The Diaper The Diaper Industry in the Industry in the Next 25 yearsNext 25 years

By Carlos RicherBy Carlos RicherRicher Investment SA Richer Investment SA de CVde CVDiaper Consulting Diaper Consulting ServicesServices

Insight 2005Minneapolis

Index of TopicsIndex of Topics

How can you anticipate the future?How can you anticipate the future? A quick review of the past and the history of the diaperA quick review of the past and the history of the diaper Why so many companies are loosing money with Why so many companies are loosing money with

diapers today?diapers today? What is the size of the diaper market today? How is it What is the size of the diaper market today? How is it

divided?divided? Where is the future growth for baby and adult diapers?Where is the future growth for baby and adult diapers? What will be the new features of the future diaper?What will be the new features of the future diaper? What to expect in the next 20 years, who will survive?What to expect in the next 20 years, who will survive? Conclusions and time for questions.Conclusions and time for questions.

Risks predicting the futureRisks predicting the future No one knows the future… but we can have an educated No one knows the future… but we can have an educated

guess.guess. Sales people need to anticipate the future. (Due to ever Sales people need to anticipate the future. (Due to ever

increasing SKU’s it is starting to be impossible to operate increasing SKU’s it is starting to be impossible to operate without a good sales forecast)without a good sales forecast)

Industry leaders need a future vision to steer the company Industry leaders need a future vision to steer the company in the right direction. in the right direction.

Regarding sales forecasts…. The use of electronic data Regarding sales forecasts…. The use of electronic data transfers with clients and suppliers will be mandatory in transfers with clients and suppliers will be mandatory in order to reduce manufacturing and working capital costs.order to reduce manufacturing and working capital costs.

Predicting the short term is not hard, predicting the long Predicting the short term is not hard, predicting the long term future requires similar tools and maybe a bit more of term future requires similar tools and maybe a bit more of intuition.intuition.

A quick review to diaper History A quick review to diaper History before 1960before 1960

Maria Allen

Marion Donovan 1946

1870 FirstMass ProductionOf cloth diapers

George Shroder 1949

1949 First pin free diaper

A quick review at modern diaper A quick review at modern diaper historyhistory

Billy Gene HarperCarlyle Harmon 1966

Vic Mills 1961

Fluff replaced Tissue 1972

Leg Cuffs 1986

Modern Diaper 20051978 “Hourglass Shape”

Inventors of SAP

Summary of events in modern Summary of events in modern diaper historydiaper history

Launch of modern disposable diaper by P&G, Launch of modern disposable diaper by P&G, 19611961

Invention of Superabsorbent Polymer, 1966Invention of Superabsorbent Polymer, 1966 First use of tapes integrated to a diaper, 1971First use of tapes integrated to a diaper, 1971 Introduction of fluff instead of creped tissue, Introduction of fluff instead of creped tissue,

19721972 First use of Superabsorbent in diapers, 1987First use of Superabsorbent in diapers, 1987 Frontal Tape and Hook and Loop systems, 1987Frontal Tape and Hook and Loop systems, 1987 Use of leg cuffs for leak prevention, 1989Use of leg cuffs for leak prevention, 1989 Introduction of training pant diapers, 1994Introduction of training pant diapers, 1994 Use of cloth like back sheets and breathables, Use of cloth like back sheets and breathables,

19941994

Diaper wars 101:Diaper wars 101: What is happening today with the diaper What is happening today with the diaper

industry?industry? What is a “purging cycle”? A globalized What is a “purging cycle”? A globalized

price war!price war! Who starts a new purging cycle?Who starts a new purging cycle? We may like to think purging cycles start We may like to think purging cycles start

as a result of coordinated collaboration…. as a result of coordinated collaboration…. No! I believe they are truly random No! I believe they are truly random events.events.

How do they get started? …. They start How do they get started? …. They start when there is a weak link in the supply when there is a weak link in the supply chain!chain!

Individual Individual ElementsElements

Pine Trees, Oil, propylene Pine Trees, Oil, propylene gas…gas…

Basic MaterialsBasic Materials Acrylic acid, Hydrocarbon Acrylic acid, Hydrocarbon resins, PP pellets, resins, PP pellets, tackifiers, etctackifiers, etc

Finished Raw Finished Raw MaterialsMaterials

SAP, Hot melts, Cellulose SAP, Hot melts, Cellulose Pulp, Nonwovens, Spandex, Pulp, Nonwovens, Spandex, BOPP, etc.BOPP, etc.

Diaper Diaper ManufacturingManufacturing

Diapers, sanitary napkins, Diapers, sanitary napkins, adult incontinence, etcadult incontinence, etc

Distribution Distribution ChannelsChannels

Wal-Mart, Carrefour, Wal-Mart, Carrefour, Walgreen, etcWalgreen, etc

ConsumerConsumer Parents buy product for Parents buy product for their baby.their baby.

The supply Chain

Diaper Wars 101 Diaper Wars 101 (Continued)(Continued)

An important disruption in the supply An important disruption in the supply chain starts a new price war cycle!chain starts a new price war cycle!

