Drypers Corporation

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Drypers Corporation

1415 West Loop North
Houston, Texas 77055
(713) 682-6848
Fax: (713) 682-3104

Public Company
1987 as Veragon Corporation
Employees: 600
Sales: $163.9 million (1995)
Stock Exchanges: NASDAQ
SICs: 2676 Sanitary Paper Products

Drypers Corporation is the third-largest manufacturer of disposable diapers and related products in the United States. The companys product line includes disposable diapers, disposable training pants, and pre-moistened wipes, most of which are marketed under the Drypers name. In the diaper market, Drypers is led by industry giants Procter & Gamble and Kimberly-Clark, to which it is a distant third place finisher holding less than a 10 percent share of the domestic market. But the company has successfully created a niche for itself by creating quality products that sell at significantly lower prices than those of its competition.

The Early Years

Drypers Corporation was formed in 1987 under the name Veragon Corporation, although the companys roots can actually be traced back three years earlier to when the companys founders launched another diaper business in Vancouver, Washington, called VMG Products. VMG was the brainchild of three college friends, David Pitassi, Walter Klemp, and Tim Wagner, all of whom shared an entrepreneurial spirit and dreamed of starting their own business. Following college, Pitassi took a job with Procter & Gamble, where he learned about the disposable-diaper business and the underdeveloped value-priced segment of the market. Both Klemp, a Coopers & Lybrand accountant, and Wagner, who held a job with a Portland adhesives company, joined Pitassi in a search for investors to back their own diaper-manufacturing project, which would focus on producing a quality product at a low price.

The three men soon set up a limited partnership with a group of investors who agreed to fund the companys start-up and then remain involved until they regained their initial investment. It was agreed that at that point, the investors would relinquish most of the companys earnings and its control to the founders. In mid-1985, VMG began shipping its diapers to West Coast supermarkets, selling them at prices significantly lower than those of the national brands such as Procter & Gamble (Pampers, Luvs) and Kimberly-Clark (Huggies).

VMG was instantly successful, and within months the fledgling company had reached its projected sales figures for five years down the road. Strangely enough, though, this success led to immediate problems for the three founders, who had no real financial stake in the company. To keep up with demand, they realized that it would be necessary to increase their production facilities and plow more money into expansion. Their partners, however, had agreed only to the initial investment, and refused to reinvest until after they had recaptured their original money. Heated debates ensued until late-1985, when the investors met and voted to oust the companys three founders. Wagner accepted a new job with VMG, but Pitassi and Klemp left with bitter feelings.

Post-VMG: A New Era in the Late 1980s

It was not long before Pitassi and Klemp had begun planning a new venture to take the place of VMG. They relocated to Houston, Texas, where there wasnt already another regional diaper brand with which to compete. The two men spent all of 1986 searching for investors, actually turning down some prospects because they sensed too many similarities to their first experience in Washington. Finally, by mid-1987 they had raised almost $2.5 million to fund the purchase of equipment and the initial production and distribution costs of their new enterprise, Veragon Corporation. One of their first moves was to hire Terry Tognietti as their chief operations officer, after wooing him away from Procter & Gamble where he had helped introduce the first Luvs brand boy/girl diaper product. Once Tognietti was in place, Veragon moved forward in its plan to produce and sell a high-quality product at a low price that consumers would appreciate. The company began shipping its new diapers under the name Drypers in the summer of 1988.

One of Veragons most important assets was the relationships it formed with the Houston retailers that stocked its product. National-brand diapers were not typically a moneymaker for retailers, due to the fact that they were sold for little more than the wholesale price that the big companies charged for them. Retailers had no room to negotiate these terms, however, because consumers wanted diapers and thus the stores had to stock them, regardless of the fact that they werent profitable items. Veragon decided to use the retailers disenchantment with diaper products to its advantage. Because it was a local Houston company, it saved money on distribution costs, and the company also used local raw materials, which saved money on production as well. Therefore, Veragon was able to sell its product to retailers at a considerably lower price than Procter & Gamble and Kimberly-Clark, while still maintaining a retail price-point that was about one dollar cheaper than the national brands. Sales of Veragons Drypers would be profitable for the stores, whose managers knew it. Soon almost everyone agreed to stock the Drypers product.

