The Diaper Industry in the Next 25 years

By Carlos Richer Richer Investment SA de CV Diaper Consulting Services

Insight 2005 Minneapolis

Index of Topics

How can you anticipate the future? A quick review of the past and the history of the diaper Why so many companies are loosing money with diapers today? What is the size of the diaper market today? How is it divided? Where is the future growth for baby and adult diapers? What will be the new features of the future diaper? What to expect in the next 20 years, who will survive? Conclusions and time for questions.

Risks predicting the future

No one knows the future but we can have an educated guess. Sales people need to anticipate the future. (Due to ever increasing SKUs it is starting to be impossible to operate without a good sales forecast) Industry leaders need a future vision to steer the company in the right direction. Regarding sales forecasts. The use of electronic data transfers with clients and suppliers will be mandatory in order to reduce manufacturing and working capital costs. Predicting the short term is not hard, predicting the long term future requires similar tools and maybe a bit more of intuition.

A quick review to diaper History before 1960

Maria Allen
1870 First Mass Production Of cloth diapers

1949 First pin free diaper

Marion Donovan 1946

George Shroder 1949

A quick review at modern diaper history

Inventors of SAP Billy Gene Harper Carlyle Harmon
1966 Vic Mills 1961
Fluff replaced Tissue
1972

Leg Cuffs 1986

1978 Hourglass Shape

Modern Diaper 2005

Summary of events in modern diaper history

Launch of modern disposable diaper by P&G, 1961 Invention of Superabsorbent Polymer, 1966 First use of tapes integrated to a diaper, 1971 Introduction of fluff instead of creped tissue, 1972 First use of Superabsorbent in diapers, 1987 Frontal Tape and Hook and Loop systems, 1987 Use of leg cuffs for leak prevention, 1989 Introduction of training pant diapers, 1994 Use of cloth like back sheets and breathables, 1994

Diaper wars 101:

What is happening today with the diaper industry? What is a purging cycle? A globalized price war! Who starts a new purging cycle? We may like to think purging cycles start as a result of coordinated collaboration. No! I believe they are truly random events. How do they get started? . They start when there is a weak link in the supply chain!

The supply Chain

Individual Elements
Basic Materials
Pine Trees, Oil, propylene gas
Acrylic acid, Hydrocarbon resins, PP pellets, tackifiers, etc Nonwovens, Spandex, BOPP, etc. Diapers, sanitary napkins, adult incontinence, etc

Finished Raw Materials SAP, Hot melts, Cellulose Pulp, Diaper Manufacturing

Distribution Channels
Consumer

Wal-Mart, Carrefour, Walgreen, etc

Parents buy product for their baby.

Diaper Wars 101 (Continued)

An important disruption in the supply chain starts a new price war cycle! An extended fixed price supply contract What past experience do we have regarding these cycles? (1994-1996 was the last one when pulp peaked close to $1,000 USD/Ton) Purging cycles will continue every 7 to 11 years. How can you get ready for the next purging cycle? You need to be very well informed.

The name of the game is Information

Who can provide us with the right information?

The enemy of my enemy is my friend information can be

free! Look for partners! Unfortunately this seldom happens. Industry References: Nonwovens World, Nonwovens Industry, Nonwovens Markets, web page subscriptions, etc. Prediction: One magazine will evolve to Absorbents World, Absorbents Industry or Absorbents Markets.

Size of the baby diaper market today and year 2025

If you count all of the babies of the world from the age of newborn to 30 months old, there are 321 million babies. If every baby in the world used a disposable diaper we would need 15,600 diapers/sec (490 billion per year). Today, only one in every 5 babies uses a disposable diaper. In year 2025 the world will have 328 million babies If diapers changes are reduced 5% due to better design Total diaper requirement in 2025 will be reduced 2.9%

For year 2025 I expect that more than one third of the babies in the world will use a disposable diaper, almost doubling current volume sales of 2005.

