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Profitability: and the factors that drive it in the U.S. absorbent products business; the results may be eye opening to some industry observers.


and the factors that drive it in the U.S. absorbent products business; the results may be eye opening to some industry observers The absorbent products industry in the U.S. is a $5.6 billion business at the manufacturers' sales level. Infant diapers, the largest category in absorbent products, has reached maturity and is no longer growing. The growth rates in feminine hygiene products are slowing down. Only the adult incontinence market is experiencing high growth in the U.S.

The competitive rivalry in these absorbent product markets has steadily intensified over the last few years. The average profitability of these businesses during the last five years was significantly lower than it was in the early 1980's.

The U.S. market for infant diapers has been essentially flat on a unit volume basis for the last three years. Current annual sales at the manufacturers' level are about $3.5 billion. The market has matured because of the combined impact of a low birth rate, decreased usage per baby and a peaking of disposables penetration.

The under 30 months old population has been growing at only 1% a year since 1983. This population is expected to decline moderately during the mid-1990's as the current baby boom generation passes its peak childbearing years.

The significantly improved performance of diapers, with superabsorbents, waist gathers and refastenable tabs, has enabled customers to use fewer diapers per week. We estimate diaper consumption per week decreased 7% between 1984 and 1988.

The penetration of disposable diapers has peaked at around 85%. The National Diaper Service Association has launched a major public relations campaign with the objective of reducing this penetration by raising consumers' concerns about the environmental impact of disposables.

Diaper Profitability Trends

During the fiscal year ended June 30, 1989, Procter & Gamble's U.S. diaper business lost some market share but realized increased sales due to price increases. The competitive environment forced P&G to increase its promotional spending in this category, so that not all of the benefits of higher selling prices were brought to its bottom line.

In addition, raw material costs increased, especially for fluff pulp. The company achieved meaningful cost savings by increasing manufacturing efficiency. Overall, we estimate that P&G improved its U.S. diaper business profitability modestly during the last year. Relative to competitors, we judge that Procter & Gamble will achieve the highest profitability in the U.S. diaper business this year.

Increased prices and volume resulted in a record sales year for Kimberly-Clark's U.S. infant diaper business in calendar 1988. Its operating profits only rose a small amount due to increased levels of marketing spending and higher raw material costs.

During 1989, K-C's advertising and promotional spending continued at a high level to maintain market share. In addition, significant marketing budgets will be required for the national introduction of "Huggies Pull-Ups" and "Huggies Supertrim" with leakage control shields. These national rollouts were planned for the end of 1989 if K-C production capacity permits.

The company believes that Huggies Pull-Ups will not be just an extension of its disposable diaper line, but rather will be a product that will create a new disposable underwear category. We think the potential market for Pull-Ups could be as large as $500 million; approximately four million children are toilet trained each year in the U.S.

While the private label manufacturers have experienced stable sales volumes in 1988 and 1989, these companies have not realized attractive profits during this period. They have not been able to increase selling prices sufficiently to offset large increases in raw material prices, higher product development expenses and sales promotion costs.

The leading private label diaper manufacturer, Weyerhaeuser, has had strong sales volume but has not been satisfied with the low profitability of this business. Weyerhaeuser's total personal care business has not been profitable during the last 12 months, due primarily to the significant developmental and technology transfer investment the company made to develop a possible branded diaper entry. The company is in the process of restructuring its total business portfolio and may decide to divest some assets and businesses.

Recently, Pope & Talbot completed a program to reduce manufacturing costs by consolidating the operations of the original Pope diaper manufacturing locations with the plants acquired in August, 1988 from Georgia Pacific. In June the company closed the former G-P plant at Aiken, SC and moved these diaper lines to plants in Porterville, CA and Oneonta, NY. The Aiken plant was redundant with Pope's new facility in Shenandoah, GA, which has two Curt Joa machines with drum forming capability that may ultimately be dedicated to boy/girl diaper production if its recent introduction of gender specific diapers is successful. The company has stated that its 1.2 billion annual diaper capacity will be unchanged by this consolidation. We believe that Pope has been foregoing short term profits and investing in its absorbent products business to build a leadership position longer term.

Last May, IPCO Corp. sold for $12 million the assets of its unprofitable Whitestone Products Div. to RLG Investments, Inc.-USA, a private company located in Houston, TX. Whitestone's diaper business has been losing money for some time and was particularly impacted by increased raw material costs and competitive pricing pressures during the last year. The new management is expected to restructure the business, consolidate assets and implement stringent cost reduction measures to turn around Whitestone's diaper business.

The Chicopee Div. of Johnson & Johnson has gained share in the private label diaper business with its "Zoo Loveables" diaper and marketing program. We estimate that this Chicopee business will gain sufficient volume to be moderately profitable.

Smaller private label manufacturers have had a difficult time competing profitably in this market unless they have pursued a low overhead regional strategy supported by lower warehousing and transportation costs.

