EPA-230/1-73-026
AUGUST 1973
ECONOMIC ANALYSIS
OF
PROPOSED EFFLUENT GUIDELINES
SOAP and DETERGENT INDUSTRY
QUANTITY
U.S. ENVIRONMENTAL PROTECTION AGENCY
Office of Planning and Evaluation
Washington, D.C. 20460
i
c>s
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This document is available in limited quantities
through the U. S. Environmental Protection Agency,
Information Center, Room W - 327 Waterside Mall,
Washington, D.C. 20460.
The document will subsequently be available
through the National Technical Information Service,
Springfield, Virginia 22151.
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EPA - 230/1-73-026
ECONOMIC ANALYSIS
OF
PROPOSED EFFLUENT GUIDELINES
SOAP AND DETERGENT INDUSTRY
AUGUST 1973
by
Colin A. Houston
Frederick C. Herot
Norman S. Douglas
Alfred W. Fleer
Contract Number 68-01-1566
U.S. ENVIRONMENTAL PROTECTION AGENCY
Office of Planning and Evaluation
Washington, D.C. 20460
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This report has been reviewed by the Office of Planning
and Evaluation, EPA, and approved for publication. Ap-
proval does not signify that the contents necessarily
reflect the views and policies of the Environmental
Protection Agency, nor does mention of trade names or
commercial products constitute endorsement or recom-
mendation for use.
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PREFACE
The attached document is a contractor's study prepared for
the Office of Planning and Evaluation of the Environmental
Protection Agency ("EPA"). The purpose of the study is to
analyze the economic impact which could result from the ap-
plication of alternative effluent limitation guidelines and
standards of performance to be established under sections
304(b) and 306 of the Federal Water Pollution Control Act,
as amended.
The study supplements the technical study ("EPA Development
Document ) supporting the issuance of proposed regulations
under sections 304(b) and 306. The Development Document
surveys existing and potential waste treatment control
methods and technology within particular industrial source
categories and supports promulgation of certain effluent
limitation guidelines and standards of performance based
upon an analysis of the feasibility of these guidelines
and standards in accordance with the requirements of sec-
tions 304(b) and 306 of the Act. Presented in the Develop-
ment Document are the investment and operating costs assoc-
iated with various alternative control and treatment tech-
nologies. The attached document supplements this analysis
by estimating the broader economic effects which might re-
sult from the required application of various control
methods and technologies. This study investigates the ef-
fect of alternative approaches in terms of product price
increases, effects upon employment and the continued via-
bility of affected plants, effects upon foreign trade and
other competitive effects.
The study has been prepared with the supervision and review
of the Office of Planning and Evaluation of EPA. This re-
port was submitted in fulfillment of contract number
68-01-1566 by Colin A. Houston & Associates, Inc. Work was
completed as of August 31, 1973.
This report is being released and circulated at approximately
the same time as publication in the Federal Register of a
notice of proposed rule making under sections 304(b) and 306
of the Act for the subject point source category. The study
has not been reviewed by EPA and is not an official EPA pub-
lication. The study will be considered along with the in-
formation contained in the Development Document and any com-
ments received by EPA on either document before or during
proposed rule making proceedings necessary to establish final
regulations. Prior to final promulgation of regulations, the
accompanying study shall have standing in any EPA proceeding
or court proceeding only to the extent that it represents the
views of the contractor who studied the subject industry. It
cannot be cited, referenced, or represented in any respect in
any such proceeding as a statement of EPA's views regarding
the subject industry.