An extended “fixed price” supply contract An extended “fixed price” supply contract What past experience do we have What past experience do we have

regarding these cycles? (1994-1996 was regarding these cycles? (1994-1996 was the last one when pulp peaked close to the last one when pulp peaked close to $1,000 USD/Ton)$1,000 USD/Ton)

Purging cycles will continue every 7 to 11 Purging cycles will continue every 7 to 11 years.years.

How can you get ready for the next How can you get ready for the next purging cycle? You need to be very well purging cycle? You need to be very well informed.informed.

The name of the game is The name of the game is InformationInformation

Who can provide us with the right information?Who can provide us with the right information? The enemy of my enemy is my friendThe enemy of my enemy is my friend … …information can information can

be free! Look for partners! Unfortunately this seldom be free! Look for partners! Unfortunately this seldom happens. happens.

Industry References: Nonwovens World, Nonwovens Industry References: Nonwovens World, Nonwovens Industry, Nonwovens Markets, web page subscriptions, Industry, Nonwovens Markets, web page subscriptions, etc.etc.

Prediction: One magazine will evolve to Prediction: One magazine will evolve to AbsorbentsAbsorbents World, World, AbsorbentsAbsorbents Industry or Industry or AbsorbentsAbsorbents Markets. Markets.

Size of the baby diaper Size of the baby diaper market today and year 2025market today and year 2025

If you count all of the babies of the world from the age of If you count all of the babies of the world from the age of newborn to 30 months old, there are newborn to 30 months old, there are 321321 million babies. million babies.

If every baby in the world used a disposable diaper we would If every baby in the world used a disposable diaper we would need 15,600 diapers/sec (490 billion per year).need 15,600 diapers/sec (490 billion per year).

Today, only one in every 5 babies uses a disposable diaper.Today, only one in every 5 babies uses a disposable diaper. In year 2025 the world will have In year 2025 the world will have 328328 million babies million babies If diapers changes are reduced 5% due to better design…If diapers changes are reduced 5% due to better design… Total diaper requirement in 2025 will be reducedTotal diaper requirement in 2025 will be reduced 2.9%2.9% For year 2025 I expect that more than one third of For year 2025 I expect that more than one third of

the babies in the world will use a disposable diaper, the babies in the world will use a disposable diaper, almost doubling current volume sales of 2005.almost doubling current volume sales of 2005.

Babies 0 to 30 months(Millions)

0

1020

3040

5060

70

2005

2025

What can we learn from the What can we learn from the Table:Table:

There are twice as many babies in India today as There are twice as many babies in India today as all of the babies in the America’s (from Alaska to all of the babies in the America’s (from Alaska to Argentina).Argentina).

India has 45% more babies and 3 times more India has 45% more babies and 3 times more density of babies per unit area than China.density of babies per unit area than China.

USA is the only country that shows significant USA is the only country that shows significant baby growth in the next 20 years (due to baby growth in the next 20 years (due to immigration).immigration).

There are 4 African countries in the list of the 10 There are 4 African countries in the list of the 10 largest in regards to population of babies; with largest in regards to population of babies; with PPP below $600 they were not considered in PPP below $600 they were not considered in previous table.previous table.

Size of the adult diaper today and Size of the adult diaper today and year 2025year 2025

There are 316 million adults over 70 years There are 316 million adults over 70 years old in the world today (1 in every 3 requires old in the world today (1 in every 3 requires protection).protection).

By the tear 2025 there will be 563 million, By the tear 2025 there will be 563 million, this is a this is a 78% increase78% increase (compare this (compare this against the 2.1% increase for babies)against the 2.1% increase for babies)

For year 2025 I expect adult For year 2025 I expect adult incontinence sales will grow at least 3 incontinence sales will grow at least 3 times the current volume sales of today.times the current volume sales of today.

G r o w o f p e o p le > 7 0 b e tw e e n 2 0 0 5 a n d 2 0 2 5

-

2 0

4 0

6 0

8 0

1 0 0

1 2 0

1 4 0

O ld e r> 7 0 Y 2 0 0 5

O ld e r> 7 0 Y 2 0 2 5

What can we learn from the What can we learn from the table:table:

China has the largest population of senior China has the largest population of senior citizens and also the biggest growth in the citizens and also the biggest growth in the next 20 years.next 20 years.

India and the USA will also have significant India and the USA will also have significant growth.growth.

European countries have marginal growth, European countries have marginal growth, Europe is not the “old continent” only because Europe is not the “old continent” only because of its buildings…today it is also old because of of its buildings…today it is also old because of its people.its people.

Indonesia and Brazil will move from positions Indonesia and Brazil will move from positions 9 and 109 and 10thth to position 5 to position 5thth and 6 and 6thth in year 2025. in year 2025.

Diapers required by country Diapers required by country (market share)(market share)

Market share data per country is not available Market share data per country is not available (not free).(not free).

I believe it is possible to estimate market share I believe it is possible to estimate market share using only macroeconomic indicators from each using only macroeconomic indicators from each country.country.

