially highly developed countries where the consumer may be more financially able to stockpile. What is surprising, however, is the French have stockpiled the least despite quarantines in place. Maybe since the bidet is infinite capacity, they don’t need to? Again, check out the BBC article, and maybe add a comment below explaining it (but I don’t really want to know).
A brief history of TP
For those interested in the 1973 Great Toilet Paper Scare, here’s an archived New York Times article on the topic…because history is important.
May want to stop buying TP stocks (WMT, PG, KMB) just for TP exposure
People react to crises in different ways. I have made the decision to exit the market entirely as I view this as such a shock to the system that conventional wisdom is out the window. Here’s my post on that.
Others have sought to strategically profit from stocks, including TP stocks, which may benefit from the crisis. I have no moral problem with that whatsoever, but I think it’s mistaken: First, the shortage is largely over – people have already built inventory; it’s prudent to get in front of news, not follow on after; we already have March-2020 Same Store comps data. Second, it’s not clear they even benefit (they may even be harmed) – TGT and DLTR both had negative March-2020 sales reports despite the stockpiling as their discretionary, higher margin products are not moving off the shelves (people are buying essentials like TP and holding off on other purchases). One could argue that WMT is less discretionary than TGT, or that it’s better to own upstream TP producers like PG and KMB, but I believe this is trumped by the fact that overall TP consumption is not changing; maybe it’s front-loaded to last quarter and this quarter, but it will not change annual sales, and we’re already hearing companies talk about the costs associated with converting manufacturing and expediting shipments are rising; balanced against this is they are reducing SKU’s and mass producing essentials (which can lead to efficiency gains) and in some places, they are the only ones still open for business (e.g. more market share).
Overall, I think it’s too obvious a trade, we’ve passed the stockpiling window, annual consumption is unchanged, the stocks have already risen (outperforming the XLP staples group), and the cost side of the equation is far from clear. Now, if you want to own these stocks as a hiding place given strong balance sheets and a semi-defensive staples sector or if you know them really well and have reasons to own them, go ahead by all means (though I’d be curious why them and not the XLP), but you may want to stop buying them for just TP and wipe the stocks slate clean, lest you feel the burn (intended as a possibly inappropriate pun).
On a more serious note…
There are some who did not have the ability to stockpile TP; we’re talking averages here. If you want to help those less fortunate source some TP, check out TPauction.com.
And that’s a wrap.