Targeting the Giant

Drypers won the top spot on the Inc. 500 with one very focused strategy: the disposable-diaper manufacturer would go up against the best and biggest of America's consumer marketers, Procter & Gamble

Aisle five of the sprawling Fiesta supermarket on the Katy Freeway on the west side of Houston may seem like an unusual setting for watching a battle. But if you want a good look at the rough-and-tumble skirmishing that has come to characterize the $4-billion disposable-diaper industry, you won't find a better perch anywhere in America.

On this particular Friday afternoon in June, harried shoppers, many of them with small children in tow, wheel their shopping carts along a 40-foot-long display that's stuffed to the gills with packages of diapers. The range of sizes (everything from preemie to extra large) and product features (some thick diapers, some thin; some made for boys and others for girls) is nothing less than bewildering, and, lately, the movement of prices has made the choices even more perplexing. At $8.19, for instance, there are Procter & Gamble's top-of-the-line Pampers, currently selling for nearly 50¢ less than they were last year. To their left are P&G's recently repositioned Luvs, now "value priced" at $7.49, their lowest level in years. For an extra dime, you can pick up Kimberly-Clark's regular or thin Huggies. And that, dear shopper, is simply the beginning.

For those looking to slash substantial amounts from the family diaper budget, a big seller here is the $6.59 Fiesta private label. And, week in, week out, some 10% of the thousands of dollars spent in this particular diaper section are captured by a Houston-based off-brand-diaper manufacturer named Drypers Corp.

Striding down the brightly lit aisle, Dave Pitassi, a 34-year-old father of two, has more than a passing interest in how that last category shakes out. He is one of Drypers' founders and the person most involved with marketing the company's midprice diapers, offered at Fiesta for $6.99. Like a general inspecting the front lines, Pitassi, who cut his teeth selling diapers and other paper products for P&G, has learned to absorb marketing information wherever he goes. He's pleased that the store has special tags on his products featuring their everyday price; it draws attention to Drypers. But a big Pampers display near the front of the store makes him nervous. There, the cases are stacked about eight feet high. Why doesn't Drypers have something like that? "We should be getting more support and more shelf space here," says Pitassi impatiently. "We deserve more."

So far, however, it's hard to argue with what Pitassi and his partners at Drypers have accomplished since they began shipping their first diapers, in May 1988. From revenues of $101,000 in its first fiscal year and $285,000 in the second, the company's sales soared to nearly $35 million in 1991, making it #4 on last year's list. Then, with the acquisition in 1992 of two other regional diaper manufacturers, revenues catapulted, increasing fourfold to $140.2 million. That's a five-year growth rate of 49,101%. Even without the acquisitions, Drypers' growth would have been more than 20,000%, placing it in the top three on this year's Inc. 500.

The pressure of going eyeball-to-eyeball against world-class giants has got to be intense. But watching Pitassi and his cohorts in action, you can feel a sense of exhilaration as well.

"How many people would choose to compete against P&G?" Pitassi asks rhetorically. And the pressure? "Pressure," he likes to say, "is what makes diamonds."

Truth be told, this isn't the first time Dave Pitassi has gone up against P&G, known far and wide as perhaps the richest and most effective product marketer anywhere. Back in 1984 he and two friends -- Tim Wagner, whom he had known in high school, and Wally Klemp, a buddy from Lewis and Clark College, in Portland, Oreg. -- had launched a similar diaper company, called VMG Products. As college students a few years earlier, Pitassi and his friends had kicked around a number of entrepreneurial notions. Ultimately, they hoped to launch a business. As a rebuttal to all the classmates and professors who pooh-poohed their ideas, they printed up a T-shirt proclaiming, "All I want is a chance to fail."

Despite their skepticism toward the corporate world, all three took big-company jobs in the Portland area (Pitassi with P&G, Klemp with Coopers & Lybrand, and Wagner with an adhesives company). But nobody wanted to put down roots. Within a year and a half the trio had a business plan they couldn't wait to execute. Operating out of Vancouver, Wash., they'd enter the disposable-diaper industry, use local materials to become a low-cost producer, and sell a quality product to supermarkets in the Pacific Northwest. At the time, three national brands -- Pampers and Luvs (by P&G), and Huggies (by Kimberly-Clark) -- had around 85% of the market; the rest was carved out by private-label producers. If the new company, VMG, could raise around $1 million, the founders reckoned they could build a $15-million regional business within four or five years.

A Seattle-based investment banker liked the plan so much he wanted to fund it. But to make it more attractive for investors and to preserve equity for the founders, he came up with an interesting approach: instead of selling stock, what about setting up a limited partnership and letting the investors own the production equipment? Initially, the limited partners would get virtually all of VMG's net income. Over time, however, if the business met its plan, the investors' interest would trail off -- and the founders' percentage would escalate.

Pitassi, Klemp, and Wagner saw no problem with the structure. They were thrilled to find any money at all. "When you're 23 years old and trying to raise money for a diaper business," says Pitassi, "do you really dictate the terms?" By June 1985 they were running diapers off their state-of-the-art production line and selling them in supermarkets right next to the national brands.

But soon a fundamental design weakness of the deal came into focus. The product was being accepted much faster than anyone's wildest dreams would have suggested; in the first few months of production the founders hit their projected sales volume for year five. Eager to keep up with demand, they began thinking about ordering production equipment. But where would they get another $2 million? Not from the limited partners, who made it clear they had no interest in putting up new money or, for that matter, in seeing their cash payouts diverted to fuel the growth.