P&G'S SHARE OF DIAPER SALES HITS ALL-TIME LOW; STUMBLE BENEFITS RIVAL: K-C GRABS 44% OF $4 BILLION CATEGORY

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Procter & Gamble's diaper business is sagging -- again.

After staging a comeback in recent years, P&G has stumbled badly, allowing its archrival to open up a wide lead in the $4 billion category. The consumer-goods giant is even getting kicked around by retailers; its Pampers brand was dropped by Wal-Mart Stores' Sam's Club.

HIGH STAKES

The stakes for P&G go beyond leadership in one of the biggest and most hotly contested categories in package goods. President-CEO Durk Jager has in the past pointed to the resurgence of P&G's diaper business as a model for how strong global management and premium-priced products can rekindle growth.

Despite a $50 million introductory effort for Pampers Rash Guard, P&G's overall dollar share of the diaper category sank more than 2 points to 36% in the second quarter, tying P&G's all-time low set more than four years ago, according to Information Resources Inc. figures from Salomon Smith Barney.

Meanwhile, Kimberly-Clark Corp. surged to an all-time-high of 44%, widening its lead over P&G from 2.3 points to 8 points in just six months.

Sam's Club last month delisted Pampers from most of its U.S. stores, opting to carry only Huggies from K-C and its own private-label diapers. Sam's alone accounts for almost 2% of U.S. grocery sales.

And things could get worse for P&G.

"Kimberly-Clark is using that exclusivity model to try to convince other retailers to make the same move," said Burt Flickinger, a consultant with Reach Marketing. "I'm not sure [discontinuing Pampers is] a judicious decision or one consumers will support. But . . . it's been a huge benefit for Kimberly and tough medicine for P&G."

NOT A SIGN OF WIDER RIFT

K-C struck the deal with Sam's executives who came from Pace, a warehouse chain bought by Wal-Mart and merged into Sam's. Those executives had no history or strong relationship with P&G. Mr. Flickinger, though, said he doesn't believe the Sam's Club move indicates a wider rift between P&G and Wal-Mart.

A P&G spokesman said the company regrets the Sam's decision and pointed to a return of Pampers this month to 27 Sam's stores in the Northeast, following consumer complaints, as a sign the delisting may not last.

Rash Guard, moved into national distribution without a test market, was among the first in what could be many P&G initiatives to roll globally or nationally without in-market tests as the company tries to improve its speed to market.

Despite marketing support that included TV and print ads from D'Arcy Masius Benton & Bowles, New York, breaking in March, and a 6.5 million-piece sample and coupon direct-mail package in April, Rash Guard chalked up only a 2% dollar share in the second quarter as P&G's overall category share declined.

Rash Guard has exceeded expectations and continues to climb, a P&G spokesman said, reaching a 2.6% dollar share of the category in July. He blamed K-C's sudden gains on heavy promotion.

"We have witnessed this year the highest level of couponing and merchandising activity that we've ever seen by K-C in history," said Jeff Ansell, VP-baby care for P&G. "The reason . . . is that 1998 was the second calendar year that their business was down, and they came out in 1999 fighting hard."

COUPON DISTRIBUTION SPIKES

Promotion Insights, a New York-based coupon tracking service, confirms a large spike in

K-C's coupon distribution in the second quarter.

The diaper business may be getting more seasonal, too, to P&G's detriment currently. Huggies Little Swimmers are mainly a spring and summer product in most of the U.S. Pampers Rash Guard, on the other hand, should sell better during cold and flu season, when diaper rash increases due to antibiotic use, the P&G spokesman said.

'P&G'S TRAGIC FLAW'

Kimberly-Clark also may have tapped another seasonal edge -- P&G soft-pedaling on marketing spending to hit quarterly and annual earnings targets for the period ended June 30, Mr. Flickinger said.

"It's very easy for their competitors to read that P&G often downshifts on marketing investment to make their profit numbers at the end of their fiscal year," he said. "P&G's tragic flaw is that [fiscal] fourth-quarter spending and sometimes late third-quarter spend ing is often less than it needs to be, particularly in competitive categories like this."

The percentage of Kimberly-Clark's diapers sold on promotion rose to 27.1% in the second quarter, according to IRI figures, which is higher than usual, but not a record. By contrast, P&G's rate of diapers sold on promotion actually fell a percentage point to 22.7%, its lowest level since 1996.

"If Procter's Rash Guard product was such a big deal, you would have thought they would have been aggressively promoting it to get people to try it," said Salomon Smith Barney analyst Wendy Nicholson. "So I was disappointed for whatever reason that shares of the product were not better."

IN-PHARMACY PROMOS

In drugstores, where P&G has promoted Rash Guard heavily in pharmacies through video loops and other in-store advertising, the product has reached a 6% to 8% share, the P&G spokesman said.

P&G may try to expand pharmacy marketing in other channels later this year.

While P&G attained full distribution of Rash Guard with its 20 biggest retail accounts, mid-sized and smaller accounts apparently didn't get as much attention.

Waremart, a Boise, Idaho-based chain of warehouse stores in the Northwest with nearly $1 billion in sales, opted not to carry Rash Guard at all.

"They've done no [in-store] advertising whatsoever with us on Rash Guard," said a buyer for a large southern chain, who said Pampers may also be hurt because P&G's value-priced Luvs brand has reached near parity in quality.

"It used to be every decision [P&G] made was gold," he said, "and here lately they're tarnished a little bit."

PACKAGE SIZES AT K-C

For its part, Kimberly-Clark credits its sudden surge on larger package sizes, which brought Huggies to pricing parity with Pampers, plus product improvements across its entire line late last year and early this year, including improved leakage protection on premium Huggies Supreme and improved breathability on base Huggies products.

Ken Harris, a partner with Cannondale Associates consultancy who has worked closely with K-C executives, said he believed they aren't surprised by Rash Guard's slow start.

P&G was "playing more on perceptions than the real need," Mr. Harris said. "Kimberly-Clark folks decided it wasn't enough of a real issue to follow them down the hole. I would imagine, given the hurdles Durk Jager has given [P&G]

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