SIC 2676
SANITARY PAPER PRODUCTS



This classification covers establishments primarily engaged in manufacturing sanitary paper products from purchased paper, such as facial tissues and handkerchiefs, table napkins, toilet paper, paper towels, disposable diapers, and sanitary napkins and tampons.

NAICS Code(s)

322291 (Sanitary Paper Product Manufacturing)

Industry Snapshot

The sanitary paper products industry manufactures paper into finished products with sanitary applications. According to the U.S. Census Bureau's Annual Survey of Manufactures (ASM), the value of shipments in the sanitary paper industry was approximately $7 billion in 2001. Projections indicate a steady increase throughout the next decade at about the rate of increase in the gross domestic product (GDP). A large majority of the products contained in this classification are branded consumer products sold in many different retail outlets, so the sanitary paper industry spends more on advertising than any other part of the paper industry.

There are three broad subcategories within the sanitary paper products industry: disposable diapers, which accounted for $3.63 billion of 2001 shipment values; sanitary tissue paper products, for $1.68 billion; and sanitary napkins and tampons, for $1.17 billion. A small "not specified by kind" segment accounted for about $117 million.

Many of the products within this classification are considered non-discretionary and, as a result, sales within this classification have followed different business cycles than those of more commodity-oriented paper lines. Although new sanitary products, such as adult incontinence products, have helped to expand the market, this industry tends to grow only as fast as overall gross domestic product. As in many mature markets, competition for customers is fierce. For example, tissue manufacturers continually seek to lower production costs because small gains can lead to major gains in either profit margins or market share. In order to maintain growth, firms have begun to focus on expansion abroad while at the same time continuing to segment the market and introduce new products domestically. Production of sanitary paper products is one of the few areas of the paper industry where major global corporations—notably Kimberly-Clark Corporation, The Procter & Gamble Company, and Fort James Corporation—operate manufacturing facilities in many locations around the world.

Most of the major companies in the sanitary paper products industry are integrated, in that they produce the raw materials for finished products, such as parent rolls of tissue at large paper mills, as well as the converted sanitary paper products, such as packages of bathroom tissue.

Organization and Structure

The majority of sanitary paper products are made from pulp or paper, though a significant percentage are made using the "nonwoven" process in which natural or synthetic fibers are bonded together by cohesion, friction, or adhesion. Sanitary paper products are usually divided into two sectors: consumer or commercial and industrial (C&I). Customers in the C&I category of sanitary paper might be schools, hospitals, or offices. C&I shipments comprise about 40 percent of sanitary tissue sales and a much smaller percentage of nonwoven sales.

Sanitary Tissue. Sanitary tissue products, the second largest segment of this industry, is divided into several subcategories. The largest of these is retail toilet tissue, which accounted for about a third of all sanitary tissue product shipments (by value) in the late 1990s. Commercial and industrial toilet tissue accounted for about 12 percent of shipments. Retail paper towels is another large subcategory, accounting for more than 22 percent of sanitary tissue product shipments, while industrial paper towels were another 10 percent of the market. Facial tissues were 9 percent, whereas industrial paper napkins (hand towels) accounted for 7 percent. Retail paper napkins held 4 percent of the market. All other sanitary tissue products accounted for nearly 6 percent of the market.

The processes used to make sanitary tissue products are very similar to those used to create other types of paper. In the standard papermaking process, wood fibers are stripped from wood chips in either a chemical or mechanical process to produce wood pulp. This pulp, a combination of wood fibers and water, is then spread on a continuous fine screen. The resulting mat is then passed over vacuum boxes (to remove some water) and run through successive drying and pressing processes until the finished paper product is achieved.

The major differences between general paper manufacture and tissue manufacture lie in the type of raw material used and the converting processes. Because of the relationship between the softness of the raw material and the softness of the final product, lightly refined softwood fibers are generally preferred for consumer-oriented products. These fibers come both from virgin fiber (wood) and from recycled fiber. In fact, the sanitary tissue products industry is one of the largest recycling industries in the United States. As of 1998, about 47 percent of all U.S. tissue was produced with fiber from purchased wastepaper (recycled paper), and 20 percent was produced from purchased virgin pulp. The remaining fiber was produced on site at integrated pulp and paper mills. Products for the C&I market typically place a higher premium on strength as opposed to softness, and are made from recycled paper or coarser grades of wood.

