Forest Products -- Diaper War -- Weyerhaeuser Subsidiary Has No Huggies For The Competition

A billion-dollar corporate battle is raging for the hearts and pocketbooks of American parents, but for Marie Youngren it all boils down to a good night's sleep.

She picks a box of Luvs disposable diapers off the shelf at Toys R Us. Cloth diapers and other disposable brands, she says, did not keep her son's legs dry, or his sheets from becoming wet and clammy.

"With Luvs, he sleeps all night," says Youngren. "For working parents, sleep is the most important thing."

Diapers are a passionate subject for harried parents, and babies' bottoms are big business for a few powerful companies such as the Weyerhaeuser Co. Behind the choices on store shelves is an intense war of technology, manufacturing and marketing, targeted to make incremental improvements in disposable diapers and capture a bigger share of a slowly growing market.

One of the three top command posts in this war is here, at Weyerhaeuser headquarters. Weyerhaeuser's subsidiary, Paragon Trade Brands Inc., is the dominant maker of private-label disposable diapers in the nation. Paragon makes 2.5 billion diapers a year for dozens of retailers such as Safeway, Albertsons, K mart and Toys R Us, who put their own names on the packages.

The other command posts are in Cincinnati and Dallas, where the big brand names reside: Proctor & Gamble Co.'s Luvs and Pampers, and Kimberly-Clark Corp.'s Huggies. Together, the brands own three quarters of the domestic disposable diaper market, with Paragon owning the next biggest share, 13 percent.

Paragon's diapers are cheaper than the brands - from $2 to $3 less per package in some area stores - yet their quality was rated nearly as high by Consumers Reports magazine last year. Paragon has followed the brands' traditional lead in technical advances, and its diaper boxes list features conceived by scientists and engineers such as leakage control zones, tear-proof taping systems and multi-elastic legs.

Sharp improvements in quality and a cheaper price have helped Paragon, and other private-label diaper companies, take market share from P&G and Kimberly-Clark in recent years.

"You're going to get the cheapest diaper you can buy, without having it leak or cause rashes," says parent Cyndi McAlpine, reflecting common consumer sentiments.

Like other parents, McAlpine confirmed a trend reported in The New York Times last month. Concerned about the environment, many baby boomers tried cotton diapers, but have largely rejected them because of health and convenience. Disposables not only keep babies drier for longer periods of time, as McAlpine found, but there are concerns that cloth diapers may have environmental impacts just as egregious as disposables.

"We tried cloth, but it was a real scenario," says McAlpine. "She got rashes and everything got wet. It was a lot of work, and really difficult with our schedules."

Market-share gains have helped Paragon's bottom line, overcoming years of losses or flat earnings with $397 million in sales and $21 million in profits last year. But the brands are striking back.

Armed with huge research and development budgets, P&G and Kimberly-Clark are upping the ante. Kimberly-Clark began selling a diaper in May that is 50 percent thinner than other disposables and just as absorbent. P&G was to introduce its own super-absorbent diaper last month, but is test marketing it in Oregon first. The jury is still out on the super-thin diaper, yet stock market analysts consider P&G's delay to give Kimberly-Clark an upper hand in the diaper war.

The brands are competing on price, too. Paragon's Canadian sales fell significantly when the brands cut prices by 20 percent last year, and P&G reduced domestic prices by 7 percent this summer. The cuts will probably cost Paragon more sales, stock analysts say.

"The market is more competitive than usual," says Dan Fritts, a regional sales representative for Kimberly-Clark. "Price is a big concern, and we don't want the private labels to take anymore of our business."

Paragon's response strategy is to spend $197 million on capital improvements through 1997. This includes manufacturing efficiencies and a new plant, to augment its factories in Texas, Georgia, California, Pennsylvania, Kentucky and Ontario.

The company also is spending more on research and development, upping its budget to $5.7 million last year, from $3.6 million in 1990. It is working on a new training pant, but other product designs are tightly under wraps. Paragon is waiting to assess consumer reaction to Kimberly-Clark's ultra-thin diaper and P&G's new product.

Weyerhaeuser had planned to spin off Paragon as a public company, but canceled the stock sale in August, after P&G announced its price cuts. The markets are not receptive to initial public offerings to begin with, and the market for a diaper issue, in the face of more intense competition, is particularly unsettled, says Lowell Moholt, Weyerhaeuser's investor relations director.

Weyerhaeuser has declined requests to interview Paragon's top executives, or to tour its research center in Kent. The company still plans to spin off Paragon, possibly next year, says Moholt, and is abiding by a "quiet period" required by the Securities and Exchange Commission.

The only detailed information on Paragon is in a registration statement filed with the SEC in July. In it, Weyerhaeuser said it planned to sell 11.5 million shares of common stock at a maximum price of $17.50 a share, hoping to raise up to $201 million to capitalize Paragon.

Weyerhaeuser wants to sell Paragon because it does not fit with its core timber and pulp business. The Fortune 500 giant has been paring subsidiaries and plants as part of a 2-year-old corporate strategy to make its divisions the top performers in their markets. Offloading Paragon makes sense, analysts say: Weyerhaeuser is not a consumer company, and does not have the marketing acumen to go head to head with the diaper brands.

"P&G and Kimberly-Clark have locked up the market," says Mark Diverio, a forest-products analyst at Shearson Lehman. "Weyerhaeuser will never be better than a distant third."

"They don't want to part with it at a distressed price just to get the deal done," says Diverio.

Whatever happens to Paragon, Weyerhaeuser is sure to continue reaping profits from disposable diapers. Ironically, its plants make pulp - a major ingredient in disposables - for Kimberly-Clark and P&G. Weyerhaeuser also bought two pulp mills, along with three sawmills and Southern timberland, from P&G in August.

Weyerhaeuser is the world's biggest pulp supplier, and the former P&G plup mill in Flint River, Ga., will be producing pulp for Paragon's competitors.

------- PARAGON -------

-- Headquarters: Federal Way

-- President and chief executive officer: Bobby Abraham

-- Full-time employees: 1,555

-- 1991 sales: $397 million

-- 1991 net income: $21 million