Designer Diapers Boost P&G, Kimberly Clark

July 8th, 2010 by Trefis Team
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Trefis
PG: Procter & Gamble logo
PG
Procter & Gamble

The diaper wars are heating up.  Kimberley Clark (NYSE: KMB) recently established a market for premium diapers with its successful, limited edition launch of Huggies Little Movers Jeans Diapers. This month, market leader Procter & Gamble (NYSE: PG) plans to launch an entire range of designer diapers, priced at a 60% premium over P&G’s existing diapers. This opens an entirely new price band for disposable baby care products.

We expect the designer diaper market to grow in coming years, creating a 1.37% upside to our $83.81 target for P&G’s stock price and a 3.93% upside to our $74.48 target for Kimberley Clark’s stock. Our analysis follows below.

Inside the diaper market

P&G dominates the $24 billion global diaper market with a 35% share for its Pampers brand, followed by Kimberley Clark’s Huggies and Pull-Ups brands with nearly 21% of the market at the end of 2009. Diapers are a more important segment for Kimberly Clark than for P&G. While diaper sales contribute 14% of P&G’s stock value according to our estimate, they constitute 35% of our estimate for Kimberly Clark. You can modify the charts below to see how changes in diaper market share would impact the stocks of these two companies.
Why designer diapers make sense
We expect the global diaper market to grow by 4.5% year-on-year during our forecast period, mostly due to rising consumer demand in emerging markets.  Growth in emerging markets will be driven by relatively high birth rates and rising per-child spending levels compared to the developed markets of the U.S. and Western Europe.
It’s difficult to grow sales volume in a saturated market. So designer diapers are a particularly sound strategy for developed markets because they allow manufacturers to raise the effective average price per diaper, thus boosting their revenues.
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Diaper R&D has hitherto focused on developing safe materials with strong absorption properties. In the emerging designer diaper market, product innovation will focus more on aesthetics. For example, designer diapers have been advertised as suitable for public display without additional clothing. If successful, this strategy could allow P&G and Kimberly Clark to capture sales volume from baby clothing manufacturers.

Bottom line
We expect rising designer diaper sales to yield a 1.37% stock upside for P&G and a 3.93% upside for Kimberley Clark. These estimates are based on the following assumptions:
  1. In 2009, 60% of total diaper sales came from developed markets. We expect emerging market sales volume to rise gradually over the next few years, reaching 50% of total sales by 2016, the end of our forecast period
  2. We assume a market split equally between less price-sensitive (33%), moderately price-sensitive (33%) and highly price-sensitive consumers (33%)
  3. We assume that diaper usage is divided equally between out-of-home (33%), daytime (33%) and night-time usage.
  4. As sales volumes rise, we expect the designer diaper price premium to decrease from 60% today to 40% by the end of our forecast period.

Our model combines these assumptions with a coefficient that projects designer diaper acceptance (defined as the percentage of target audience consumers who actually buy) increasing from 60% in 2010 to 80% by 2016. We define the target market as less price-sensitive customers in developed markets who buy diapers for out-of-home use.