Once the tissue paper is formed, large, integrated producers typically convert it into consumer products on-site. (Smaller, nonintegrated converting operations purchase "jumbo rolls" of tissue paper on the open market.) Depending on the type of product, dyes and perfumes may be added and the paper may be embossed. The tissue is then prepared for market—facial tissues are folded and boxed, and bathroom tissue is rolled and prepared for shipment.

Nonwoven Sanitary Products. The nonwoven sanitary paper market consists of products that incorporate non-woven fabrics in their manufacture. Nonwoven products include disposable diapers and training pants, feminine hygiene products, adult incontinence products (including consumer and institutional adult pads and bed pads), and premoistened tissues (including baby wipes). Advances in nonwoven technology have increased the number of nonwoven applications and enhanced the use of nonwovens in existing applications.

Nonwovens are so named because the fibers (synthetic or wood pulp) used in their fabrication are bonded together instead of woven, as they would be in textile-type products. This bonding can take the form of an adhesive applied to the fiber mat before or after forming, or it can be the result of a chemical reaction. The typical nonwoven product incorporates many steps into its fabrication. A diaper, for example, will begin with a polyethylene outer shell. Dry formed wood pulp (fluff pulp) within layers of impervious nonwoven fabric is bonded to the shell. Glues, resins, and adhesives are used to bind the various components to one another. The typical adult incontinence pad, sanitary napkin, and tampon incorporate many of the same steps into their manufacture.

In the manufacturing process, nonwovens are often treated with super-absorbent polymers (SAPs) which can absorb as much as 70 to 80 times their weight in liquid. A further distinguishing feature of SAPs is that, unlike a sponge or other woven absorbent products, SAPs retain water even when squeezed. A sponge, for example, retains water in channels or pores. SAPs chemically bind with the fluid to form a gel. Under extremely heavy pressure, SAPs might release a type of gel, but most liquids remain in their chemical compound.

Aside from sanitary applications, nonwovens can also be found in other applications either as a substitute for cloth or in applications requiring a high degree of absorbency (filters, car covers, durable shop towels). Because most producers of nonwoven sanitary products are also producers of nonwoven fabrics, the strength of these related industries can also have an impact on these companies' results.

Marketing. After the final product is ready, the process moves from manufacturing to marketing. The need to market effectively drives two additional defining features of the industry. First, there is the need for extensive promotion: companies within the sanitary paper industry spend the highest percentage on advertising of any paper-producing industry. Second, companies have also recognized the need for sophisticated marketing techniques. Increased segmentation and "database marketing," using elaborate information banks to determine lifestyle predictors for a target segment, have become important success factors in the industry.

Establishment Size and Distribution. Unlike other grades of paper, many sanitary paper products—notably tissue products—are bulky, and it is not cost effective to ship them long distances. As a result, sanitary product converters have traditionally been located close to their end-use markets. This is especially true for more commodity-oriented product lines such as bathroom tissue and household towels. This is one of the reasons sanitary paper product manufacturers have developed a global network of manufacturing plants. For higher value-added products such as tampons and ultra-thin pads, or niche products such as premoistened tissues and baby wipes, producers typically supply markets from only one or two manufacturing facilities.

The twin requirements of converting massive amounts of raw materials and a highly competitive consumer marketplace have led to a high degree of concentration in the U.S. sanitary paper products industry. For example, at the end of 1999, four firms—Fort James Corporation, Kimberly-Clark, Procter & Gamble, and Georgia-Pacific Corporation—controlled 76 percent of U.S. tissue paper manufacturing capacity, with the top two firms controlling half of the total. Fort James (created by the 1997 merger of James River Corporation and Fort Howard Corporation) held about 29 percent of U.S. tissue paper manufacturing capacity, while Kimberly-Clark, following its 1995 merger with Scott Paper Company, held 21 percent of capacity. Procter & Gamble controlled an additional 14 percent, followed by Georgia-Pacific Corporation with about 12 percent. Georgia-Pacific's share increased sub-stantially in 1999 when it agreed to form a joint venture with Chesapeake's Wisconsin Tissue unit, which combined the companies' tissue making operations. The new unit, called Georgia-Pacific Tissue, was 90 percent owned and effectively controlled by Georgia-Pacific Corporation.

