Sector Insight: Disposable nappies - Slowed to a crawl

promotions have undermined profit. In response, manufacturers have
embraced NPD, creating accessories such as wipes and handwashes, and
increased advertising activity. In a sector where parents are prepared
to spend more on quality products, there is still room for
development.

The UK nappy market is suffering on two fronts. The most significant
factor is a fall in birth rates; the other is the rise of price cuts and
promotions, which have taken their toll on the value generated by the
sector. In 2004, sales totalled £507m, according to Datamonitor,
down 1% on the previous year.

However, there is some solace for nappy producers. The significant drop
in birth rates seen in 2002 and 2003 was reversed in 2004, as the UK
experienced a slight increase for the first time since 1999. In 2004,
there were 639,721 births in England and Wales, up 2.9% on the previous
year.

While the sector's total value is down, there has been a growth in
volume sales. One contributing factor has been a cultural shift which
has led parents to delay potty training, meaning that young children
stay in nappies longer.

This is at odds with the practice of previous generations, and may be a
consequence of the convenience of disposable nappies. Also, more working
mothers tend to wait for a long holiday break to give them more time to
train their toddlers out of nappies.

Euromonitor highlights the trend for mothers to focus on convenience and
reliability when choosing their babies' nappies, which accounts for the
faster growth experienced by premium brands such as Pampers Active Fit
over standard variants. Pampers Active Fit and Easy Ups grew from a
combined share of 16% in 2002 to 24% in 2004.

Consumers are less prepared to compromise on product performance in this
market and are more cautious about value brands. For many parents, the
hassle involved if the product leaks outweighs the cost saving.

Market duopoly

The two main companies battling it out for market share of nappies are
Procter & Gamble and Kimberly-Clark, with their Pampers and Huggies
brands respectively.

In 2004, P&G accounted for 61% of value sales of nappies, up from 37% in
2001. Although Kimberly-Clark lost ground in 2004, it is expected to
recover thanks to product launches and promotional activities.

In this sector, product innovation and promotional activity are high on
the agenda, with additional product claims constantly introduced.

P&G upgraded its Active Fit brand in 2003 with a wider waist band,
better fastenings and more flexibility. It also invested £7m in an
experiential marketing campaign in 2005 based on its World of Babies
event, which also took in direct mail, print and online. It extended its
offering in the baby-wipes sector with perfume-free Sensitive wipes.

Kimberly-Clark, meanwhile, added flushable wipes for children who no
longer wear nappies, called Pull-Ups Just for Kids Wipes. This followed
P&G's launch of Kandoo wipes in 2001, which has since extended to
include a handwash for children.

Kimberly-Clark invested £10m in improving the fit and comfort of
its Beginnings and Freedom varieties in 2004. It later relaunched
Beginnings as Huggies Newborn, and backed its Huggies Super-Flex brand
with a TV campaign using celebrity voiceovers.

In the same year, the company ran a sampling campaign for the Super-Flex
nappies, offering free packs and money-off coupons to parents.

Last year, it signed up TV presenter Donna Air and her daughter as part
of a Huggies Little Swimmers campaign to encourage parents to take their
babies swimming.

Baby clubs

As well as TV advertising, a key communication tool in this market is
baby clubs. The clubs give new parents free advice on pregnancy, newborn
babies and child development, as well as sampling and vouchers for
discounted products. The Bounty Club offers a range of manufacturers the
opportunity to reach new mothers via hospitals, distributing about
40,000 nappies a month, and gives companies direct access to new
parents.

Both P&G and Kimberly-Clark also run their own clubs, predominantly
online, offering a broad range of advice for parents as well as
information about their own products.

While a wider debate rages about the environmental impact of disposable
nappies versus reusable cloth nappies, there are some more
environmentally-friendly disposable varieties available.

Green options

Naty, a Swedish company set up by a mother, produces the Nature Boy&Girl
range that has been stocked in Sainsbury's and Waitrose supermarkets
since 2000. These relatively green disposable nappies contain 70%
natural products.

The company has since extended into the sanpro market.

