Spanked by Change, Top Diaper Maker Moves to Cut Its Prices : Brands: A tough economy and growing pressure from generic products prompt Procter & Gamble’s action.
Procter & Gamble Co.’s decision to slash prices on its best-selling disposable diapers is yet another indication of how a tough economy is roughing up premium brands.
Under pressure from generic and private-label diapers, Procter & Gamble announced Tuesday that it will lower prices on its Pampers and Luvs, the third price cut in 10 months. The move is significant for Procter & Gamble because Pampers account for 16% of its worldwide sales.
The price cut is also a challenge to its chief competitor, Kimberly-Clark, which recently raised the cost of it Huggies brand diapers, the second-leading seller behind Pampers.
The move rattled the stocks of consumer product companies on Wednesday as investors worried that other brands might come under price pressure. Two weeks ago, Philip Morris shook up the investment world by slashing prices on its best-selling Marlboro cigarettes. Marlboro has been losing sales to lower-cost generic brands.
But investment analysts said that few consumer products are as vulnerable to price competition as cigarettes and disposable diapers.
Heather Hays, an analyst with the Wall Street investment firm of Salomon Bros., said that consumers spend an average of $700 a year on cigarettes and $500 a year on disposable diapers, making them “big ticket” purchases. With the economy stagnant, “there is a real incentive for the consumer to trade down” to private-label items, she said.
Shoppers are less price-conscious with products that they buy less often. “You don’t see the same inroads of generics in household cleaners or toothpaste,” Hays said.
She said Procter & Gamble’s share of the $4-billion disposable diaper market has dipped to less than 42% from more than 50% since 1988. Most of the sales have been lost to generics and store-brand diapers, which cost up to one-third less.
The reductions announced by Procter & Gamble will narrow the price spread between its brands and the private-label diapers. Effective May 17, the company is reducing the price of Pampers by 5% and cutting Luvs prices by 16%. The company said it is slashing Luvs prices more deeply because it is repositioning the product as a “medium-priced” diaper.
Procter & Gamble said it will sell Luvs only in “convenience packages,” eliminating the jumbo and travel sizes. It said it would save money on the brand by getting rid of package handles and print advertising.
The step is an acknowledgment that the Luvs brand has not lived up to expectations. It was introduced in 1976 as a premium brand.
“They are in a difficult position and are handling it the best they can,” Hays said. “It is wise to offer two price points. When consumers have a choice, generics make less of an impact.”
The market signaled faint approval of Procter & Gamble’s action. Shares of the Cincinnati-based consumer products giant ended up 12.5 cents, closing at $48.25.
Besides defending its turf against encroachments by generics, Procter & Gamble has had difficulty maintaining its edge as a premium brand. It has failed to match technological innovations by archrival Kimberly-Clark and its Huggies brand.
Analysts said that Kimberly-Clark has maintained its market share at about 35% by being the first to bring out “ultra-thin” diapers and disposable panties for toddlers.
One indication of the strength of those products is that Kimberly-Clark recently reduced the number of diapers in a package, effectively boosting prices by 3%.
In response, Procter & Gamble has launched an aggressive attack, planting stickers on Pampers packages that note “still 40 diapers” or “still 30 diapers.” Meanwhile, the company has been testing its own “thin” diaper in Oregon, and will soon begin testing an “ultra-thin” version in Nebraska.
A spokesman could not say when the company might roll out an “ultra-thin” diaper nationwide.
He said the company plans to introduce a disposable toddler’s panty in Europe this spring, but could not say when the product might turn up in the United States.
Kimberly-Clark’s stock price fell $1.875 Wednesday, closing at $51.50, in anticipation that it will be forced to lower its prices in response to Procter & Gamble’s latest move.
Shares of other consumer products companies also had a bumpy day. Gillette closed down 87.5 cents at $56. Colgate recovered from an initial drop to close unchanged at $62.125.
Disposable Diaper Market
Procter & Gamble, although still the diaper market leader with its Luvs and Pampers brands, has lost some of its market share in the last five years as branded generic and private label products have gained ground. 1992: Branded generics, private label: 20.44% Kimberly-Clark (Huggies): 36.94% Procter & Gamble (Luvs and Pampers): 41.90% Other: 0.72%
1988: Branded generics, private label: 14.06% Kimberly-Clark (Huggies): 33.77% Procter & Gamble (Luvs and Pampers): 50.46% Other: 1.71%
Source: Salomon Brothers
