July 2, 2010 / 4:35 PM / in 8 years

Analysis: P&G's Pampers leak market share

CHICAGO (Reuters) - Procter & Gamble Co (PG.N) has a leakage problem with its Pampers diapers — they can’t seem to retain their market share.

U.S. consumer concerns that Pampers Dry Max diapers can cause rashes are driving away customers, some vowing never to buy Pampers again, recent research shows. That is putting a dent in P&G’s reputation for developing strong products and improving on them regularly, the lifeblood of any consumer products company, analysts said.

“This is a product that goes on children’s bodies, and because of that no parent wants to take any chance at all,” said branding expert Gene Grabowski, senior vice president of public relations company Levick Strategic Communications.

“What they might want to do is add something to it or change the formulation somehow so that they can legitimately make the assertion that the diapers are new and improved and safe,” he said.

P&G, which makes scores of household products from Head & Shoulders shampoo and Tampax tampons to Crest toothpaste and Tide laundry detergents, lost about 3 percentage points of diaper market share in the United States to rival diaper maker Kimberly-Clark (KMB.N), according to Connecticut-based research group Consumer Edge Research, which used data from the SymphonyIRI Group.

Consumer Edge Research released a survey last week of 2,500 U.S. households that found that the percentage of Pampers users who said they were dissatisfied with the product climbed to 11 percent in June from 7.7 percent in May.

The share loss coincided with parents’ complaints that the new diapers gave children rashes and blisters that were more severe than the usual, frequent cases of diaper rash.

“It was a pretty significant market-share loss in the last four weeks,” said Consumer Edge Research CEO Bill Pecoriello. “This is a major initiative of the company, and it was expected to drive share gains for the company for years to come.”

P&G saw a boost in its market share after introducing the new Pampers Dry Max diapers in March. Pampers, P&G’s biggest brand, does $8 billion in annual sales.

Promoted as thinner, more absorbent and environmentally friendly in an attempt to compete with cheaper store-brand diapers, P&G touted the new Pampers as one of its most significant innovations of the last 25 years.

But it’s beginning to look a lot more like Coca-Cola’s (KO.N) New Coke — a marketing disaster in the mid-1980s — than Apple’s iPad (AAPL.O).

A group of seven parents from across the country filed a lawsuit against P&G in May. Attorneys are seeking class-action status for the lawsuit, which, if granted, would mean consumers would be eligible to receive damages.

Angry parents also declared war online. A Facebook group asking P&G to return to the old Pampers formulation has more than 11,000 members. Parents in the group have posted stories about their children’s reactions to the diapers.

“I was walking down the baby aisle at Target today and saw a family with a young baby looking at Pampers. I just blurted out ‘please don’t buy Pampers!’” one mom wrote.

Those who told Consumer Edge Research they didn’t like Dry Max also said they would not buy Pampers again, Pecoriello said.

“It’s a good indicator of future purchases of the product,” he said. “It is beginning to have an impact.”

Since parents started complaining about rashes in April, P&G shares have fallen about 5.3 percent, while rival Kimberly-Clark’s shares are down 1.9 percent. The Standard & Poor’s Household Products index .GSPHOPR fell 4.7 percent.

P&G has seen diaper sales fall off at some retailers, but has confidence in the Pampers brand, spokesman Bryan McCleary said. The company said that Dry Max diapers went through extensive testing before reaching stores.

“We’re still seeing that millions and millions of moms and dads are buying Dry Max every week,” McCleary said.

P&G’s product updates usually allow the company to stay ahead of its competition, said Janney Montgomery Scott analyst John San Marco, who rates the stock a buy.

“P&G has proven pretty resilient in coming back from temporary market share onslaughts,” said Morningstar analyst Lauren DeSanto. Pampers Dry Max has done better overseas where the brand has not faced the same controversy, she said.

The company’s mistake was in getting defensive about the complaints, public relations experts said.

P&G’s claims that the lawsuit’s allegations were false and that diaper rash is common in infants, a statement issued after the lawsuit was filed, came off negatively to parents, Grabowski said.

That attitude riled some people who used social media to magnify what market research firm Euromonitor last month said could have been a “low-impact” problem.

The company has revised its marketing and increased its advertising and use of coupons, Grabowski said. P&G has begun to shift some of its marketing focus to fathers. It also said that fashion designer Cynthia Rowley will design a line of Pampers for discount retailer Target Corp (TGT.N).

“If this were some kind of tool or book or something that wasn’t used with infants, I think that Procter might have succeeded with that strategy,” Grabowski said.

P&G still must convince parents that Pampers are safe, he said. “Until they do that, there’s always going to be residual concern about the diaper.”

P&G shares were down 7 cents at $59.47 in midday trading on Friday on the New York Stock Exchange. Kimberly-Clark shares were up 15 cents at $60.79.

The lawsuit is: 1:10-cv-00301-SJD Clark et al v The Procter & Gamble Company et al, filed in the U.S. District Court for the Southern District of Ohio on May 11.

Reporting by Emily Stephenson. Editing by Robert MacMillan.

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