70 60 50 40 30 20 10 0
In d ia a In d Pa ki s ta n d St at es Br az Ph ili pp in es t Vi et na m Eg yp M ex ic o il on es ia Ch in

Un ite

Babies 0 to 30 months (Millions)

2025

2005

What can we learn from the Table:

There are twice as many babies in India today as all of the babies in the Americas (from Alaska to Argentina). India has 45% more babies and 3 times more density of babies per unit area than China. USA is the only country that shows significant baby growth in the next 20 years (due to immigration). There are 4 African countries in the list of the 10 largest in regards to population of babies; with PPP below $600 they were not considered in previous table.

Size of the adult diaper today and year 2025

There are 316 million adults over 70 years old in the world today (1 in every 3 requires protection). By the tear 2025 there will be 563 million, this is a 78% increase (compare this against the 2.1% increase for babies) For year 2025 I expect adult incontinence sales will grow at least 3 times the current volume sales of today.

Grow of people >70 between 2005 and 2025 140 120 100 80 60 40 20 Older>70 Y2005 Older>70 Y2025

a ite d di

Un

te s Ja pa Ru n ss G ia er m an y Ita Fr ly In anc do e ne si a Br az il

in Ch

In

St a

What can we learn from the table:

China has the largest population of senior citizens and also the biggest growth in the next 20 years. India and the USA will also have significant growth. European countries have marginal growth, Europe is not the old continent only because of its buildingstoday it is also old because of its people. Indonesia and Brazil will move from positions 9 and 10th to position 5th and 6th in year 2025.

Diapers required by country (market share)

Market share data per country is not available (not free). I believe it is possible to estimate market share using only macroeconomic indicators from each country. With a mathematical model that uses pre-segmented Purchasing Power Parity (PPP), Unemployment data and a minimal threshold PPP that triggers diaper sales. The only information we do not have are the cultural barriers that generate market resistancebut we can have an educated guess.

Market Share for Baby Diapers from my model:

Only countries with PPP > $2,000
Country

(*Nigeria, Bangladesh, Ethiopia and Congo excluded*)

Market Share 2005

India China Indonesia Pakistan United States Brazil Mexico Philippines Egypt Vietnam

2.0%

5.5%
9.0% 4.0% 95.5% 29.5% 58.6% 21.5% 22.2% 9.0%

What kind of cultural and social barriers?

Social and economic Barriers:

In many countries the cost of diapers are very high in relation to the cost of labor. In India, it is still possible to hire a maid with $100 dollars per month (but not for long). It takes a lot of money to reeducate people regarding what are acceptable social practices (such as babies peeing on the street).
Note: The playboy maid photo was to make sure you were not sleepy

Baby diaper market predictions

China will have the largest baby market grow in the next 5 years or so. Explain Compare with Japan India will be the largest consumer of diapers within the next 15 years, explodes in about 3 to 5 more years when PPP reaches required Threshold (get ready!) Brazil (waiting for higher PPP), 10% of the people in Brazil have 50% of the wealth. Indonesia North African Countries (exceptional growth!) Latin America (Colombia, Argentina, Chile) OK. Mexico and Caribbean countries limited because of current poverty levels (Mexicos poverty is 40% and market share is close to 60%, only growth in this region are exports)

Let us talk about the new diaper features.

How do you imagine the diaper of the future?

People like to fantasize about the use of electronic gadgets.

I do not believe these gadgets will be mass produced

The need moves the market and not only the technology

The diaper of the future:

Landfill volume reduction, use microcapsules. Skin protection, microcapsules to control pH !!

After Grows saltwhen is released wet

Diaper of the future:

Special nonwoven fabrics (breathable when dry) New nonwovens (breathable only when its hot) Backsheet without the need of laminated film will bring a new generation of extra soft diapers. High compression packaging will continue. Air laid or pulp? What about synthetics? When? Better elastic components to improve diaper fit. Much better pad integrity with new generation hot melts. How much more performance in a diaper?

Predictions regarding industry diversification

Successful paper companies have a good chance of becoming successful diaper producers. Successful diaper producers have a slim chance of also becoming successful tissue producers, examples are everywhere. Be careful when you diversify!!

Conclusions

Thank you!
Questions?
By Carlos Richer Richer Investment SA de CV Diaper Consulting Services www.richernet.com