Another marketing strategy that proved successful for the young diaper company was its effort to mold advertisements and promotions to the needs of the individual stores that stocked the product. While Huggies, Luvs, and Pampers ran general advertisements on a national scale, Drypers focused on bringing customers into individual stores, which further strengthened its relationship with the retailers. These relationships proved themselves to be crucial when Veragon experienced its first attack by Procter & Gamble and Kimberly-Clark.

Drypers biggest selling point was its retail priceabout one dollar less than that of its competitors. As the product gained popularity in the Houston area, though, the big companies issued $2-off coupons for their Pampers, Luvs, and Huggies in that region, attempting to destroy the Drypers price advantage. Pitassi came up with a genius counterattack strategy, however, which drew upon Veragons strong relationships with its retailers. He convinced stores to apply any diaper makers coupon to the purchase of Drypers, which turned the big companies coupon attacks against themselves. Veragon ran local newspaper advertisements inviting customers to Pamper, Hug, and Luv Us, and use their coupons to try out the new Drypers product. The marketing ploy worked like a charm, and Veragon was soon running at full production capacity to keep up with the heightened demand.

Veragon achieved first-year revenues of $101,000, which almost tripled the following year as 1990 revenues jumped to $285,000. In 1991, the company changed its name from Veragon Corp. to Drypers Corp. It was during that year that Drypers hit it big, as sales not only surpassed the $1 million mark, but actually topped off at $35 million. Drypers had spent the year exercising another brilliant marketing plan, which once again involved using Procter & Gambles and Kimberly-Clarks own promotions to Drypers advantage. Both big companies ran educational advertisements on a nationwide scale, which attempted to convince customers that certain characteristics of diapers were beneficial and necessary to have a dry and happy baby. For example, the big companies spent millions to explain the advantage of boy/girl-differentiated diapers. Drypers advertisements simply acted as a follow-up; the big companies had already convinced the consumer to buy boy/girl diapers, and Drypers ads focused on selling its own boy/girl products as opposed to-those of the other companies.

Even though Drypers often opted to ride the coattails of its large competitors, the small company actually came up with some interesting innovations of its own as well. For example, Drypers attempted to appeal to working parents whose children went to day care facilities when it added a blank space on its packaging so parents could label and identify their diapers with their childrens names. The company also introduced perfume-free products in the early 1990s, which were accompanied by an advertising campaign based on the idea that the perfumes used in most diaper products can be irritating to babies sensitive skin.

Nationwide Expansion in the 1990s

If Drypers was a small annoyance to Procter & Gamble and Kimberly-Clark in their Texas markets during its first few years, it became an actual headache in 1992 when it expanded its distribution scope nationwide. 1992 saw Drypers acquire two other regional diaper makers, in an attempt to join forces and compete with the big companies, rather than compete against each other. Ironically, Drypers first acquisition was VMG, Pitassi and Klemps first diaper company. With the purchase, Drypers gained access to the market in the Pacific Northwest. Then in late 1992, Drypers purchased an Ohio-based company called UltraCare Products, which possessed a distribution network throughout the Midwest.

By the end of the year, Drypers sales had doubled to $77 million. The company possessed over 5 percent of the market for diapers in the United States, making it the countrys third largest diaper manufacturer. Drypers had experienced a growth rate of over 49,000 percent since its inception in 1987, earning it the number one spot on Inc. magazines 1993 list of fastest-growing private companies. 1993 sales broke the $150 million mark, nearly doubling in the space of one year. Meanwhile, private label and value-priced goods and merchandise were gaining popularity with consumers, shedding the cheap image that had often plagued generic brands in the past. Consumers were looking for quality products that they could afford, and were tunning to discounted brands like Drypers more and more often.