ii
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CONTENTS
INTRODUCTION 1
EXECUTIVE SUMMARY 3
Introduction Of Summary Of Impacts 3
Methodology 3
Segmentation 3
Cost 7
Financial Profile 8
Impacts 10
Limitations 11
I INDUSTRY PROFILE AND SUBGROUPS 13
Definition Of The Soap And Detergent
Industry 13
II ECONOMIC AND FINANCIAL CHARACTERISTICS 23
Introduction 23
Macroanalysis 23
Microanalysis 28
III INDUSTRY MANUFACTURING PROFILE 47
Introduction 47
Manufacturing Plant Segmentation By
Unit Process 49
Soap Manufacture 49
Detergent Manufacture 54
Effluent Treatment 57
IV THE SCOPE OF THE IMPACT ANALYSIS 59
V MODEL PLANTS 63
VI METHODOLOGY FOR ENGINEERING ANALYSIS 65
VII METHODOLOGY FOR FINANCIAL ANALYSIS 67
VIII MODEL OF A SMALL SOAP PLANT 69
Financial Analysis 71
Summary 81
IX MODEL OF A SMALL LIQUID DETERGENT PLANT 83
Financial Analysis 84
iii
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X MODEL OF A LARGE INTEGRATED PLANT 93
Wastewater Volume Generation 96
Pollutant Concentration 97
Treatment Plant 97
Financial Analysis 97
Summary 101
XI SUMMARY OF FINANCIAL MODELS 107
XII PRICE EFFECTS 109
The "Big Three" 109
Private Brand Household 109
Soap And Detergent 110
Industrial And Institutional Cleaners 110
Glycerine Producers 111
Summary 111
XIII PRODUCTION EFFECTS 113
Equipment Installation 113
Operation Costs 114
Production Curtailment 114
Plant Closings 114
Industrial Growth 114
XIV EMPLOYMENT AND COMMUNITY EFFECTS 115
XV INDUSTRY GROWTH AND BALANCE OF
PAYMENT EFFECTS 117
XVI LIMITS OF THE ANALYSIS 119
XVII BIBLIOGRAPHY 121
TECHNICAL REPORT DATA PAGE 123
iv
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TABLES
Number Title
1 Soap And Detergent Processes Expected To
Require Modification Due To Guideline
Recommendations 9
2 Summary Value Of Shipments Of Soaps And
Detergents - SIC 2841 Manufacturer'^ Level 14
3 Soaps And Other Detergents Detail Product
List - SIC 2841 15-17
4 United States Glycerine Production 20
5 Production Of Selected Fatty Acids 21
6 General Statistics By Employment Size Of
Establishments-.1967 25
7 Selected Industry Data On An Establishment
Basis And On A Company Basis - 1963 27
8 First-4 And First-8 Companies, SIC 2841 ' 29
9 Procter And Gamble Company Five Year
Financial History 30
10 Unilever N.V./Lever Brothers Five Year
Financial History 31
11 Colgate-Palmolive Five Year Financial History 32
12 Purex Corporation Ltd. Five Year Financial
History , 33
13 SIC 2841 Impact ; ... 36
14 Value Of Shipments And Value Added As
Measures Of Efficiency By Industry Group
From Establishment Data, 1967 38
15 Selected Operating Ratios, 1967 40
16 Operating Characteristics Of A Secondary
Treatment Plant 57
17 Lower Quartile Ratio Data 71
18 Small Model Soap Plant - Lower Quartile Data -
Impact Analysis For Levels I, II, and III
Technology 73
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19 Small Model Soap Plant - Lower Quartile Data -
Statement Of Income And Expense 74
20 Small Model Soap Plant - Lower Quartile Data -
Balance Sheet 75
21 Median Ratio Data 76
22 Small Model Soap Plant - Median Data -
Impact Analysis For Levels I, II, And III
Technology 78
23 Small Model Soap Plant - Median Data -
Statement Of Income And Expense 79
24 Small Model Soap Plant - Median Data-
Balance Sheet 80
25 Upper Quartile Ratio Data 84
26 Small Model Liquid Detergent Plant - Upper
Quartile Data - Impact Analysis For Levels
I, II, And III Technology 85
27 Small Model Liquid Detergent Plant - Upper
Quartile Data - Statement Of Income And
Expense 86
28 Small Model Liquid Detergent Plant - Upper
Quartile Data - Balance Sheet 87
29 Small Model Liquid Detergent Plant - Median
Data - Impact Analysis For Levels I, II, And
III Technology 89
30 Small Model Liquid Detergent Plant - Median
Data - Statement Of Income And Expense 90
31 Small Model Liquid Detergent Plant - Median
Data - Balance Sheet 91
32 Model Of A Large Soap And Detergent Plant 93
33 Wastewater Generation - Present vs Expected 96
34 Large Model Integrated Plant - Upper Quartile
Data - Impact Analysis For Levels I, II, And
III Technology 99
vi
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35 Large Model Integrated Plant - Upper Quartile
Data - Statement Of Income And Expense 102
36 Large Model Integrated Plant - Upper Quartile
Data - Balance Sheet 103
37 Large Model Integrated Plant - Median Data-
Impact Analysis For Levels I, II, And III
Technology 104
38 Large Model Integrated Plant - Median Data-
