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MarketScreener Homepage  >  Equities  >  Nyse  >  Procter & Gamble Company    PG

PROCTER & GAMBLE COMPANY

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Procter & Gamble : High-Tech Diapers Test How Much More Mom and Dad Will Pay

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07/31/2019 | 05:07pm EDT

By Sharon Terlep

Diapers promising to soften babies' behinds and digitally track their sleep are hitting the market. Billed as parental aids, the new products also are helping the biggest diaper makers lift prices.

Demand for diapers has declined in the U.S. and is set to fall further as Americans have fewer babies, a dilemma for Procter & Gamble Co., maker of Pampers and Luvs, and Huggies maker Kimberly-Clark Corp. The number of babies born in the U.S. last year fell to a 32-year low, dropping 2% from 2017 to 3.79 million births.

Both companies have been increasing diaper prices successfully without losing sales to less expensive brands, and executives say they can push higher as long as they make improvements.

"We've far from exhausted that lever," Kimberly-Clark Chief Executive Michael Hsu said in an interview. "There are bigger problems for the consumer that we can still solve."

Kimberly-Clark in July rolled out a Huggies line called Special Delivery, which is made from plant-based materials, comes in black packaging and costs roughly five times the least costly diaper on the market. P&G, meantime, has teamed with Google's research division to develop a tech-infused diaper system that includes monitors and activity sensors that track when babies sleep and go to the bathroom, sending alerts to parents' phones.

Both companies are introducing new products in China, a massive market in which parents are willing to pay up for diapers, creating categories P&G refers to as "super premium" and "super, super premium."

"Moms and dads dwell appropriately on their babies," P&G CEO David Taylor said in an interview. "There is evidence that if you provide a meaningful benefit, consumers are generally willing to pay."

That diapers rank among the products that generate the most feedback for P&G is evidence parents see room for improvement, Mr. Taylor said. Diapers could be softer, less leaky and do more to prevent skin irritation, he added. P&G's new offerings include all-natural diapers and ones with extra-sturdy fasteners.

P&G and Kimberly-Clark together dominate the $3.6 billion U.S. disposable-diaper business, accounting for 80% of sales, according to Nielsen data provided by Wells Fargo.

After years of trying to stoke demand by cutting prices, P&G and most of its rivals switched course about a year ago and have been pushing up prices across a range of consumer products. The moves have paid off as shoppers have been willing to absorb the increases, some of which were prompted by higher costs and some of which have padded profits.

Kimberly-Clark's Mr. Hsu said there is room in the U.S. market for more expensive diapers. A private-label diaper costs about 11 cents, while the most expensive offering until recently was around 35 cents a diaper, he said. Huggies' new Special Delivery line goes for 55 cents apiece.

Other consumer-products categories have bigger differences between the discount and high-end offerings. The least expensive toothpaste, for instance, goes for 18 cents an ounce, while pricier options can be more than $1 an ounce, said Mr. Hsu, referring to the overall U.S. industry.

Natasha Colon, an Appleton, Wis., resident who is the mother of a 3-month-old daughter, said the eye-catching designs on the Special Delivery line appealed to her.

"I'm all about cute," said Ms. Colon, who has been switching between brands. She said the look, combined with the diapers' softness, make them worth the extra cost.

The high-tech P&G diapers are part of a new baby-monitoring system called Lumi that includes a separate webcam. The system includes a sensor that detects moisture and is attached each time a diaper is changed. P&G hasn't disclosed pricing for the product, expected to go on sale later this year.

Some analysts question whether price increases could open the door for private-label and startup competitors, which so far have struggled to make inroads within the diaper market. P&G has acknowledged that ever-higher razor prices opened the way for online shave brands to steal away customers.

"Everybody has been talking about raising prices. That's well and good to offset the headwinds, but if it's not being matched with value-added innovation, that's the challenge," Morningstar analyst Erin Lash said.

The strategy can be successful, she said, if the companies introduce features that are truly useful and figure out ways -- either through marketing or offering free trials -- to persuade parents to try their diapers.

The diaper category "is robust and it's competitive, and our eyes are wide open," Mr. Taylor said.

On Tuesday, P&G reported its highest quarterly sales growth in more than a decade. P&G said organic sales, which strip out currency moves, acquisitions and divestitures, rose 7% in the quarter. About half the gains came from higher prices.

Write to Sharon Terlep at sharon.terlep@wsj.com

Stocks mentioned in the article
ChangeLast1st jan.
KIMBERLY-CLARK CORPORATION -0.38% 137.07 Delayed Quote.21.02%
PROCTER & GAMBLE COMPANY 0.20% 121.35 Delayed Quote.31.73%
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Financials (USD)
Sales 2020 70 186 M
EBIT 2020 15 346 M
Net income 2020 12 543 M
Debt 2020 23 660 M
Yield 2020 2,48%
P/E ratio 2020 25,1x
P/E ratio 2021 23,6x
EV / Sales2020 4,65x
EV / Sales2021 4,49x
Capitalization 303 B
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Mean consensus OUTPERFORM
Number of Analysts 25
Average target price 125,22  $
Last Close Price 121,09  $
Spread / Highest target 12,3%
Spread / Average Target 3,41%
Spread / Lowest Target -14,9%
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NameTitle
David S. Taylor Chairman, President & Chief Executive Officer
Jon R. Moeller Vice Chairman, Chief Operating & Financial Officer
Kathleen B. Fish Chief Research, Development & Innovation Officer
Javier Polit Chief Information Officer
Scott D. Cook Independent Director
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