Fluff Pulp Fiction: The

Disposable Diaper Industry in

1974
Strategy: MBAM 619
March 13, 2009

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Topics Covered
PEST of the Diaper Industry
Industry Analysis
Value Chain & Value Creating Activities
Porters Five Forces
Incumbency Advantages

P.E.S.T.
Analysis

Industry
Analysis

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

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

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

Industry Analysis: Growth in

Disposable Diapers 1966-1973
Manufacture Sales $ MM
400
350
300

$ MM

250
200

Manufacture Sales $ MM

150
100
50
0
1966

1967

1968

1969

1970

Year

1971

1972

1973

Industry Analysis: Birth

Rate Trends
Growth rates had started to decline in the early
1970s
Birth rates were expected to increase by 1976-77
By the late 1970s 1980s, births were expected to
increase by as much as 300,000 to 500,000 per
year, reaching 3.9MM by 1980

Industry Analysis: Birth

Rate Trends
Birth Rate
3.8
3.7

# of Births in MM

3.6
3.5
3.4
3.3

Birth Rate

3.2
3.1
3
2.9
2.8
1966

1967

1968

1969

1970

Year

1971

1972

1973

Competitive Players in
1974
Branded:
P&G
Kimberly-Clark
Johnson & Johnson
Kendall/Colgate

Branded in Test Market:

Union Carbide
Scott Paper

Private Label
Weyerhaeuser
IPCO Hospital Supply
Georgia-Pacific

Competitive Analysis:
Market Share
Market Share
100
90
80
70

P&G

60

K-C

50

J&J
Other Brands

40

Private Label

30
20
10
0
1967

1968

1969

1970
Year

1971

1972

1973

Value
Chain
& Value Creating
Activities

Value Chain Analysis

Value Creating Activities

Inbound logistics
P&G obtained a portion of their diapers fluff pulp needs from a whollyowned 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&Gs size made it the only player able to reap the benefits of fullcarload and trainload shipments

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

Porters
Five Forces

Fluff Pulp

Porters Five Forces

Bargaining
Power of
Suppliers

Ne w

an
r
t
n
E

Threat of
New Entrants

Competitive
Rivalry

The Incumbent
Firms
Bargaining
Power of
Customers
Threat From
Substitutes

Substitutes

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)

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) dont have
the same performance)

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

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)

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.

Incumbency Advantages

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

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

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)

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
astronomical amount for
a new entrant
somewhere in the order
of $250 million

To put this in
perspective,
the Kimbies brand
brought
in $62 mil in 1973

*These numbers only represent diaper related costs (SG&A, Operating costs, etc.)

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

Why So Many Diapers

Couldnt Handle the Mess?
Money!
It was estimated that K-Cs 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.
Couldnt 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