Dueling Diapers Think big companies can't innovate? Look how Kimberly-Clark and P&G are fighting over disposable training pants.
By Matthew Boyle

(FORTUNE Magazine) – The battle for your baby's bottom--a brutal slugfest that makes the Coke-Pepsi showdown look like a playground tussle--took an even nastier turn last year. Procter & Gamble's overhaul of its $4-billion-a-year Pampers product line sparked a knock-down, drag-out price war with the Huggies line from Kimberly-Clark, P&G's archrival in the $19-billion-a-year global baby-care market. (The price war took such a toll on Kimberly-Clark that new CEO Thomas Falk said it was largely to blame for the company's depressed fourth-quarter earnings.) The most interesting fight between Kimberly-Clark and P&G is taking place on one specific front: disposable training pants.

Worn by toddlers while they're being potty trained, the elastic diapers are pulled up over the legs like ordinary underpants, rather than being fastened at the sides--and they're the fastest-growing, highest-margin diaper product around. Kimberly-Clark invented the category in 1989 with its Huggies Pull-Ups brand and has dominated it ever since. But in the past 12 months P&G's Pampers Easy Ups have come from nowhere to grab 15% of the $1 billion U.S. training-pants market, reducing Pull-Ups' share from more than 50% to 41%, according to year-end data from Information Resources in Chicago. (Private-label brands and other products like nighttime pants make up the rest of the category.) P&G's sudden success shows the power of product and marketing innovation even late in the game.

In the 1980s, as parenting experts such as Dr. T. Berry Brazelton began counseling parents not to rush the potty training process, Kimberly-Clark--long known for product innovation--sensed an opportunity. Delaying potty training meant that kids would increasingly be in nappies longer. So why not create an entirely new category of diaper: disposable training pants that protected against accidents but also let the growing child feel as though she were wearing underwear just like a big kid? To help give that feel, Kimberly-Clark developed a clothlike outer cover and a breathable nonwoven material called stretch-bonded laminate. It also built new machines to attach the sides of the pants, a step not required for regular diapers.

To help sell parents on the concept, Kimberly-Clark argued that "switching out of diapers and into training pants help[s] speed the potty training process along," a claim made on Parentstages.com, a parenting site sponsored by Kimberly-Clark. That assertion isn't endorsed by the American Academy of Pediatrics, though. Some doctors say that the products are unnecessary and may even delay or prolong potty training. (In 1961, 90% of children were potty trained by age 2 1/2; by 1997, only 22% were.) Training pants give diaper makers the opportunity "to sell into the market two or three years longer than before...and triple the life cycle of that consumer," says Ryan Mathews, a consultant who follows retail trends.

Whether or not training pants were strictly necessary, they took off. A dozen years later demand is still growing at a 15%-a-year clip. And there's plenty of room to expand, since only about half of the nation's 3.5 million training-age toddlers--defined as kids 18 to 48 months--wear disposable training pants, according to Dudley Lehman, group president of Kimberly-Clark's infant and child care division. (Some parents choose cloth training pants, some keep their kids in regular diapers, and some intrepid souls go right to underwear.) Pull-Ups are big moneymakers too. Training pants are typically 35% more expensive per unit than regular diapers at retail, giving them margins north of 20%, an analyst estimates (neither company will disclose its diaper margins).

If training pants are such an attractive category, why didn't P&G enter the market sooner? Well, it did. Pampers Trainers launched in 1994. But a combination of poor design and high production costs conspired to do them in. The company quietly killed Trainers in 1996. While Kimberly-Clark gloated, Procter went back to the drawing board.

Three years later P&G unveiled a new training-pant design. It chose to introduce it in Japan, the Land of the Rising Pant, where pant-type diapers command about half the market. (One reason: Japanese kids are changed while standing up.) P&G's product, called Pampers Suku-suku, looked and felt much more like underwear than Trainers had without sacrificing absorbency, according to P&G global baby-care president Deb Henretta. Its clothlike exterior was softer and, Henretta hoped, more appealing than that of Pull-Ups. The design held its own in Japan and convinced P&G that it was on to something.

P&G soon moved to test markets in Scandinavia and Greece; a full rollout of what it was now calling Easy Ups followed across Western Europe and Britain in 2001. Europe posed a special challenge, partly because kids there are toilet trained earlier. So P&G positioned Easy Ups as an extension of its premium diaper line rather than as a training pant. The strategy worked, and P&G says Easy Ups are now twice as popular as Pull-Ups in Western Europe. (Kimberly-Clark disputes this.) "They are a godsend!" says Kate Beard, a resident of Weston, 30 miles north of London, whose 3-year-old, Molly, wears Easy Ups at night.

The stage was finally set for Easy Ups' North American debut in February 2002. Kimberly-Clark execs, who had seen P&G try and fail in the U.S. market before, pooh-poohed Easy Ups' prospects. "Kimberly-Clark was trash-talking that P&G wouldn't even get a 7% share," says Tom Vierhile, executive editor of Productscan Online, which tracks the packaged-goods industry.

In fact, P&G got 7% in less than three months. That share has since more than doubled, thanks to a well-orchestrated attack on Pull-Ups' position. First, P&G threw buckets of advertising and marketing dollars into the Easy Ups launch. According to ad-spending tracker CMR in New York City, P&G spent $19 million on ads for Easy Ups in the first ten months of last year, more than the company spent on all other Pampers products combined. Meanwhile, through aggressive couponing and other promotions, P&G cut the price on its training pants so that they cost only 15% more than regular diapers rather than 35% more. Shoppers buying Kimberly-Clark's Pull-Ups at Krogers would turn over their receipt to find a coupon for $4.50 off a jumbo package of Easy Ups, which usually sold for about $11.50. This wasn't exactly a new trick: "The easiest thing to do is to buy share by lowering the price," says Vierhile. And $40-billion-a-year P&G has much deeper pockets than $15 billion Kimberly-Clark.

On the production side, a new global manufacturing system (in which modular machinery can quickly be added to or removed from the diaper line) enabled P&G to release four product improvements to Easy Ups in just seven months. The upgrades included adding Elmo graphics, a thinner core, and a wetness indicator. Normally a single change could take a year or more. "That's stunning," says Bill Steele, an analyst at Banc of America Securities. "That should have their competitors worried."

Still, Kimberly-Clark insists it's not fazed. Lehman told Advertising Age last summer that "the jury's out" on Easy Ups' success, and he stands by that opinion. Kimberly-Clark has rolled out improvements to its Pull-Ups, making them 30% thinner and, more recently, adding refastenable sides. The company claims that consumers prefer its newest Pull-Ups three to one over Easy Ups. And, Lehman boasts, it has the highest margins in the diaper industry.

Analyst Steele, for one, thinks Kimberly-Clark should worry: "If a 15% share doesn't indicate that P&G is here to stay, is Kimberly waiting for 40%?" he asks. "I was surprised that Kimberly didn't defend its position as aggressively as it should have. Perhaps they underestimated P&G." If Kimberly continues to do so, it will have quite a mess to clean up.

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