K-C takes unusual tack to boost Huggies' share

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Callers to the toll-free consumer hot line for Costco's new Kirkland Signature private-label diapers don't talk to Costco employees or even overseas contractors. Instead, the folks touting the benefits or apologizing for shortcomings of Costco's private-label diapers work for Kimberly-Clark Corp., marketer of leading U.S. diaper brand Huggies.

K-C has struck an unusual bargain in an industry where brand manufacturers who also make private-label on the side often try to hide the link and seldom help with marketing. As part of a deal with the nation's No. 2 diaper retailer that got rival Procter & Gamble Co.'s Pampers booted from most Costco stores in June, K-C is providing consumer-affairs support for private-label diapers it also agreed to make.

In fact, when Deutsche Bank analyst Bill Schmitz, father of a newborn, called the Costco support line last month, the customer-service rep acknowledged she was a K-C employee. He said the rep told him the Kirkland diapers "are just about as good as Huggies." A Kirkland rep called by a reporter didn't go quite that far, but did acknowledge she works for the same company that makes Huggies.

"They do have different attributes," the rep said of the Huggies and Kirkland diapers, but after checking with a supervisor, she wouldn't elaborate much. "The Huggies and the Kirkland are made to slightly different specifications," she said. "But we consider them both high-quality diapers."

Kirkland sells for $29.99 for 140 diapers in size five, about 6% less per than Huggies Supreme at the same price for 132. Costco has delisted Pampers from about 70% of its stores nationwide, but in an Ohio store still carrying one size of Pampers Cruisers, they're priced 5% higher than the Huggies.

Kimberly-Clark and Procter & Gamble Co. declined to comment. Costco did not return calls.

In a conference call last month K-C Chairman-CEO Thomas J. Falk said the company's private-label strategy hasn't changed. "We do a very small portion of our portfolio in private label ... with customers where we think that there is a strategic advantage."

"It is unconventional," said Burt Flickinger, principal of retail-marketing consultancy Strategic Resource Group, of K-C operating the Kirkland call center. But he sees it as part of a smart deal for Huggies that helps it boost share, cut costs and fill excess capacity.

RISKS FOR COSTCO

Costco accounts for 8% to 10% of U.S. diaper sales, Mr. Flickinger estimates. So the deal could in one stroke boost K-C's market share by more than three percentage points of the $3 billion category.

In stores tracked by Information Resources, excluding Wal-Mart, Costco and dollar stores, P&G had a 51.6% share in the second quarter, its best in more than a decade and up three points from a year ago.

Dumping a resurgent Pampers does present risks for Costco, Mr. Flickinger said, though other retailers have found stocking just Huggies and private-label can work. Wal-Mart's Sam's Club dropped a similar effort in the late 1990s after 20 months following a change of management and heavy P&G lobbying, he said.

Strategy

One analyst says by operating the Kirkland call center, K-C could trim costs and fill excess capacity

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