THE BUSINESS: Dydee Diaper

FOUNDED: 1933 CLOSED: 1996

PRIMARY CAUSE OF DEATH: Dwindling customer base

SECONDARY CAUSE OF DEATH: Failure to diversify

When he was 10, Steven Landry started folding diapers for Dydee Diaper after school. At 47, he folded the family diaper-delivery business forever. Six years of spectacular decline in the demand for cloth diapers had wiped out Boston-based Dydee. It also left the country with only about 75 diaper services, down from more than 200 during the industry's peak, in 1990.

Founded in 1933, Dydee was one of the country's oldest diaper services. Steven and his father, Arthur, both started working there in 1960; Steven joined the company full-time in 1975. Five years earlier his father had bought the company from founder Ed Sturgis. Back then Dydee was earning a little less than $2 million a year from its 8,000 customers. It had 115 employees, 20 delivery trucks, and four industrial washing machines. For each customer paying $3.95 a week, Dydee kept up to 200 diapers in rotation--half with the customer, half being laundered.

The Landrys grew the business for 25 years, employing family members periodically. In the mid-1980s Arthur expanded by opening a New Hampshire subsidiary. He retired from operations in 1988, retaining 46% of Dydee's stock. Steven held 22%, and other family members a total of 32%.

In 1987 the industry began a three-year growth spurt, with sales reaching a high of $200 million nationwide in 1990. Fifteen competitors opened in the Boston area, and Dydee tripled its business in less than three years. Cloth-diaper use peaked by Earth Day 1990, and that year Dydee's 11,000 customers generated $5 million in sales.

But the very next year, disposable-diaper manufacturers unleashed an advertising blitz, converting busy baby boomers to disposables. "We dropped a solid 20%," Arthur says, and the slide continued at 20% each year. "There's a natural customer attrition in this business. That growth period was all gravy, but two years later we all had to start replacing customers." After 1990 diaper services began closing at an average rate of about 25 a year.

Steven sold the New Hampshire subsidiary and floated loans to the Boston operation--$43,000 of his own money and $91,000 from his parents. By 1995 Dydee had shrunk to 20 employees, down from 70 in 1990.

In what looked like a smart move, Steven added a delivery, pickup, and recycling service for disposables in February 1995. The few remaining diaper services in the United States had begun offering convenient options like recyclable disposables or flat monthly rates for unlimited diapers. Some started expanding to service hospitals and nursing homes. But for Dydee, the attempt to diversify was too little, too late.

The new margins were too small--Dydee charged about $13 a week for either disposable or cloth delivery. But its costs were $5 a week for cloth and $8 for disposables. About a third of Dydee's 2,000 customers switched to disposables, cutting Dydee's gross profit margin from 62% to 53%. It became impossible to pay overhead.

Dydee finally filed for Chapter 7 bankruptcy in January 1997, owing $344,000 to 59 creditors. Customers begged New England's two remaining diaper services for help. "But as business declines you have some towns with one or two customers," says Bob Martucci of Dy-Dee in New Hampshire. "To drive all the way out there just doesn't make sense anymore."