The disposable diaper industry in 1974 was a $370 million industry dominated by Procter & Gamble with 69% market share. The industry was expected to continue growing steadily due to increasing births rates predicted through the late 1970s. Major competitive players included Kimberly-Clark, Johnson & Johnson, and various private label brands. P&G had significant incumbency advantages over competitors due to economies of scale, manufacturing and distribution efficiencies, innovation advantages from high R&D spending, and strong brand loyalty from extensive marketing. Entry into the disposable diaper industry faced enormous barriers due to the high costs of manufacturing plants, distribution networks, marketing, and time needed to gain scale and market share.
1. Fluff Pulp Fiction: The
Disposable Diaper Industry in
1974
Strategy: MBAM 619
March 13, 2009
, G aurav G up ta, S am ir Moh a n,
S a rah G ay
S a n dro Oli v ie ri
2. Topics Covered
PEST of the Diaper Industry
Industry Analysis
Value Chain & Value Creating Activities
Porter’s Five Forces
Incumbency Advantages
9. Size of the Industry
Assuming a slowly declining growth rate, 55 diapers per baby per week,
and 25 months (on average) of diaper usage, the unit demand in 1974
varies from
16.9 to 17.6 billion diapers
Given a 42% penetration rate of diaperable babies and a 69% market
share in 1973, P&G was producing
5.2 billion diapers
10. Industry Overview 2002
Census Data
Industry Code: 322 - Paper Manufacturing
$89,085,026,000 MM Industry
Sub-sector Code: 322291 - Sanitary Paper Product Manufacturing
This US Industry comprises establishments primarily engaged in
converting purchased sanitary paper stock or wadding into sanitary
paper products, such as facial tissues and handkerchiefs, table napkins,
toilet paper, towels, disposable diapers, sanitary napkins, and
tampons.
9,559,179,999 MM sub-sector business
11. Industry Analysis: 1974
By 1973 the disposable diaper industry reached
$370MM in sales
Manufactures enjoyed sales growth in excess of
25% YoY
P&G had 69% of the market share
K-C had approx 15% of the market share
12. Industry Analysis: Growth in
Disposable Diapers 1966-1973
Manufacture Sales $ MM
400
350
300
250
$ MM
200 Manufacture Sales $ MM
150
100
50
0
1966 1967 1968 1969 1970 1971 1972 1973
Year
13. Industry Analysis: Birth
Rate Trends
Growth rates had started to decline in the early
1970’s
Birth rates were expected to increase by 1976-77
By the late 1970’s 1980’s, births were expected to
increase by as much as 300,000 to 500,000 per
year, reaching 3.9MM by 1980
14. Industry Analysis: Birth
Rate Trends
Birth Rate
3.8
3.7
3.6
# of Births in MM
3.5
3.4
3.3 Birth Rate
3.2
3.1
3
2.9
2.8
1966 1967 1968 1969 1970 1971 1972 1973
Year
15. Competitive Players in
1974
Branded: Private Label
Weyerhaeuser
P&G
IPCO Hospital Supply
Kimberly-Clark
Georgia-Pacific
Johnson & Johnson
Kendall/Colgate
Branded in Test Market:
Union Carbide
Scott Paper
19. Value Creating Activities
Inbound logistics
P&G obtained a portion of their diapers’ fluff pulp needs from a wholly-
owned subsidiary, cutting their costs
Operating activities
Most efficient manufacturer of disposable diapers
Highest sales per manufacturing machine
Early capital investment in design of diapers (switch to adhesive tabs
and fluff pulp) to maximize manufacturing efficiency in the long run
Pleated diapers conformed to babies’ bodies better
No adhesive tabs to throw away
Outbound logistics
P&G is able to defray some freight costs (which run up to 10% of retail
price) because of their 4 regional manufacturing plants with 5 more on
the way
P&G’s size made it the only player able to reap the benefits of full-
carload and trainload shipments
20. Value Creating Activities
Marketing and sales
Sampling Programs
Relationship with Gift Pax to get their products to new mothers,
including a coupon for the first purchase
Consumer Advertising – P&G and K-C were outspending everyone here
by almost 500%, and P&G spent 35% more than K-C
Network television and Spot TV ads
Local Newspaper Ads
Couponing
Used to improve sales in problem markets
Promotional Allowances to the trade
E.g. One free case for every three the retailer buys
Test Marketing
Post-sales service
Coupons were sent to homes with children at an age where they would
need a new size of diaper
22. Porter’s Five Forces
Bargaining
Power of
t
n
n t ra
Suppliers Threat of
E
Ne w New Entrants
Competitive
Rivalry
The Incumbent
Firms
Bargaining
Power of
Customers
Threat From
Substitutes
Substitutes
23. 1. Bargaining Power of
Suppliers
•Medium bargaining power
