A recent study from Nielsen on the baby products market points out that while global baby care consumers are more likely to buy baby items in a physical store, more consumers are starting to make the switch to online channels. According to a global survey they conducted, the Asia-Pacific region leads the pack in terms of online purchases for baby products, with 31% of respondents reporting they have bought baby diapers online. Furthermore, 16% of respondents in North America, 15% in Latin America, 14% in Africa/Middle East and 13% in Europe reported online purchases of diapers.
To find out how the web is changing things up in the baby diaper market, Nonwovens Industry spoke with diaper industry consultant Pricie Hanna, managing partner of Price Hanna Consultants.
Nonwovens Industry (NWI): Newcomers to the baby diaper market, such as the Honest Company and Parasol, are starting their businesses off on the internet rather than in a physical store. Does this help new diaper makers enter the market, making it easier than in the past to introduce a new diaper to the world?
Pricie Hanna (PH): Newcomers to the baby diaper market really don’t have any choice for branded diapers other than starting their own website for internet orders. Diapers are such a huge category. If a diaper manufacturer were to walk into a major retailer and say, “Here’s my new diaper,” the retailer would say, “What’s your advertising budget? Are you prepared to cover all of our stores nationwide overnight?” It’s just too big of a challenge to start that way as a branded product.
The online sales start-ups are typically companies that pursue branded market positions for specialty diapers that offer features such as a wide selection of print patterns, designer prints or environmentally-friendly materials. New entrants need to have some point of differentiation that consumers prefer or they won’t be successful. Initially, these companies typically contract out for the actual manufacturing of their diapers. They’re not set up to make billions right away. The internet gives new brands an ability to try out a differentiation strategy. They still have to be very aggressive in marketing their diapers using social media and public relations activities as well as their websites—but it’s a feasible entry strategy and an approach that enables new competitors to learn and fine-tune their diaper designs and market positioning much faster.
NWI: How are newer brands that rely on online sales changing things up in the diaper market?
PH: Honest and Parasol are examples of aesthetic differentiation for diapers. They’re essentially a new sub-segment. We’ve also seen a lot of new environmentally-friendly diapers come on initially through the internet and then ultimately through retail. But I would consider Honest and Parasol to be designer diapers. They’re focusing on attractive backsheet prints and they’re also developing product bundles. Because Parasol’s so new, they’re just bundling with wipes, whereas Honest bundles with a lot of related products.
There are some differences in the way the companies approach subscriptions and bundling. Parasol is focused on marketing upscale, premium diapers and wipes as well as building active customer relationships. Honest obviously has a much broader selection of patterns at this point, and they change them seasonally. Honest’s diaper designs are somewhat more conventional. Parasol strikes me as having a more avant-garde type of fashion design. So I think each company is going after—to some extent—different audiences. But they’re both premium priced even with discounts for subscriptions and bundled with wipes. They come closer to the pricing of the premium global brands, but I think the internet is just perfect for that kind of strategy.
NWI: Amazon was quick to halt manufacturing of its own brand diaper after receiving negative comments on their performance. If Amazon re-enters the market with a successful diaper, how do you think this will affect the market?
PH: To me, the amazing thing about Amazon is the way they analyze their sales data. They can understand consumer reactions to new products, respond rapidly and take corrective action quickly, as they did when their Amazon Elements Soft & Cozy diapers didn’t satisfy consumer expectations. And that means that for every other diaper that is sold through them, such as the Huggies and Pampers product lines, they have the most amazing data profiles in terms of relative price levels, repeat purchases and how fast other brands in the same market segment are being sold, etc. So they’re very well positioned to make a strategic decision on whether to come back with a diaper. It is interesting to note that they decided not to withdraw their Elements brand baby wipes because they received good consumer feedback on these wipes.
It’s been very well reported that Amazon has done a recent survey regarding baby diapers that everybody’s speculating about; speculating on if this means they’ll come back with a new diaper. I think Amazon will look at all their data and say, “Is there an opportunity? Is there room for a diaper under our name? and What does our name add?” And the most important decision is going to be the right price position for the diaper specifications and product features that they select. I suspect that the price and the diaper features were a mismatch in Amazon’s original diaper that was launched in late 2014. It wasn’t that the diaper was all that bad, but people expected it to be a premium diaper and it wasn’t. I would certainly not say that Amazon will never launch a baby diaper under their own name again. But when and exactly what combination of price differentiation and feature differentiation they’ll use - we’ll have to see. It could go either way. Amazon could seek a premium price position and compete directly against all the novel features that consumers prefer in the premium diapers sold by P&G and Kimberly-Clark, or they could decide to deliver a very good diaper at a price that nobody else could beat. The later strategy would be a typical private label concept. The Amazon name is trusted for delivering known branded products on time and at a good value. I think Amazon customers will select and purchase diapers based on the perceived value of the diaper itself.