Statement Of Income And Expense 105
39 Large Model Integrated Plant - Median Data-
Balance Sheet 106
vii
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INTRODUCTION
Pursuant to the Federal Water Pollution Control Act Amend-
ments of 1972, Colin A. Houston & Associates, Inc. (CAHA)
was engaged by the EPA on January 16, 1973, Contract
68-01-1517, to undertake a technical study of the soap and
detergent industry for the purpose of assessing its role in
water pollution. Carrying out its assignment, CAHA identified
and described the various manufacturing processes employed
in producing soaps and detergents. Having done so, CAHA then
studied the effluent streams associated with each manufacturing
process. The nature and quantity of the pollutants in each
stream was ascertained by sampling and analysis. Next, with
a full knowledge of the processes and pollutants to be en-
countered in the industry, treatment technology was reviewed
to find technically feasible means of achieving pollution
control. Finally, all factors uncovered in the CAHA study
were carefully weighed and effluent limitation guidelines
recommended.
In the Federal Water Pollution Control Act Amendments of
1972, Congress directed the EPA, in promulgating effluent
limitation guidelines, to consider the economic and social
costs involved and their relationship to the economic and
social benefits to be obtained. Thus, in carrying out its
mandate insofar as it applies to the soap and detergent in-
dustry, EPA let a second contract, #68-01-1566, to CAHA on
June 25, 1973 to assess the economic impact of the guide-
lines recommended in the earlier CAHA technical study.
This report on the economic impact of the proposed effluent
limitation guidelines and standards for the soap and deter-
gent industry, SIC 2841, deals with the industry in terms
of its products, its participants and its technology. Ag-
gregate data for the industry is analyzed on both an intra-
industry and interindustry basis. The ranking of the industry
vis-a-vis concentration ratios with respect to worker pro-
ductivity is reviewed. Data on an establishment basis is
also analyzed. Then industry growth and geography are re-
viewed. Next, a microanalysis is undertaken, identifying
the "big three" in the industry within the context, the
number, and size distribution of the industry participants.
The industry is then segmented for further study: Segment I
is made up of the first four largest companies in the indus-
try. Segment II is made up of the second four largest com-
panies in the industry. Segment III is made up of the rest
of the companies in the industry.
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The oligopolistic nature of -the industry is analyzed with
respect to price competition, advertising, product differen-
tiation, barriers to entry, and price elasticity of demand.
It is generally concluded from the available data that the
relative impact of the proposed effluent limitation guide-
lines and standards, recommended by the guideline contractor,
will fall most heavily on Segment III and least heavily on
Segment I.
It is predicted that the economic impact of the guidelines
will increase manufacturing costs especially for the smaller
less efficient producer. As manufacturing costs increase,
it is predicted that there will be a corresponding increase
in prices.
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EXECUTIVE SUMMARY
INTRODUCTION OF SUMMARY OF IMPACTS
As shown in this report, the impact of effluent limita-
tion standards and guidelines recommended for the soap
and detergent industry is of serious consequence to both
large efficient companies and the less efficient smaller
companies.
METHODOLOGY
In assaying guideline impact, a number of tasks were
completed. For example, the industry was defined in terms
of its product, its participants and its technology. A
macroanalysis was made. Aggregate data on the industry
as a whole was analyzed on both an intra-industry and inter-
industry basis. Factors considered included the rank of
the industry vis-a-vis concentration ratios with respect
to worker productivity; industry growth; and geography.
A microanalysis was made in which individual companies
were analyzed. The "big three" in the industry were iden-
tified vis-a-vis context, number and size. Finally, three
hypothetical plants were modeled for the purpose of analyzing
the financial impact of the effluent guidelines.