•Option to produce their own raw materials (like
K-C
•Few large manufacturing suppliers : complex
machines
•Volume is very important to supplier
•Switching costs are high - machines are finely
tuned ( takes years and lots of $ to change)
24. 2. Threat from Substitutes
•High threat from substitutes
• Other products perform just as well
•Ease and convenience of disposal diapers keeps
the use of cloth diapers down
•High price-performance trade-off (lower priced
substitutes (cloth or diaper services) don’t have
the same performance)
25. 3. Threat of New Entrants
•Low threat
•Brand identity is extremely important
•Millions of dollars spent on advertising
•Shelf space on stores is hard to get (would need to offer
coupons and promotional allowances to stores)
•Huge setup costs = machines and crews can cost millions
of dollars
•Economies of scale (takes a few years to get things up to
speed)
•Access to distribution is extremely important (volume)
•Must roll out region by region - timely and costly
26. 4. Bargaining Power of
Consumers
•High bargaining power - they vote with their
pockets
•Brand is extremely important
•Customers are very sensitive to price
•Substitutes are readily available
•High buyers’ incentive = coupons, hospital kits
•Buyers are very informed of products (starting
at the hospital and continuing through heavy
advertising)
27. 5. Competitive Rivalry
•No exit barriers
•Industry is highly concentrated
•Large fixed costs
•Very little diversity of rivals
•Few product differences - all are beginning to
offer similar products (adhesive tabs)
•Had to differentiate with things like coupons,
samples, etc.
29. Incumbency Advantages I
Scale and Learning advantages
Manufacturing – P&G was the largest manufacturer with over 80
machines spread across 4 manufacturing plants
350 – 400 diapers per minute
$5.5 - $6.0 million annual sales rate per machine
Distribution
regional plants and full truck-load (and train-load) shipments helped minimize
transport, and transport costs
If Kimberly-Clark wanted to catch up to P&G,
they would have to spend at least:
$18 million * and 2 to 3 years**
*Based on K-C immediately purchasing 60 additional machines
– this does not count crews and additional infrastructure
(buildings, etc..)
**complex fold of Kimbies would mean spending years tooling
machines for maximum efficiency
30. Incumbency Advantages II
Other cumulative investment advantages
Innovation advantage – the leading manufacturers
(P&G included) invested large amounts in R&D to
improve the diapers and their manufacturing process
Cost to match P&G: at least $10 million annually
Promotional advantage – The Pampers brand was
recognizable nation-wide, and required huge outlays in
marketing
Cost to match P&G: at least $8.9 million annually
31. Incumbency Advantages III
Consumer loyalty advantage
The Pampers brand was not only the most recognized
brand in the nation, but was also the highest-rated
diaper in consumer reports for 7 years running
New entrants would need to outspend P&G in in
promotional efforts to gain shelf space by engaging in
promotional allowances to retailers – e.g. 1 free case
for every 3 bought
Cost to gain on P&G: up to one quarter of revenues
(one quarter of revenues = $15.5 Million)
32. Barriers to Entry
(Quantified)
If Kimberly-Clark wanted to catch up to P&G, we estimate
a cost of:
$18 mil in capital outlays for manufacturing, $15.5 mil
annually in allowances to trade, $2.3 mil annually in ads,
and 2 to 3 years to make it happen.
Cost for K-C to catch up to P&G:
$53.6 – $71.4 mil *
It would cost an To put this in
astronomical amount for perspective,
a new entrant – the Kimbies brand
somewhere in the order brought
of $250 million
* in $62 mil in 1973
*These numbers only represent diaper related costs (SG&A, Operating costs, etc.)
33. Why So Many Diapers?
Huge Market!
Around 17 Billion diapers a year
Huge Demand!
More affluent families looking for convenience
and ease
Demand expected to increase, even though
birth rate might decrease in the upcoming
years
34. Why So Many Diapers
Couldn’t Handle the Mess?
Money!
It was estimated that K-C’s diaper start-up cost them $10 million!!!
Diaper manufacturing machines are a huge investment
Complex, high-speed machines
Companies spent almost $10 million a year on R&D
Millions of dollars spent on advertising, sampling, etc.
Couldn’t roll-out nationally
Region by region roll-outs were costly and time-consuming
Distribution was expensive
Who are you?
Brand recognition was very important
Big bucks on advertising
Big companies started brand awareness at hospital
