DIAPERS MATURE, DRYPERS ADJUSTS

LISA SAXTON

HOUSTON -- Now that the diaper category has reached a mature stage, manufacturers will have to bring something new to market if they want to remain competitive.

Terry Tognietti, co-chief executive officer and president of Drypers Corp. here, said differentiation will be the key to staying in the game, especially in this day and age of falling prices.

Drypers -- which recently combined its four regional brands to become one national label -- is facing stiff competition from national giants and private-label brands, as well as smaller, regional players. This crowded playing field, according to Tognietti, has tightened margins.

"What makes this more challenging," he said, "is it happens to coincide with the fact that raw material prices are going up.

"So, with paper costs going north and, at the same time, pricing pressures going down, the industry is being forced to separate themselves from one another with regard to quality and pricing," said Tognietti.

While Procter & Gamble and Kimberly-Clark more than likely have the wherewithal to weather this pricing storm, smaller manufacturers are going to have to reach some sort of equilibrium, he noted.

"It's up to companies to try to maintain a balance of being cost-effective enough to compete with the people applying the pricing pressure, and still be capable of providing the technology and the flexibility to differentiate themselves. I think that's really the challenge for a manufacturer in this industry."

Tognietti said Drypers is in a good position to compete through these rather tight times. "We thought this would happen. And, in the early 1990s, we took steps to have a national scope by the time this phenomenon occurred.

"Clearly, we are not the size of P&G or K-C -- it's like David and Goliath compared to those two. But we're not a little player; we're a regional player with a national scope. "However, we can still provide the retailer with the positives of being a smaller regional player with national support and cost effectiveness," he said.

While diaper manufacturers have been fighting it out, the consumer has emerged the undisputed winner, said Tognietti.

"Consumers have raised the bar in terms of the level of expectations. In a lot of ways it's beautiful because it's capitalism at work. If you were to go back and place yourself in the late '80s and then compare that to 1995, it's clear the consumer is getting a bet-

ter product to-

day for a lower price.

"This is what you should expect when an industry matures, which is going on right now."

Because of this, "the consumer now expects a diaper that fits well and doesn't leak. And they expect to get it for a value price, because they've been taught that it's possible. "So the consumers are a lot more demanding than they used to be, and rightfully so," said Tognietti.

In the future, Tognietti said, diaper manufacturers will continue to look for ways to differentiate themselves from their competitors. For instance, his company offers perfume-free products.

"Again, that innovative, technical capability for a manufacturer needs to be there or they're going to be left in the cold without the ability to provide a difference at a reasonable cost."

As far as the private-label component, Tognietti said he expects that segment to reach its plateau. "Private label has grown substantially over the last five years and the goal, if you're a retailer, is not to give that away. I don't anticipate private label growing much more. "I think they'll be challenged to stay at the same level they are at today, because of the pricing pressures. The typical pricing advantage of private label vs. national brands has shrunk," he said.

So, too, has couponing activity from some of the larger diaper companies, added Tog-

nietti.

"But we believe, particularly in this category that continues to be a high dollar ring -- it may not be as high a dollar as it was three years ago, but it is still a significant purchase -- that couponing is still something that attracts consumers. "So we're going to stay dedicated to continuing to build our brand," he said.

Drypers also will be looking for opportunities to help retailers lower their labor costs, but not have out-of-stocks. Tognietti said some mass merchandisers have tried things to improve their shelf pack-out in the diaper category, but there's not much going on with supermarkets.

"There hasn't been a lot of creativity applied to merchandising the diaper category in terms of planograms and shelf placement and product placement," said Tognietti.

Therefore, Drypers hopes to work with retailers individually to address the problem and help solve it. "We think it's important to understand what each account feels is their best vehicle for promoting against their competitors, and support the real, true account-specific program, as opposed to saying 'We're a national company, you're going to do it our way,' " said Tognietti.

Only time will tell how the diaper competition will play out. But Tognietti has a pretty good idea of who will be left standing when the smoke clears.

"I think the people that will survive in the category are the people who have proven themselves to have good service, good quality, innovation and cost effectiveness."