SEGMENTATION
For detailed study, the industry was divided into three
segments. Segment I comprised the four largest companies
in the industry. Segment II comprised the second four
largest companies. Segment III included the remaining
companies.
Segment I
Procter & Gamble Company
Lever Brothers Company
Colgate-Palmolive Company
Purex Corporation, Ltd.
Segment II
Amway Corp.
Armour Dial Division, Greyhound Corp.
Economics Laboratory, Inc.
Chemed Division,W. R. Grace and Company
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Segment III
Remainder of the'Industry
Segment I, with the exception of Purex Corporation, Ltd.,
is composed of multinational corporations having individual
annual sales in excess of a billion dollars, most of which
is derived from the sale of household products. Purex
sales are estimated at $400 million for 1973.
Segment II comprises medium sized companies, or soap and
detergent divisions of large companies, generally strong in
specialty and industrial products.
Segment III comprises the balance of the industry, over 350
companies whose sales range from $20,000 to $50,000,000 per
year.
Aggregate plant data indicates that the efficiency of the
three groups corresponds generally to their ordering.
Segment III has high cost of materials and payrolls when
measured against the average. Segment II has the lowest cost
of materials and Segment I has the highest ratio of production
workers to total employees and the lowest payroll as a per-
centage of value added.
Technical Study
The economic impact statement contained herein builds and
costs three model plants. The models are impacted with
Level I, Level II, and Level III guidelines.
Level I - BPCTCA - Best practicable control technology
Level II - BATEA - Best available technology economically
achievable
Level III - BADCT - Best available demonstrated control
technology
The models hypothesized are:
1. A small soap company
2. A small liquid detergent company
3. A very large integrated soap and detergent company
All of the models are postulated to be single plant com-
panies. The in process changes necessary for the small
plants to meet the guideline raw waste loadings are pos-
tulated and costed. It is evident from this study that if
these raw waste loadings were required as pretreatment
standards, the viability of the small companies would be
in jeopardy.
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The large integrated soap and detergent company is costed
to meet the recommended raw waste loadings and then the
secondary treatment given to the wastes to meet the guide-
line recommendations is costed. Although the costs are
significant, they are supportable within the economics of the
large plant.
One assumption had to be made to bring out the effect of
the guidelines, namely, each plant had to be considered
as a separate profit center and company in itself. This
is not general industry practice - usually a product is
considered to be a profit center and costs assigned^ to the
various plants manufacturing that product gathered into one
total manufacturing cost; and profitability is calculated
on a product basis, not a plant basis. Attempting to
establish guidelines costs relative to such accounting
practice would be impossibly complex.
The Level III case in each instance is evaluated as a square
case representing a new facility operated at manufacturing
capacity from the initial on-stream date. Each process unit
necessary to operate the total plant at capacity is treated
similarly.
The study of the models bears out the industry segmentation
and confirms the potential seriousness of the guidelines to .
the small operator. The price effect is discussed in the
economic impact, and it is obvious that if the small companies
are to install process changes to reduce raw waste loadings, "
prices will have to be raised.
It is pointed out that demand is inelastic with respect to
price and should thus support ~a price increase. Here again,
however, the incremental cost per pound of product for the
small company is substantially higher than that for the
larger firm, indicating a potential deterioration in the
small company's business position.
Economic Study
The oligopolistic nature of the industry is analyzed with
respect to price competition, advertising, product differen-
tiation, barriers to entry and price elasticity of demand.
The soap and detergent industry is characterized by a
highly concentrated oligopolistic market in which, according
to^!970 census data, the first four companies accounted for
7070 of the value of shipments and the first eight companies
accounted for 79%.
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Since the market leaders already possess large shares of the
market, they would probably like to avoid any further
dominance that would expose themselves to public censure
and possible punitive action by the government. Therefore,
the market leaders may have to raise prices sufficiently to
keep from squeezing smaller producers who will be severely
impacted by the guidelines. Whether this effort will succeed
is problematical. The weakest members of the industry must
attempt to raise more capital to meet pollution guideline
standards. This will be a severe strain on their viability.