As for the regional brands, Universal Converters is one of the older regional brand producers. The company was sufficiently encouraged by the results of its business since mid-1985 in the Wisconsin and surrounding area to open a second plant in Jackson, MS.

Newer entrants with regional brand strategies are also optimistic about their prospects. Veragon in Houston, TX, and UltraCare Products, Marion, OH, experienced strong initial sales and are estimated to be operating profitably now.

Although the small volumes of specialty brand marketers prevent these companies from achieving the operating and marketing economies of scale realized by the larger participants in the diaper market, these brands are typically priced at sufficient premiums to generate satisfactory profit margins. Consumers who buy specialty brands are relatively insensitive to price because they are highly motivated by special factors, such as the commitment to environmental improvement or the esthetic appeal of colored diapers.

Future Trends in Diaper Profitability

We expect that the profitability gap in the U.S. diaper market between the returns earned by the two entrenched branded leaders and those generated by private label manufacturers will continue to be a significant one, due to the structure of the market and its competitive dynamics. Leading private label manufacturers will earn adequate profits only if they consistently produce good quality imitations of branded products and are highly cost efficient. Smaller private label suppliers will continue to struggle with less than satisfactory profitability.

All participants will experience some future relief in the cost of raw materials. We expect cyclical pulp pricing to peak in 1989. Additional capacity will come on-line to produce the raw materials needed for other key supplies, such as acrylic acids for superabsorbents, causing the supply pressures on these materials to ease. The prices for polypropylene, resins and fiber are also forecast to decline.

More time is required to fully confirm the attractiveness of regional branded strategies. We believe that there are sufficient local economies available to support the competitive positions of well managed regional suppliers.

Their strategies may be vulnerable to focused and enduring efforts by the national branded leaders to challenge the regionals' positions with local distribution channels. The regional companies also must generate sufficient cash flow to fund new product development and equipment investments to keep up with major innovations in the future.

Sanitary Napkin Profitability

The leading three branded marketers of sanitary napkins in the U.S.--Johnson & Johnson, Kimberly-Clark and Procter & Gamble--control 82% of the market today. Profitability in this business was excellent for J&J and K-C in the early 1980's.

P&G's entry into this category in 1984 with its "Always" product line was supported by heavy promotional spending. Within two years the Always brand approached P&G's 20% market share target. Since P&G's entry, J&J and K-C have substantially increased their level of promotional investments. During the last two years the market share battle among these three leaders has been intense and has resulted in a stalemate situation. The companies reduced their advertising spending in order to fund discounted pricing and promotional programs.

During 1989, both J&J and K-C had major advertising and promotional programs to publicize redesigned products in their major brands. P&G is expected to respond aggressively to this challenge.

Thus, the bottom lines of the leaders in the U.S. sanitary napkin market will continue to be under pressure. We estimate that the earnings of J&J and K-C from this business in 1989 will be lower than the previous year.

Tambrands, the number four participant, originally entered the sanitary napkin market in 1981, but has never achieved profitability. This company faces difficult decisions on whether or not to stay in the external feminine protection market in the U.S. and whether to invest additional cash in the launch of "Tampax Ultra Fit" napkins, now in test market.

Coverstock Profitability

The returns earned by the most successful coverstock roll goods producers have been consistently lower than the returns realized by the successful branded leaders in converted absorbent products. In our studies we have found that profitability for roll goods businesses is driven by proprietary technology and cost effective manufacturing.

The nonwoven coverstock used in absorbent products in the U.S. is produced on highly efficient large scale lines, but is not based on proprietary technology. The major participants in the merchant coverstock market offer similar products and compete intensively based on price and quality.

The profitability of the carded bonded staple coverstock business for U.S. merchant market producers has, in general, been unsatisfactory during the past several years. At current pricing levels, we estimate that producers have been earning after tax returns on replacement cost investment in the 5-8% range when their capacity has been fully utilized. However, most suppliers' capacity has not been fully employed, so their after tax returns have been much lower, more in the 1-4% range. Historically, participants in this market have reacted to the threat, real or perceived, of underutilized capacity by reducing pricing during the intensely competitive bidding for large volume business.

Profitability of spunbonded coverstock has been better than carded fabrics during the last several years. We estimate that spunbonded coverstock for the merchant markets has yielded after-tax returns on replacement cost investment in the range of 11-12%. K-C's spunbonded coverstock production, which is consumed primarily in its captive absorbent products, is highly cost effective because of K-C's economies of scale, considerable skill and extensive experience in this process. James River's spunbonded coverstock business is somewhat less profitable than K-C's but still earns attractive returns when capacity is fully utilized.
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Title Annotation:includes related articles
Author:Hanna, Pricie
Publication:Nonwovens Industry
Date:Jan 1, 1990
Previous Article:The baby diaper market: the gathering storm.
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