In the disposable diaper segment, market concentration is even more pronounced. The two leading firms, Kimberly-Clark and Procter & Gamble, shared about 80 percent of the market in 1998, with roughly equal shares. Private label products accounted for 18 percent, and other brands held 3 percent of the market.

Background and Development

The development of the sanitary paper market in the United States has paralleled the development of two broader categories the market represents, the paper and consumer products industry groups. The advances made in paper production technology from the latter half of the nineteenth century to the early part of the twentieth century that had an impact on the paper industry as a whole also impacted the sanitary paper industry.

Sanitary Tissue Products. As with most of the paper industry, the sanitary tissue sector owes much of its growth to advances in automation and wood processing made in the last century. The development of the fourdrinier paper machine in the first half of the nineteenth century allowed greater volumes of paper to be produced at a lower price. This process is particularly relevant for sanitary tissue because it is still the ideal process for lighter weight grades in general and tissue manufacture in particular.

Since 1850, ongoing developments in wood processing have provided paper manufacturers with a cheap, reliable source of raw materials. Prior to these discoveries, the main raw materials for paper production were rags, cloth, and straw. By the 1850s, mechanization had already substantially reduced the costs of producing paper, but constraints on the supplies of raw materials limited paper production to specific applications. Once a process was developed for wood fiber to be converted into pulp, greater applications for paper became possible and the sanitary paper industry was born. Paper began to find its way into more and more households and assumed the roles previously held by towels, leaves, and rags.

The marketing of sanitary paper products did not assume its current importance until the early part of the twentieth century. Prior to that, competition in the industry seemed to be oriented toward consolidation and acquisition. The United Paper Company made a series of acquisitions in the 1890s in an attempt to form a "tissue trust," but the trust was broken and the company forced into bankruptcy when other paper producers switched to tissue production and undercut the trust's position.

From the early part of the twentieth century, developments in the sanitary sector were not so much technology-as consumer-driven, and the role of the sanitary paper producer switched from being a provider of specific products to responding to consumer needs. The development of one company, Scott Paper Company, reflects many of these changes. In 1902, the company introduced Waldorf, one of the first branded bathroom tissues, and moved quickly into a position of dominance in this product line. Scott's invention of paper towels in 1907 further consolidated the company's position. By the 1950s, Scott held more than 50 percent of the sanitary tissue market. Over time, however, new product introductions and sustained marketing efforts by competitors reduced Scott's market dominance.

Perhaps it was Kimberly-Clark's long experience with marketing that allowed it to gain some of Scott's market share. In 1915, Kimberly-Clark developed Cellucotton, an absorbent wadding that was later used in feminine hygiene products. In 1924, Kimberly-Clark introduced one of the most ubiquitous brand names in America—Kleenex. Originally developed as a tissue for removing cold cream, the company found that it sold better as a disposable handkerchief; due to technological innovations in folding and packaging, Kimberly-Clark was able to market it as such.

Since these developments, the sanitary tissue sector has been marked more by evolutionary realignments than revolutionary innovations. The basic product offerings of the major producers in the sector have remained essentially the same, but improvements in quality, strength, and packaging, have been the driving forces in the market. Since the 1960s, the sanitary paper market has witnessed intensified competition among a number of strong competitors. Lowcost producers have captured large segments of the lowend market, and marketing and consumer product giants have gained substantial market share in the premium branded segments. James River Corporation of Virginia, founded in 1969, used acquisitions and joint ventures to expand its activities rapidly. James River evolved from a start-up operation in the early 1970s to the third largest tissue producer in the United States in the mid-1990s. In 1997, it merged with Fort Howard Corporation, the nation's leading producer of tissue for the C&I market, to form Fort James Corporation.

Nonwoven Sanitary Products. The nonwoven sector, with its emphasis on consumer goods, reflects the development of the power of marketing on American lifestyles. At the same time, the technological innovations in super-absorbent polymers and nonwoven fabrics have marked advances in the sector.

