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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 companys product?

The Disposable Diaper Industry in 1974

Disposable Diaper Industry 1974

Estimated sales of $370m 1973


Major players Procter & Gamble, Kimberly Clark, Colgate-Palmolives
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

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

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%

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

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

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

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 companys 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 Johnsons Disposable
Diapers
o

Union Carbide

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)

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