DIAPER CHANGE

LISA SAXTON

FEDERAL WAY, Wash. -- Private-label diapers are accepting the double dare of national brands, and will continue to grab more market share in the future.

That's how the future looks to Tanya Rhone, vice president of marketing at Paragon Trade Brands here, a manufacturer of private-label diapers for some 200 retail operations and a lead player in getting private label to where it stands now.

Store-brand diapers hold down a 21% share of the business nationally, said Rhone in an interview with SN. She expects that share to grow another 10% to 20% in the next couple of years. Some industry watchers predict the share could double in 10 years.

Two forces will continue to drive the upsurge of private-label diaper sales, said Rhone. One will be continued price appeal; the other will be the industry's attention to quality and product innovation that keeps pace with the national-brand leaders.

At the same time, however, the top national-brand manufacturers will continue to challenge private-label progress by putting downward pressure on their own prices, Rhone said.

Paragon -- a company with more than $500 million in annual sales -- is a leader in its own right. Considered the No. 3 diaper supplier nationally, Paragon not only supplies store-brand products for supermarket chains, but also major mass merchandise and club store operators such as Wal-Mart, Sam's Club, Kmart and Toys "R" Us.

Rhone said pocketbook concerns have helped private-label gains in the diaper category, particularly given diaper price points.

"The economy is soft, and people are going to be very price-conscious -- particularly on big-ticket items like diapers, which also have to be purchased frequently.

"As long as people are watching their pennies and having to plan budgets, they're going to be looking for value. Diapers are the highest ticket item that a family buys in a grocery store, ranging in price from $5 to $9 a bag. There's very little else in a grocery store that costs that much on a per-unit basis," she explained.

"So when you're talking about spending eight bucks a week, people are going to look hard at a product. Price becomes an issue."

However, price appeal alone has not allowed private label to make inroads into the national-brand diaper business, and likewise won't fuel continued growth in the future. Rhone said the second reason for private label's stronger presence in the baby aisle is improved quality.

"The performance of private-label diapers has risen dramatically in the last four to five years. Prior to that, there really wasn't enough quality," said Rhone bluntly. "By that, I mean they didn't work; there was very high leakage. And customers will not sacrifice that for price."

Paragon invested a substantial amount of money on research and development to address the weaknesses in the quality of its products, she said. "We've spent a lot of time in our plants to raise the quality of our equipment as well. And now we deliver a product that is very close to the brands in performance." Data collected during Paragon's usage tests indicated private-label products now score on par with the national brands performance, at 5% to 6% leakage -- in other words, 5% of the diapers a customer buys might leak.

"I think consumers are getting smarter; they're trying private label and saying, 'Hey, the same number of diapers leak as the brand, so why should I pay more?' "

Naturally, the shift toward private label hasn't gone unnoticed by the big branders, as evidenced by Procter & Gamble's price cuts last year on its Luvs and Pampers brands.

"And since then, they've been dealing to the trade very aggressively, keeping their prices low on rotos and features. We've had to respond because we believe we need to offer the consumer at least a 10% to 15% discount," Rhone said.

She voiced a wistful hope that the pricing situation would stabilize in the near future, but she said she believes the price maneuvering is likely to persist.

"Procter and Kimberly-Clark are going to continue to battle it out for share, and price is a legitimate weapon," she said.

Indeed, manufacturer tactics are changing in the battle for the diaper dollar. For instance, freestanding inserts are becoming a thing of the past, said Rhone.

"What they are doing is a bit of direct mail -- particularly when they're introducing a new item," which offers a strong challenge to store brands for the consumer's attention, she explained.

"I do believe it's having some impact on us, because mothers are very curious about a new feature and they will use those branded coupons," said Rhone.

Private label's best response will be to stay close to national-brand trends and and not get left too far back on product innovations, according to Rhone. And for now, that means getting into the thin business; no new item is an acceptable new item unless it's a thin new item.

"Ultra is the meat and potatoes. It's the top of the line. Economy diapers now account for less than 10% of the market. Thin is in," she said.

Right now, she said, "you'll find that Procter is showing direct-mail coupons to build trial on its thin diapers." This strategic marketing shift hasn't left private label unaffected, because consumers are taking branders up on their direct-mail offers, she admitted.

"However, the good news is that we will be in a position to start shipping our version of ultra thin very shortly. It's brand matching," Rhone noted.

While manufacturers duke it out, retailers are readjusting their own diaper mix at store level -- and private label will play an increasingly important role in that exercise.

"What's changed in recent years is that retailers, who have always had private-label diapers, have decided to strengthen their image and really push their own products more. The reason is diapers are a very important draw item, because mothers are going to spend the most money in the store; they've got multiple mouths to feed.

"At Paragon, our top-volume retailers have driven their private-label share upwards from 30% to 45%." And they're doing this with "a good, solid merchandising program, which can really drive major business," said Rhone.

Putting diapers on endcaps and cross-merchandising other baby items are good ways to enhance sales, she said. "It's a great tool."

And with other classes of trade pushing diapers as well, it's important for supermarket operators to continue to work the baby aisle, especially since parents shop in supermarkets more frequently than the competition.

"What's interesting is that surveys of consumers say that their diaper purchases are still made in grocery," said Rhone. "The reason is frequency; they're in the grocery store every week. They go to Toys 'R' Us once a quarter. Nor do they go to Kmart, Target or a club store as frequently as to a supermarket.

"Grocery retailers should take advantage of that fact with this item that is a weekly purchase by having great merchandising and attractive prices. Supermarkets can still lead the way here."

Rhone said Paragon is upgrading its products and services to help supermarkets do just that. As head of its marketing department, she noted that Paragon has "many programs that we tailor for each individual retail company."

The supplier also has established a licensing arrangement with Jim Henson Productions to strengthen the in-store marketing of its lines. "The Muppet Babies characters appear on our diapers," she said.