Disposable diapers comprise the largest subsegment in the sanitary products industry, with the value of product shipments reaching $4.13 billion in 1997. Procter & Gamble invented the category when it introduced disposable diapers with the Pampers brand in 1961. Since that time, the market has exhibited steady growth based mainly on increasing penetration rates. Continuous product enhancements and forceful marketing by the two main players in the disposable diapers field, Procter & Gamble and Kimberly-Clark, led to high usage rates. Annual new product introductions have kept competition high and have continuously improved the image of disposable diapers. Advances in nonwoven technology have led to improvements in absorbency and size reductions, enabling producers to achieve savings in transportation and packaging. The next generation of diapers is expected to allow for even greater absorbency, so as to stay dry even through multiple wettings. Another major development was the introduction by Kimberly-Clark of the Pull-Ups brand of disposable training pants for older children, which expanded the market.

Sanitary napkins and tampons generated about $1.56 billion in value of shipments in 1997. Kimberly-Clark first entered the consumer products segment in the 1920s with a sanitary napkin called Kotex. At first, societal norms prevented feminine care products from being publicized and displayed. Many magazines refused to carry advertising for feminine care products, and stores were reluctant to stock them. However, despite these barriers and the relatively high prices, consumer acceptance of the products was high.

The sanitary paper market experienced steady growth in the mid-1990s. The non-discretionary nature of many of its product lines seems to ensure a strong demand base. At the same time, many producers see limited growth opportunities in the domestic market. The aging of the American population, the relatively stable birth rate, and increasing competition all pose significant challenges for this industry.

The 1990s were marked by a series of massive mergers in the sanitary products market. The trend was started by the 1995 merger of Kimberly-Clark Corporation and Scott Paper Company. The merger of these two industry giants was valued at $9.4 billion, with Kimberly-Clark (K-C) being the surviving corporation. The new K-C is a massive presence in the sanitary paper products industry, controlling nearly 30 percent of the sanitary tissue market and about 40 percent of the disposable diaper market. The U.S. Justice Department, concerned about excessive market concentration, reached a consent decree with K-C before it approved the merger. Under the decree, K-C agreed to sell the Scotties facial tissue brand and its Fort Edward, New York tissue mill to Irving Tissue Inc. It also sold the former Scott wipes plant to its leading competitor, Procter & Gamble (P&G). The latter sale gave P&G a one-third share of the baby wipes market.

The K-C/Scott merger was followed by the 1997 linkup of James River and Fort Howard to create Fort James Corporation and the 1999 combination of the tissue units of Georgia-Pacific and Chesapeake Corporation. Fort James became the number one tissue producer in the United States and the number two producer worldwide.

Two of the major U.S. sanitary paper products producers moved away from vertical integration in the 1990s. Both Procter & Gamble and Kimberly-Clark sold much of their pulp making capacity, in order to establish long-term agreements with independent pulp producers. Both companies cited the need to put more money into their core marketing, operations, and research and development units as reasons for the divestitures.

Because production of tissue and tissue products is highly integrated, one of the major factors affecting the financial performance of the industry is the capacity to produce tissue. If there is excess capacity, prices of tissue tend to drop, as do retail prices for tissue products. When demand exceeds growth in capacity, tissue prices can rise sharply, as they did in 1994 and 1995. U.S. tissue manufacturing capacity grew 3.4 percent in 1999 to 7.1 million tons, thanks to the startup of several new machines and the "ramping up" of machines that came on line in 1998. Capacity grew an additional 2.8 percent in 2000, as more machines were brought on line.

Sanitary Tissue Markets. Although unit volume of sanitary tissue products grew steadily at about 2 percent in the mid-to late 1990s, the value of shipments was somewhat erratic, largely due to low underlying prices of tissue. However, the value of shipments began increasing again in 1994 and 1995 as major producers raised prices in response to dramatically higher prices for tissue paper and the wood pulp and wastepaper from which it is made.

In 1996, however, sharp drops in wood pulp and wastepaper prices helped increase profitability for major sanitary tissue product producers. These lower raw material prices allowed manufacturers to reduce prices modestly and still maintain profitability. For example, Procter & Gamble instituted a 5-to 8-percent price cut in early 1996 for various consumer tissue products.

Despite a sharp drop in pulp prices in late 1995 and early 1996, the overall decline in tissue pricing was only 3 percent in 1996. Steady demand, rising operating rates, and an increase in pulp prices during 1997 drove prices up modestly. The prices of tissue product stabilized in the late 1990s due to relatively low prices for tissue paper and low inflation in the general economy.

