By the fall of 1991 there were plenty of reasons to think that approach was on track. As Drypers moved its diapers throughout the South, sales were heading for around $35 million, and the company was making handsome operating profits. For the partners, the burning issue of the day was how best to expand into other parts of the country so they might be less of a target for their better-heeled rivals. If Drypers sold its products across the United States, the big brands would have to commit a lot more money to fight, Pitassi and others thought, which would make Drypers less exposed.
Ultimately, the partners decided that, rather than spending a lot of money slugging it out with regional brands similar to theirs, they'd join forces with them. So, fortified with $11.6 million in new equity raised from Texas buyout funds and venture-capital partnerships, along with $26 million in additional debt, they negotiated two deals that tripled the size of their business. The first one, ironically, was to buy VMG, the Washington company Pitassi and Klemp had been booted from five years earlier. ("The baby had been kidnapped," says Pitassi, "and now we wanted it back.") The second, completed in November 1992, was for a company in Marion, Ohio, named UltraCare Products. The CEOs of the two acquired companies were brought in as partners at the top management level. Suddenly, from relative obscurity, Drypers would now claim a nearly 6% market share of all the diapers sold in America's supermarkets.
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What does a giant company like P&G do when the market share in its biggest product category (one that, by itself, would be a Fortune 500 company) drops from 47% to 42% in a single year? The Drypers partners didn't know. But just as they were negotiating the mergers, there were signs that they might soon begin to find out. In Cincinnati, P&G's hometown, there had been lots of handwringing. And to be sure, the worries weren't just over Pampers and Luvs. During 1992 many of P&G's other top brands -- its Downy fabric softener, for example, and its Crest toothpaste -- were losing altitude as well. Across the country the private labels and "value" brands, like Drypers, were moving up. Even Kimberly-Clark was holding steady (at around 37% of the market). Not surprisingly, P&G wanted its business back.
The first salvo came in May 1992, when P&G lowered prices to retailers on both Pampers and Luvs by about 5%. Kimberly-Clark quickly got in step, matching the decrease. Then, last fall P&G went further, cutting prices by another 7%, and abandoned use of coupons in favor of more consistent everyday prices. This past May it slashed prices yet again -- Pampers by 5%, Luvs by 16%. Have we seen the end? It's unlikely. In mid-July, P&G announced an unprecedented drive to streamline overhead and to cut its costs (partly by laying off 12,000 employees), suggesting there could be more price cuts down the road.
These days the relative positioning of the various products is in a state of flux. In some stores, for instance, you see Luvs at $6.99, the same price as Drypers. In light of the massive pricing pressure, lots of people are speculating that Drypers' best days may be over.
Are they? Things are happening so fast that the market data are inconclusive. And how many new volleys will we see before the end of 1993? Different scenarios seem to crop up almost every day. Some retail experts speculate, for example, that the P&G pricing squeeze will backfire -- and that whatever Luvs gains in the market may be at the expense of Pampers, not Drypers. "What will P&G do then?" asks Paul Shilling, a broker at Acosta Sales, in Atlanta. Others think it's a good bet that supermarket chains will start to drop prices on their private labels, even if it hurts their profits -- thus giving Drypers new room to price below other brands. And then there's this rosy prediction: that stores will stop selling Luvs altogether in favor of products that make them money -- with Drypers at the top of their lists. "The Luvs strategy isn't particularly popular with retailers," notes John Bolt, a merchandiser with Houston's 49-store Appletree chain. "Stores see it as predatory."
As for Drypers, war has become the corporate lifestyle, and in many ways people seem to be enjoying the struggle. Pitassi says he and his colleagues haven't figured out exactly what they'll do to strike back. They could cut prices, he says. Or boost advertising. Or go back to heavy use of coupons. Or they could just keep on doing what Drypers has done all along -- scope out the changes and opportunities and then strike. Recently, for instance, the company has been establishing new footholds for its diapers in Latin America and the Far East. And Drypers' training pants (for children who are preparing to move beyond diapers), introduced in August 1992, will generate revenues of around $25 million this year. "When the elephants fight, the mouse picks up the cheese," says Pitassi.
"We have a lot of respect for our competition and for who they are," he volunteers. "But we're not losing any sleep over them. They're the ones who should be losing sleep, because in order to give value to consumers, they're going to have to play a different game." P&G may have written the book on how to lead markets with new features, Pitassi points out, but today's consumer wants something else -- the best possible product at a competitive price.
"They're going to have to act like us and find a way to teach thousands of people to think differently. But we're already here -- the whole foundation of our business was built to provide better value. And we won't let anyone outvalue us."
