The Disposable Diaper Industry

The disposable diaper industry 1. Barriers to entry a. High Cost for machines/setup cost b. Competition c. Incumbent advantage – high r&d, distribution, masss shipping, low advertising ( offer retailer low allowance), customer loyalty d. Economic of scale

Why do you want to enter? Return, Growth and Risk  

Barrier for entry is high since there are a lot of barrier Economic of scope – using the same channel, they can deliver more product

If selling another product it will destroy the company? Why Differentiation – more margin (why not product differentiation?) Cost leadership – low margin Why no price war in express mail? When should we go for price war Why P&G follow other company’s product?

The Disposable Diaper Industry in 1974

Disposable Diaper Industry – 1974  

Estimated sales of $370m – 1973 Major players – Procter & Gamble, Kimberly Clark, Colgate-Palmolive’s subsidiary – Kendall, Johnson & Johnson, Union Carbide, Scott Paper etc.

History     

Prior to 1966,reusable diapers were the most used form of diapers P&G led the growth of Disposable Diaper Industry through the acquisition of the Chairman Paper Company in 1957 Pampers by P&G was the first successful disposable Diaper Each of the companies were using different technology to develop diapers – Scott Paper -> Two – piece principle, Kimberly Clark – fluff pulp technology Though a lot of firms got into the disposable diaper industry, due to explosive growth many of the firms put an end to some of its products and some of the

firms like Borden, Chicopee had exited the industry all together after sustaining considerable losses

Product – Disposable Diapers  

One-piece triangular or rectangular pads with three layers Outer – layer: water proof plastic film, Middle layer: highly absorbent, cellulose based filler material, Inner layer: hydrophobic layer next to the baby

Variety of Prodcucts Diaper Variety Newborn Daytime Overnight Toddler Toddler Overnight

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Baby Size Up to 11 or 12 pounds From 12 to 22 pounds From 12 to 22 pounds with extra absorption capacity Over 22 or 23 pounds Over 20 pounds with extra absorption capacity

The market standing of a Diaper Brand was based on performance. Any diaper which performed poorly lost market position

Demand   

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15-20 billion diapers per year – US market; grew rapidly after introduction of pampers Cost was not a determining factor and parents selected diapers based only on performance Factors influencing the growth of the industry – o Increasing number of working mothers o Better education and decision to postpone having children o Improvement in quality of disposable diapers o Better advertisements reaching out to more people Further growth was expected. Growth a function of forecast births, disposable diaper penetration and the number of diapers consumed per baby Increase in number of women of child bearing age to offset the declining birthrate Forecasted penetration of 70-75% of diaper changes by 1980 Usage rate – ambiguous- depended on the future product improvements that might make diaper industry more absorbent

Distribution  

Sales through supermarkets, drugstores and mass merchandisers Gross margin of 10 to 28% of retail selling price, with a median of around 18 – 20%

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Represented 63% of the sales and 50% of gross profit of baby care products in supermarkets Retailers allocated significant shelf space and carried two or more branded diapers Retailers looked for aggressive support from the manufacturer in the form of sampling programs, consumer advertising and promotional allowances Brokers were used to sell the product and some firms had their own sales force

Marketing 

Complex and involved a variety of vehicles o Extensive sampling through hospitals o Couponing o Consumer advertising o Test marketing

Manufacturing The sequence of the manufacturing process can be described as below

Rolls of fluff fed to hammer mill

Chop pulp in separate room

Loosely formed batt carried to diaper making machine

Cut into sections and laminate to plastic outer sheet

Attach inner liner and adhesive tabs

Diapers folder counted and packaged

Diaper Machine Considerations 

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Operations o Staffed by 4 complete crews o Operated 80% of the week at the rate of 400 diapers per minute o Speed dependent on engineering improvements and complexity of diaper o Rejects and scraps have significant cost impact o Time for learning process and improving efficiency Procurement o Lead time of 12-18 months o Much costly and major proprietary modifications for speed and specifications o Complete line setup cost - $2 million to $4 million o Three to four machines per plant

Other considerations   

Rising prices for fluff pulp in 1974 Fluff pulp and liner generally purchased, sometimes integrated Transportation costs significant, benefits of scale

Research and Development  

High investments – Product improvement and Manufacturing process improvement Significant changes in diaper required extra capital investments - led to sharp drop in machine performance

Competition Branded P&G – Pampers Kimberly Clark – Kimbies Johnson & Johnson Kendall/Colgate – Curity

Branded- In Test Market Union Carbide – Drydees Scott Paper – Scott Tots

Private Label Weyerhaeuser IPCO Hospital Supply Georgia – Pacific

Procter & Gamble 

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4 business areas o Laundry and Cleaning Products: detergents, soaps, fabric softeners, cleaners and cleansers o Personal Care Products: bar soaps, toothpastes, mouthwash, deodorants, shampoos, paper tissue products and disposable diapers o Food Products: shortenings, oils, cake mixes, peanut butter, potato chips and coffee o Other products Operations concentrated in Europe, Great Britain, Canada and parts of Latin America, Asia and Africa Pampers was the single largest P&G brand in paper Products division and enjoyed high profitability Introduced a large no of varieties in the diaper line and constant changes were made to suit the market Diapers were marketed aggressively and sold by 400 person strong sales force

Kimberly – Clark 

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3 business lines o U.S. consumer and Services Products: Kleenex, bathroom tissue, table napkins, kotex sanitary pads, kimbies, Teri towels etc o U.S. paper and forest products: communication papers, business papers, industrial and specialty products, softwood and hardwood lumber o Operations outside the United States: overseas production and sale of the same consumer products sold in U.S. Kimbies was the company’s single largest investment program Achived 85% national distribution in quick time Manufactured in 5 plants Sourced fluff pulp and other key diaper components from suppliers

Johnson & Johnson 

3 business lines

Health Care: prescription and nonprescription drugs, diagnostic, therapeutic, contraceptive products, surgical dressings etc o Industrial and other: industrial tapes, adhesives, textiles, paper products and other items sold primarily to the apparel, textile, health care, agricultural food etc o International: international sales of the products mentioned above Dominant producer of nonfood baby products Subsidiary – Chicopee Manufacturing Company – made Chux and Chix disposable diapers Chux and Chicx phased out by the introduction of Johnson’s Disposable Diapers o

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Union Carbide 

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6 business lines o Chemical: petrochemicals o Plastics: thermoplastics, vinyl plastics, polystyrene etc o Gases and related products: oxygen, nitrogen, argon, acetylene etc o Metals and Carbons: ferroalloys, special alloys, uranium ores, industrial carbon products etc o Consumer and related products: Eveready batteries, flashlights, insect repellents etc o International: above products internationally Disposable diapers – Drydees Carbide manufactured the individual layers of Diapers on its own

Colgate-Palmolive (Kendall) 

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5 business lines o Consumer Laundry and Cleaning Products: laundry detergents, dishwashing detergents etc o Personal care and Cosmetics: toothpaste, bar soaps, hair products, shaving creams, skin creams etc o Other consumer products: plastic bag and food wraps, cloth and disposable diapers etc o Professional Products: surgical dressings and packs, obstetrical pads and underpads etc o Industrial and Institutional: woven and non-woven fabrics, specialty cotton, rayon products etc 2 lines of disposable diapers: Curity and Curity Tape-Tab

Other Competitors  

Scott Paper Weyerhaeuser