In early 1994 Drypers went public, offering its stock at $14.50 per share. Industry analysts projected great things for the little diaper company, and its stock was quickly rounded up by people hoping to jump aboard early and earn huge returns in the future. Even Robert Sanborn, who had managed the leading U.S. stock fund for the three previous years, chose Drypers as one of the top five picks for the following year. Suddenly the name Drypers was becoming well-known around the country, and so the company decided to capitalize on the name recognition factor and combine all four of its regional diaper brands under the Drypers name. Around the country, Babys Choice, Cozies, Wee-Fits, and Drypers were rolled under one umbrella and tagged with the Drypers name.

Unfortunately, the nationwide change of all regional brands to the name Drypers acted against the company, rather than in its favor. Many customers werent adequately informed of the switch, and thus didnt follow their brand as it became Drypers. But even more detrimental was the poor timing of the switch, which coincided with two other major changes. First, the company opted to make a switch from thick to thin diapers, which when combined with the name change made it confusing for consumers to relocate their previous brand once it became Drypers. Also, the price of raw materials suddenly skyrocketed during the middle of the confusion, which brought on a price increase. These factors all hurt Drypers, and in fiscal 1995 the company experienced its first annual sales decrease, from $173.6 million in 1994 to $163.9 million in 1995.

Furthermore, a new price war being waged between Procter & Gamble and Kimberly-Clark combined with Drypers heightened production costs to virtually destroy the companys retail price advantage. In fact, the big companies promotional prices were often below the everyday prices for the Drypers brand. Without its low price advantage to appeal to its customers, Drypers quickly began to lose market share. The company suffered losses of $15.5 million in 1995, and after debuting at $14.50 per share the previous year its stock plummeted to lows of less than $4 per share. Rumors began to surface that Drypers would either seek bankruptcy protection or sell its holdings to another company.

Amazingly, however, the tide turned once again for the struggling company in late 1995. The price war between Procter & Gamble and Kimberly-Clark subsided, and the cost of raw materials decreased dramatically as well. Drypers made a last ditch effort to stay afloat. Internally, the company reorganized so as to decrease its operating costs. This included the consolidation of its production operations to its facilities in Ohio and Washington. It also secured a large line of credit to handle expenses, and earned approximately $9 million when it initiated a preferred stock placement offering. Drypers once again set its retail prices lower than those of competitors, and used its new earnings and credit to reinstate its promotional and advertising campaigns and recapture its customer base.

By early 1996, Drypers had regained almost 7 percent of the market for diapers in the United States, its largest share ever. The company was planning the rollout of a new diaper containing baking soda to control odors, and was also working to increase its presence in the international market with continued expansion into Latin America. Drypers executives hoped that these measures would further aid the company in making a solid comeback. As the company entered the end of the decade, it had been seasoned by its string of ups and downs throughout its short history, and thus seemed well-equipped to handle the pressure of maintaining a profitable enterprise in the face of fierce competition.

Principal Subsidiaries

Drypers Limited; Drypers, S.A.; Hygienic Products International, Inc.; UltraCare Products, Inc.; UltraCare Products International, Inc.; VMG Holdings, Inc.; VRG Leasing Corp.; New Dry, S.A.; Seler, S.A.

Further Reading

Calkins, Laurel Brubaker, Drypers Files Private Placement Offering with SEC, Houston Business Journal, December 14, 1992, p. 25.

Ellis, Junius, The Top Fund Manager Since 91 Picks Five Stocks to Gain 66%, Money, December 1994, p. 191.

Neff, Jack, Diaper Battle Puts EDLP on Injured List, Advertising Age, August 14, 1995, p. 3.

Posner, Bruce G., Targeting the Giant, Inc., October 1993, p. 92.

Stein, Tom, Outselling the Giants: How Aggressive Upstarts Toppled the Competition, Success, May 1996, p. 38.

Sullivan, R. Lee, Diaper Guerrillas, Forbes, July 1, 1996, p. 58.

Laura E. Whiteley