Producers have seen slow but steady growth in the disposable diaper market since the product's introduction. The value of shipments in this category was $4.13 billion in 1997, according to the 1997 Economic Census. Growth in the domestic diaper industry reached a plateau in the late 1980s and early 1990s with a decline in net births and stabilization of market penetration. Much of the sector's growth can be accounted for by increased market penetration and higher usage rates as the product has improved, yet marketers foresee limited opportunities for domestic growth.

As diaper penetration rates have stabilized, makers of disposable diapers have used their capabilities to introduce products for market segments exhibiting increasing growth. Some of these products include training pants (for children making the transition from diapers) and adult incontinence products. The adult incontinence segment is considered one of the fastest-growing in the country, albeit from a small base.

In the feminine care sector, sanitary napkin usage continued to decline in the mid-to late 1990s in favor of tampon usage. The value of shipments in the total sanitary napkin and tampon market was $1.56 billion in 1997, with feminine pads accounting for $866 million of the total (55.5 percent) and tampons accounting for $694 million (44.5 percent). The share of tampons peaked at around 50 percent in the late 1970s, but declined in the 1980s due to adverse publicity associated with toxic shock syndrome. Since then, medical improvements in tampon manufacture have led to increased acceptance of these products, and the tampon market rebounded.

Environmental Concerns. In the early to mid-1990s, environmental concerns and long-term access to fiber were two of the top issues facing the paper industry group. Restrictions on timber-cutting, new environmental regulations, and potential long-term fiber shortages are all concerns for many sectors of the industry. However, timber-cutting restrictions in the Northwest, which continued throughout the late 1990s, have had less of an impact on sanitary paper products industry, mainly because a large proportion of the industry's fiber base is in recycled paper.

Manufacturers of tissue, like other producers of bleached paper products, faced stricter air and water regulations under the Environmental Protection Agency's (EPA) "Cluster Rule," which was issued in its final form in April 1998. This rule further limited air and water discharges from bleached kraft pulp mills and other paper industry facilities, focusing on limiting discharges—particularly of dioxin, chloroforms, and other chlorinated organics arising from the pulp manufacturing process. Mills also faced new regulations promulgated by the EPA under revisions to the Clean Air Act of 1970 and Clean Water Act of 1972. However, mills that use recovered paper were expected to be less affected by these new rules than mills using wood pulp. This is significant for the sanitary paper products industry because nearly 50 percent of all tissue produced in the United States is made from recycled paper.

Producers of nonwovens have had other concerns. In the early 1990s, environmental pressure about disposable diapers in landfills caused some concern among producers. It even prompted Procter & Gamble to create a program to compost used diapers, although the experiment was eventually discontinued. However, diapers account for just 2 percent of solid waste in the average municipal landfill, and concern over this issue was dying down at the same time that the landfill crisis was easing. By the mid-1990s, new landfills were being opened, and it was discovered that available landfill space had been drastically underestimated.

Although the United States is still an enormous market, most producers see their greatest opportunities for growth in the sanitary paper markets in overseas expansion. The relatively large size of U.S. producers compared to their foreign counterparts, the marketing strength of U.S. companies, and relatively low levels of penetration of sanitary products in developing nations indicate continued globalization efforts.

Current Conditions

The pulp and paper industry in North America was negatively affected by the economic recession of 2001, along with the terrorist attacks of September 11, and the demand for most paper fell. Shipments saw declines, along with product prices. In addition, high energy costs and inexpensive imports from Europe drove the U.S. paper and pulp industry into a further slump. Producers were forced to cut production due to the declining demand, and several small, single mill operations closed down. U.S. paper and paperboard production as a whole declined 5 percent in 2001 to approximately 4.7 million tons.

Other common issues facing the three main segments of the hygiene market—made up of baby diapers, feminine hygiene, and adult incontinence—include high penetration levels in the North American, European and Japanese markets. Another common issue among the three is the constant demand to innovate, which include being more absorbent and less bulky or offering more features.

With all sectors experiencing a decline in sales, among the three broad subcategories within the sanitary paper products industry, disposable diapers accounted for $3.63 billion of 2001 shipment values; sanitary tissue paper products, $1.68 billion; and sanitary napkins and tampons, $1.17 billion. A small "not specified by kind" segment accounted for about $117 million. One segment experiencing growth was adult incontinence, which rang up $553.3 million in sales in 2001, up more than 7 percent from 2000. Solid sales in the sector were reportedly due to the increasing number of older Americans and increased life expectancy among the elderly. Most of these products were sold in drug stores, with supermarkets and discounters like Wal-Mart gaining increased market shares. Kimberly-Clark Co.'s Depend was by far the leading brand in the segment.