Other nappies targeting environmentally-conscious parents are available
on the internet, and there are niche consumers who are willing to pay a
premium for products that are in line with their beliefs. There is also
the potential for the development of fair-trade and homoeopathic
nappies.

The trends already seen in the market are expected to continue in the
coming years. Branded products will remain dominant, not least because
product innovation is vital to this market. Improved fit and comfort, as
well as added absorbency, remain the key performance attributes.

Euromonitor expects that volume growth will slow as a consequence of
declining birth rates and that overall, value sales will decline 2% to
reach £496m by 2009.

NAPPY SALES BY SUB-SECTOR (pounds m)

Newborn Standard Junior
1999 37.5 262.4 202.7
2000 36.0 243.5 187.9
2001 36.5 231.2 172.4
2002 37.4 236.6 165.8
2003 38.0 239.7 164.2
2004 37.5 238.0 158.9
99-04 % change 0.0 -9.3 -21.6

Source: Euromonitor International



NAPPY SALES BY BRAND SHARE (%)

Brand Owner 2004 2003 2002 2001
1 Pampers Baby Dry Procter & Gamble 33.5 35.0 34.0 36.0
2 Pampers Active Fit Procter & Gamble 13.9 12.5 9.0 1.2
3 Pampers Easy Ups Procter & Gamble 10.5 9.0 7.0 0.2
4 Huggies Freedom Kimberly-Clark 8.5 12.0 14.0 12.6
5 Huggies Adventurer Kimberly-Clark 4.5 5.5 5.0 n/a
6 Pampers New Baby Procter & Gamble 3.2 n/a n/a n/a
7 Huggies Pull-Ups Kimberly-Clark 1.2 1.8 4.1 4.5
8 Huggies Kimberly-Clark n/a n/a n/a 12.5
Own-label n/a 12.5 12.4 13.2 15.5
Others n/a 12.2 11.8 13.7 17.5

Source: Euromonitor International



NAPPY BRANDS BY ADSPEND (pounds m)

Brand Owner Spend
1 Pampers Baby Dry Nappies Procter & Gamble 4,801,621
2 Pampers Active Fit Procter & Gamble 3,958,361
3 Pampers Feel Learn Advanced Training Procter & Gamble 2,587,444
4 Huggies Convertibles 2 in 1 Kimberly-Clark 2,392,283
5 Huggies Super-Flex Kimberly-Clark 2,306,237
6 Huggies Pull-Ups Kimberly-Clark 2,101,631
7 Huggies Nappies Kimberly-Clark 910,578
8 Huggies Little Swimmers Kimberly-Clark 509,900
9 Huggies Flexi-Fit Nappies Kimberly-Clark 395,529
10 Pampers Easy Ups Procter & Gamble 323,993
Source: Nielsen Media Research

ANALYST COMMENT - JENNY CATLIN, CONSUMER ANALYST, MINTEL

Sales of disposable nappies are so heavily dependent on the birth rate
that the possibilities for increasing volume sales are severely
limited.

As the number of children under the age of four declines over the long
term, the usual course of action by manufacturers looking to increase
sales would be to encourage more people to use these products more
often.

But in this market, the majority of the key target group (parents with
young children) already use disposable nappies, so manufacturers need to
look at alternative opportunities.

Manufacturers have continued to invest in new product development and
advertising to appeal to parents during the two to four years when their
children use nappies. As a result, they have successfully introduced
nappy products to use during and beyond toilet training, such as
training pants and night nappies for older children.

But price discounting has eroded market values, preventing manufacturers
from charging premium prices, despite their investment in NPD and
advertising.

Manufacturers need to persuade new mums and dads that their products are
not just 'commodity lines' and that higher prices buy a better-quality
nappy.

Older mums, with a higher income, are likely to be prepared to spend
more on the 'best products' for their kids, a trend that has already
been seen in the baby-food market.

Alternatively, looking at people's lifestyle choices may provide some
potential avenues. Nappies positioned as better for the environment, and
made with products such as unbleached cellulose, present a potential way
to add value.