NWI: Are online diaper sales becoming more important to diaper manufactures?
PH: Yes – no question about it. Consider the evidence of P&G’s collaboration with Amazon in providing floor space in their warehouse for Amazon’s order fulfillment operations. P&G simply carries in a forklift truck for the diaper boxes purchased by Amazon to the Amazon side of P&G’s warehouse so that Amazon can efficiently apply labels and directly ship diapers to Amazon’s customers. Once word got out that P&G had leased space in their warehouse to Amazon, you would be amazed at the number of warehouse space offers Amazon received from other consumer packaged goods companies.
Also, online sales are basically becoming more important to the extent that they provide strong differentiation or highly competitive pricing for bulk product bundle shipments or subscriptions for ongoing product delivery. There’s a limit to how much consumers will go for the convenience of internet ordering and home delivery beyond that early “I’ve got a newborn at home” stage if pricing isn’t competitive. Amazon’s diaper pricing used to be rather high, but now consumers can get all the top brands and competitive pricing as long as they do it through an Amazon Prime subscription. The other leading retailers have also introduced competitive diaper subscription and delivery services.
Regarding the Honest Company, they have a smart strategy and they’re clearly growing. I think what fuels it is that they are attracting interest with their cute print patterns while fulfilling the need for convenient home delivery. Honest’s diapers are available at Target, but consumers have to pick them up in store. While shopping at Target, if the mom or dad is intrigued with a combination of patterns seen in the Honest diapers on the shelves, they might purchase them in the store to try them and ultimately be motivated to arrange an online subscription to ensure supply of their preferred patterns.
NWI: Are you noticing online diaper purchases becoming more popular in specific geographic regions, similar to what the Nielsen study found?
PH: What has fascinated me is the large growth in online orders in China. It’s interesting that the Nielsen report suggested that the reason for this growth is that a lot of people in rural China don’t have other access to diapers. However, I think a more important driver of online growth may be within the urban, now middle class populations, because they have good earnings and they have a strong preference for premium brands. The premiumization trend in China has been remarkable. In China it is fueled by a trust issue, especially for baby products. This is the country that went through a major baby milk formula scandal, so middle class parents are concerned about safe, healthy and gentle products for their babies. This concern has caused these parents to seek convenient ways access to reliable, high quality diapers that are made in Japan, the U.S. or Western Europe. With families of only one or two babies supported by the incomes of their parents and often grandparents, buying the best baby products is an affordable priority for the middle class.
Going back two years ago, Kao couldn’t keep their diapers in stock in Japan because traders were buying up everything they could buy in Japan, importing them into China and selling them for a higher price, which they could do in China, so made money on the trade transactions. The driving forces of premiumization and trust have really stimulated growth in the diaper market in China facilitated by surging consumer usage of the internet and mobile phones in the cities.
The big internet sites in China are bringing the premium diapers in from Japan, Europe, etc. By ordering diapers online, people really know that they’re buying a diaper that’s made in Japan, or any of the western global brand names that appeal to this segment of the population. Through internet purchases, Chinese consumers have gotten to know and trust the global premium diapers made by companies like Kimberly-Clark, Unicharm and P&G. I think that the preference for premium brands and the trust issue that’s coming from the urbanites with rising incomes is probably the major reason why Asia-Pacific online purchasing is higher than other regions.
The global diapers leaders also produce premium diapers in China and strive to convince Chinese consumers that their “made in China” products also are premium design, high quality diapers. For example, Chinese parents can find Unicharm diapers that are made in China with a small logo on the package saying “Japanese design.” They can’t say they’re made in Japan because they’re not, but it’s the Japanese design that appeals to the trust and premium preference in China.
Also, the emerging markets in the Asia-Pacific region do not have large chains of major retailers with a lot of space and private label. They haven’t had time to develop that entire infrastructure, so savvy consumers go right to the internet. In the U.S. we might say, “I’m going to go to Costco and buy a big box of diapers that are a good deal.” Consumers can also do that in Japan, but it’s not easy to do in the average Chinese city. They don’t yet have the equivalent, on the ground retail infrastructure so the young people are essentially skipping that phase and going right to the internet.