Easing environmental concerns, in late 2002 it was announced that the first disposable baby diaper recycling program would be launched. With nearly 20 billion disposable diapers weighing 7 billion pounds being added to U.S. landfills each year, according to the EPA, disposable baby diapers are reportedly the biggest single contributor to landfills. Leading the recycling technology, Knowaste Technologies Inc. launched a six-month pilot program in one California city whose residents would place used diapers in specially designed plastic bags or bins to be placed curbside and picked on their regular garbage day. The diapers would be sanitized and the recycled plastic used for plastic wood production, roof shingles, and vinyl wood siding and the recycled pulp could be recycled for a variety of uses. The program was the first of its kind in the United States.

Industry Leaders

The largest companies within the sanitary paper product industry are Georgia-Pacific Corporation, Kimberly-Clark Corporation, and The Procter & Gamble Company.

Since acquiring tissue industry leader Fort James Corporation in 2000, Georgia-Pacific Corporation is now one of the leading providers of tissue, as well as being the number-two paper and building products company in the world behind International Paper. Some of its well known consumer paper products include Angel Soft, Brawny, Dixie, Green Forest, Mardi Gras, Quilted Northern, So-Dri, Soft 'n Gentle, Sparkle, and Vanity Fair. Sales in 2002 were $23.27 billion, down 7 percent from the previous year. The company employs 61,000 people.

Since its merger with Scott Paper Company, Dallas-based Kimberly-Clark Corporation has grown into an even more dominant presence in the sanitary products market. In 2002, K-C's sales were $13.5 billion, making K-C the number one maker of personal paper products in the world. K-C is a global manufacturer and marketer of products for personal, business, and industrial uses. Nearly all of its products are made from natural and synthetic fibers. K-C now operates manufacturing facilities in 38 countries, with products available in 150 countries.

With brands including Cottonelle, Kleenex, Scott, Huggies, and Kotex, K-C holds commanding market shares in many segments of the sanitary paper products industry. Its diaper brands accounted for about 40 percent of the North American market and its facial tissue brands held over 50 percent of the North American market. K-C also dominates the adult incontinence products market, with over 50 percent market share.

Procter & Gamble of Cincinnati, Ohio, is one of the world's largest consumer products companies, with revenues of more than $40 billion in 2002. P&G operates in 140 countries and in 1998 spent $3.27 billion on acquisitions, most of them in the paper business. They included Tambrands Inc. and its global leading brand, Tampax; the Loreto y Pena Paper Company in Mexico; and the Ssanyong Paper Company in Korea. In North America, the company's paper sector generated 10 percent unit volume growth compared with 1997. P&G's Charmin brand dominates the U.S. consumer toilet paper segment, holding 30 percent of the market. With about 37 percent of the disposable diaper business in 1998, P&G continues to battle with K-C, which held about 40 percent of the market.

Disposable training pants for toddlers, a market invented by Kimberly-Clark in 1989 with its Huggies Pull-Ups, were the area of fiercest competition between P&G and K-C in 2002. P&G's newly launched Pampers Easy Ups made heavy inroads that year to gain 15 percent of the $1 billion training-pants market in the United States and reducing Pull-Ups' 50 percent share by 9 percent.

The U.S. feminine hygiene market has a number of players. P&G's Tampax was the most popular tampon in 2002, with 32.6 percent share of the market. Playtex Product's Playtex Gentle Glide won a 21.9 percent share of the market, and K-C's Kotex Security came in third place, with 12.6 percent share of the tampon market.

Workforce

According to the U.S. Census Bureau's Annual Survey of Manufactures, the sanitary paper products industry employed 15,489 people in 2001, which included 11,871 production workers. Wages in this industry for production workers are much higher than other industries in the paper and allied products group, averaging $17.36 per hour in 2001.

