DIAPERS BATTLE PUTS EDLP ON INJURED LIST;ANALYSTS SAY P&G BACKED OFF TO GAIN SHARE

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What industry observers are calling one of the fiercest rows ever between Procter & Gamble Co. and Kimberly-Clark Corp. in diapers has wounded Drypers Corp.

Some in the industry also point to another victim: P&G's everyday low pricing strategy.

Insiders say P&G's lobbing of trade and consumer dollars at one of its biggest categories-and one that had been firmly in the EDLP camp-indicates pure EDLP won't work in an increasingly competitive U.S. marketplace.

Blaming many of its problems on a crushing price and promotional war initiated by P&G in first-half 1995, Drypers last week reported steep second-quarter losses, announced a round of cost reductions and raised the possibility of bankruptcy or acquisition if new bank financing doesn't come through as expected.

"Whatever happened to EDLP?" Drypers Chairman Co-CEO Walter V. Klemp asked. "Somehow [P&G] must think people forget they make these promises."

Mr. Klemp said Nielsen North America figures show the number of Pampers units sold on promotion rose 158% in the 12 weeks ended May 20 compared with a year earlier, vs. a 123% increase for Kimberly-Clark's Huggies brand, 93% for P&G's Luvs and 18% for Drypers. In most cases, he said, promotional prices for Pampers were even with or below the everyday prices for the Drypers value brand.

P&G also has locked in a category-exclusive nationwide agreement with Catalina Marketing-owner of the Checkout Coupon system-to distribute Pampers coupons through its point-of-purchase terminals and used direct-mail couponing to help bolster the sagging shares of its Luvs brand in the first half of 1995, according to industry sources.

The promotional spending followed P&G's February reduction of everyday prices by 11% on Luvs and 2% on Pampers plus reduced package counts for each brand by 10%.

P&G denied abandoning EDLP in diapers or elsewhere. A spokesman said trade spending levels have remained fairly steady on a year-to-year basis and couponing has been in line with other brands. He attributed any temporary increases in trade spending to a launch of the Pampers Stretch line and promotion of the new unisex version of Luvs.

"We find ourselves in a position to coupon from time to time-whether driven by Huggies or to drive trial and awareness in support of a new initiative," the spokesman said.

Analysts view P&G's moves as temporary tactical maneuvers that appear to be winding down. The percentage of units sold on promotion by P&G and others peaked in February and March at their highest levels in four years, according to a Dean Witter Reynolds report. But merchandising activity is now heading back toward more normal levels, said Tristan Gerra, associate analyst with Dean Witter, San Francisco.

Mr. Klemp and some industry analysts attribute P&G's moves to a resolve to regain market share. Figures from Dean Witter showed P&G's dollar share for the first two quarters was off 1.7 points to 35.6%, while Kimberly-Clark was up 3.1 points to 31.6%. Drypers fell 0.5 points to 2.7%, and private label was off 1.3 points to 18.4%.

The diaper category is clearly a hot issue for P&G President-Chief Operating Officer Durk Jager.

"Durk Jager has made recapture of .... market share in disposables as important to him as some of the popes made the Crusades in the Middle Ages," said independent consultant Burt P. Flickinger. "He has gone toe-to-toe getting very emotional with some key retail CEOs in the industry over discontinuing Luvs."

Safeway and other West Coast retailers discontinued Luvs last year, Mr. Flickinger said, hurting P&G badly in California, once its strongest diaper market. By plowing money into trade and consumer promotion early this year, he said, "P&G bought its way back" into about 80% of the West Coast retail distribution the Luvs brand lost.

P&G has temporarily retreated from EDLP for short-term strategic reasons before in other categories. Mr. Flickinger said P&G modified EDLP with Tide in 1993 by increasing consumer promotion and trade deals after losing share to Unilever's Wisk and Surf brands.

Silvermine Consulting President Paul Kelly said P&G has consistently used high-low promotions regionally in categories where it's deemed necessary. "You get a kick out of Procter's bravado when they start something, about how they're going to change the industry," he said. ".*.*. When it gets rough and they have to make the numbers, they do the same things everyone else does."

Mr. Klemp believes P&G used profits from its lead over Kimberly-Clark in Europe to boost diaper promotion spending while catching up technologically with Kimberly-Clark in the U.S. He said he thinks P&G could reach technological parity with Kimberly-Clark by October, when he says P&G will launch its new Pampers Premium product nationally. A P&G spokesman would not comment on the launch date.

But price and promotion weren't the only downfalls for Drypers. PaineWebber analyst Andrew Shore cited the company's merger of four regional brands into one national brand, new package designs and a switch from thick to thin diapers, all in 1994.

That switch had big short-term negative impact as did making all the changes at once, Mr. Klemp said. "But we didn't know [1995] would be the bloodiest price war we've ever seen."

Drypers' problems come in the midst of a $20 million print advertising and promotion campaign by Gerber Advertising, Portland, Ore., the company's first national campaign. Amid other cost reductions, advertising and promotion spending will increase, Mr. Klemp said. But he added that the bulk of spending would be on trade and consumer promotion.

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