P&G Looks To Boost Profit Margins By Changing The Diaper Dynamics

by Trefis Team
-15.59%
Downside
83.27
Market
70.29
Trefis
PG
Procter & Gamble
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Procter & Gamble (NYSE:PG) recently made upgrades to its entire line of Pampers diapers, training pants and wipes in order to make them more absorbent. The upgrade came in after a P&G-sponsored survey of mothers indicated that superior overnight dryness is the most important, unaddressed aspect of a comfortable diaper. The objective of the survey that covered over 1,000 mothers was to find out what is important for babies when it comes to diapers.

Nearly one in every three mothers of babies aged one year or less responded that a wet, leaky diaper is the most likely factor that wakes up their babies in the middle of the night. Further, the survey found that putting on a dry diaper just before going to bed is the most common technique used by mothers to help their babies have an uninterrupted sleep during the night. [1]

See our complete analysis of Procter & Gamble

How Could The Upgrade Impact P&G’s Baby Care Division?

The baby care division, which sells diapers, pants and wipes, is one of the more important business units of P&G. It accounts for about 13% of company net sales, next only to the fabric care division which contributes 20% to net sales. P&G sells baby care products globally under two popular brands: Pampers (premium) and Luvs (mid-tier).

Pampers is the world’s number one premium diaper brand. It generates more than $10 billion in annual sales for P&G. The brand has improved the quality of its products by addressing the needs of babies and their mothers through constant innovation. While P&G has further improved the quality of the diaper through the recent upgrade, it has also reduced the number of diapers per pack without changing the price of a pack. This has effectively raised the price per diaper by 5%-7%.

The downsizing technique is popular in the retail industry as it works in favor of retail companies by boosting profit margins. In P&G’s case, the higher pricing should help keep revenues steady by offsetting the impact of a decline in diaper volumes due to their longer lasting nature. On the other hand, lower diaper volumes should enhance EBTIDA margins as less raw material costs will be incurred.

We currently have a stock price estimate of $74 for Procter & Gamble, around 5% below its current market price.

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Notes:
  1. Pampers Launches Large Product Innovation Across Entire Line of Diapers and Wipes, Market Watch, September 2013 []
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