America and the World

The capital-intensive nature of paper manufacturing means that cheaper overseas labor has less of an impact on manufacturing costs than in other, more labor-intensive industries. U.S. manufacturers face little threat from abroad; only one foreign paper manufacturer, Finland-based Molnlycke, has established a significant presence in U.S. sanitary markets. The internationalization of the sanitary paper industry has meant U.S. firms going abroad. Superior product quality and marketing ability has given the United States a competitive advantage in a number of foreign markets.

For most sanitary paper producers, Europe is viewed as particularly promising—the European Community contains 5 percent of the world's population but consumes 25 percent of the world's sanitary tissue. This compares with 3 percent and 40 percent, respectively, in the United States. This is one of the factors behind P&G's acquisition of VPS AG, a major European tissue manufacturer, in 1995. Through the 1990s, nearly all of the large U.S. producers had secured market positions in the European Union. Fort James even ventured into Russia, setting up a production and distribution venture there.

The prospects of greater access to global markets was one of the key elements behind the merger of K-C and Scott Paper in 1995. Scott Paper had more extensive European operations than K-C, and the combination of the two made K-C a powerful competitor in Europe. In fact, before the deal was allowed to go through, governing bodies of the European Union required significant divestitures, including selling the Kleenex tissue and towel lines in Europe, Scotties boxed facial tissue, and Handy Andies facial tissue in the United Kingdom and Ireland. K-C was also forced to sell its Prudhoe, England, tissue mill. In 1998, K-C was the leading European producer of consumer tissue products, though its operations there were challenged by aggressive competition from local manufacturers.

In Asia, U.S. sanitary paper producers have had limited success penetrating the Japanese market but much more success in the rest of Asia. The Japanese market is highly fragmented and thus viewed as vulnerable to the sophisticated marketers of U.S. products, but intricate supplier-retailer relationships have thus far prevented any U.S. producer from establishing a significant presence.

However, U.S. companies' penetration of the fast-growing "rest of Asia" market is much greater. For example, K-C holds a strong position in Taiwan, Korea, and the Philippines. K-C joint ventures in Indonesia, Malaysia, and China are also generating strong sales growth.

Research and Technology

Changes in the manufacture of paper have historically been evolutionary rather than revolutionary. The processes used to manufacture paper from rags in the middle of the nineteenth century are in many forms still used today. Much of the research and technology in this industry is focused on lowering incremental manufacturing costs, because the ability to be the low-cost producer can translate into a strong market advantage. Also, the ability to produce softer and stronger paper is a significant focus of sanitary paper products research and development. For example, Procter & Gamble's development of "through-air-drying" helped it develop the Charmin brand, which had superior bulk and softness compared with other products. Baby diapers lead the segment in terms research and development.

Increased innovation was an important trend in 2001, translating into products that were more comfortable, breathable, and stretchable. Baby and adult diapers saw improvements, including graphics that indicated the level of wetness of the outside of the diaper; more elastic in waist belts and legs; and more breathable cloths. Sanitary napkins innovations included better fit and thinner designs, and tampons benefited from better leakage protection. Of the 143 patents in the nonwovens industry from August 2001 to July 2002, 121 (91 percent) related to absorbent applications.

Because companies in this industry are highly competitive, their research and development programs are tightly guarded secrets. Many companies will not allow tours of their tissue-making operations for fear of industrial espionage.

Further Reading

"Absorbent Products Patents Review." Nonwovens Industry, August 2002.

"Adult Incontinence." Nonwovens Industry, March 2003.

Boyle, Matthew. "Dueling Diapers." Fortune, 17 February 2003.

"First Time Technology Used in U.S." Nonwovens Industry, December 2002.

"Hygiene Machinery Update." Nonwovens Industry, January 2003.

"Outlook 1999: Paper Markets Will Remain Weak As Demand Slows; Recovery Delayed." Pulp & Paper, January 1999.

"Outlook 2002: Inventory Levels, Fiscal Stimulus Offer Hope for Mid-2002 Price Recovery." Pulp & Paper, January 2002.

Paper, Paperboard, Pulp Capacity and Fiber Consumption. Washington, D.C.: American Forest & Paper Association, 1999.

"Papermaker's Top 50 Paper Companies." PIMA's North American Papermaker Magazine, June 1999.

"The Changing Face of U.S. Tissue Manufacturing." PIMA's North American Papermaker Magazine, August 1999.

U.S. Census Bureau. Annual Survey of Manufactures. Washington, DC: 12 December 2002. Available from http://www.census.gov .



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