With a mathematical model that uses “pre-With a mathematical model that uses “pre-segmented” Purchasing Power Parity (PPP), segmented” Purchasing Power Parity (PPP), Unemployment data and a minimal threshold Unemployment data and a minimal threshold PPP that triggers diaper sales.PPP that triggers diaper sales.

The only information we do not have are the The only information we do not have are the cultural barriers that generate market cultural barriers that generate market resistance…but we can have an educated guess.resistance…but we can have an educated guess.

Market Share for Baby Diapers Market Share for Baby Diapers from my model:from my model:Only countries with PPP Only countries with PPP

> $2,000 > $2,000 (*(*Nigeria, Bangladesh, Nigeria, Bangladesh,

Ethiopia and Congo Ethiopia and Congo excluded*excluded*))

Country Country Market Share 2005Market Share 2005

IndiaIndia 2.0%2.0%

ChinaChina 5.5%5.5%

IndonesiaIndonesia 9.0%9.0%

PakistanPakistan 4.0%4.0%

United StatesUnited States 95.5%95.5%

BrazilBrazil 29.5%29.5%

MexicoMexico 58.6%58.6%

PhilippinesPhilippines 21.5%21.5%

EgyptEgypt 22.2%22.2%

VietnamVietnam 9.0%9.0%

What kind of cultural and social What kind of cultural and social barriers?barriers?

Social and economic Social and economic Barriers:Barriers:

In many countries the cost of diapers are In many countries the cost of diapers are very high in relation to the cost of labor. In very high in relation to the cost of labor. In India, it is still possible to hire a maid with India, it is still possible to hire a maid with $100 dollars per month (but not for long).$100 dollars per month (but not for long).

It takes a lot of money to reeducate people It takes a lot of money to reeducate people regarding what are acceptable social regarding what are acceptable social practices (such as babies “peeing” on the practices (such as babies “peeing” on the street). street).

Note: The playboy maid photo was to make sure you were not sleepy Note: The playboy maid photo was to make sure you were not sleepy

Baby diaper market Baby diaper market predictionspredictions

China will have the largest baby market grow China will have the largest baby market grow in the next 5 years or so. Explain… Compare in the next 5 years or so. Explain… Compare with Japan…with Japan…

India will be the largest consumer of diapers India will be the largest consumer of diapers within the next 15 years, explodes in about 3 within the next 15 years, explodes in about 3 to 5 more years when PPP reaches required to 5 more years when PPP reaches required Threshold (get ready!)Threshold (get ready!)

Brazil (waiting for higher PPP), 10% of the Brazil (waiting for higher PPP), 10% of the people in Brazil have 50% of the wealth. people in Brazil have 50% of the wealth. Indonesia…Indonesia…

North African Countries (exceptional growth!)North African Countries (exceptional growth!) Latin America (Colombia, Argentina, Chile) Latin America (Colombia, Argentina, Chile)

OK. Mexico and Caribbean countries limited OK. Mexico and Caribbean countries limited because of current poverty levels (Mexico’s because of current poverty levels (Mexico’s poverty is 40% and market share is close to poverty is 40% and market share is close to 60%, only growth in this region are exports)60%, only growth in this region are exports)

Let us talk about Let us talk about the new diaper the new diaper

features.features.

How do you imagine the diaper of How do you imagine the diaper of the future?the future?

People like to fantasize about the use of electronic gadgets.People like to fantasize about the use of electronic gadgets.

The need moves the market and not only the technologyThe need moves the market and not only the technology

I do not believe these gadgets will be mass produced

The diaper of the future:The diaper of the future:

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

Grows when wetAfter salt is released

Diaper of the future:Diaper of the future: Special nonwoven fabrics (breathable when dry)Special nonwoven fabrics (breathable when dry) New nonwovens (breathable only when its hot)New nonwovens (breathable only when its hot) Backsheet without the need of laminated film Backsheet without the need of laminated film

will bring a new generation of extra soft diapers.will bring a new generation of extra soft diapers. High compression packaging will continue.High compression packaging will continue. Air laid or pulp? What about synthetics? When?Air laid or pulp? What about synthetics? When? Better elastic components to improve diaper fit.Better elastic components to improve diaper fit. Much better pad integrity with new generation Much better pad integrity with new generation

hot melts.hot melts. How much more performance in a diaper?How much more performance in a diaper?

Predictions regarding industry Predictions regarding industry diversificationdiversification

Successful paper companies have Successful paper companies have a good chance of becoming a good chance of becoming successful diaper producers.successful diaper producers.

Successful diaper producers have Successful diaper producers have a slim chance of also becoming a slim chance of also becoming successful tissue producers, successful tissue producers, examples are everywhere.examples are everywhere.

Be careful when you diversify!!Be careful when you diversify!!

ConclusioConclusionsns

Thank you!Thank you!

Questions?Questions?

By Carlos RicherBy Carlos RicherRicher Investment SA Richer Investment SA de CVde CVDiaper Consulting Diaper Consulting ServicesServiceswww.richernet.com www.richernet.com