The available .data supports the conclusion that the rela-
tive impact of the proposed effluent limitation guidelines
and standards, recommended by the guideline contractor,
would fall most heavily on Segment III and least heavily
on Segment I.
Since over 9870 of the plants in the soap and detergent
industry are not point sources of effluent, but send their
effluent to publicly-owned treatment facilities, the
immediate obvious impact of point source guidelines on this
industry must be very small. On the other hand, the industry
may face very heavy forthcoming sewer charges from publicly
owned treatment facilities when these facilites endeavor to
meet their new treatment standards and guidelines.
One real economic impact of the industry point source guide-
lines will soon become apparent. The point source guidelines
limit and establish the cost of the alternate to publicly-
owned treatment for the very large plants of the industry,
most of whom have access to navigable water.
This then is the opportunity cost of publicly-owned treat-
ment for the large plants of the industry. It is the point
at which that portion of industry must consider so far as
practicable the alternative to publicly-owned treatment.
Contrasted with the large producer is the small company which
is presently using publicly-owned treatment. For the small
producer the option of becoming a point source is severely
limited by:
1. Geography - the small plants are frequently
located within the confines of a major metro-
politan area with no access to navigable water.
2. Technology - industrial wastes such as those
from a small soap and/or detergent plant would
preclude smooth operation of a small
package treatment plant. The technical
and laboratory staff to provide supervision
of a package treatment plant under frequent
upset conditions would be economically
unsupportable.
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For the small producer who must then use publicly-owned
treatment, an important possible effect is the impact of
the recommended guidelines and standards on publicly-owned
pretreatment requirements.
Justification for Additional Segments
Additional segmentation could be made between the manufac-
turers of household soaps and detergents and manufacturers of
industrial cleaning compounds. Contrasted with the immense
amount of data on treatment of household products under
both aerobic and anaerobic conditions, very little is known
about the treatability of industrial cleaners. Until at
least preliminary treatability studies are conducted on
industrial cleaners, it is impossible to make a meaningful
economic study based on this type of segmentation.
COST
The guideline contractor made the cost analysis used in con-
structing the model plants practicable by the method used to
categorize the industry. The industry was broken down into
the basic process building blocks.
Soap Manufacture
Code Process Description
101 Soap Manufacture - Batch Kettle and Continuous
102 Fatty Acid Manufacture by Fat Splitting
102H Fatty Acid Hydrogenation
103 Soap from Fatty Acid Neutralization
104 Glycerine Recovery and Concentration
105 Soap Flakes & Powders
106 Bar Soaps
107 Liquid Soap
Detergent Manufacture
201 Oleum Sulfonation & Sulfation (Batch & Continuous)
202 Air 803 Sulfation and Sulfonation (Batch &
Continuous
203 Solvent and Vacuum Sulfonation
204 Sulfamic Acid Sulfation
205 Chlorosulfonic Acid Sulfation
206 Neutralization of Sulfuric Acid Esters & Sulfonic
Acids
207 Spray Dried Detergents
208 Liquid Detergent Manufacture
209 Detergent Manufacturing by Dry Blending
210 Drum Dried Detergents
211 Detergent Bars & Cakes
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Utilizing these building block processes which are described
in the guidelines report, any detergent or soap plant con-
figuration can be simulated and costed.
In establishing costs for the model plants all raw material
costs were tabulated and checked with industry sources. Each
of the above processes was carefully costed utilizing infor-
mation on capital and operating costs from contractors ser-
ving thet industry as well as those obtained from searching
and updating literature estimates. Treatment costs were ar-
rived at by analysis of current industry point source treat-
ment costs and also by checking against treatment costs in
related industries.
FINANCIAL PROFILE
The financial analysis of the economic impact study concerns
itself with the impact of the proposed standards and guide-
lines on the economic viability of three groups of companies
making up the industry. Segment I is made-up of the four
largest companies in the industry. Segment II is made-up
of the next four largest and Segment III is made-up of the
balance of the industry.
In order to measure the impact of the control standards on
these groups, models were constructed of three different
types of hypothetical companies reflecting characteristics
of the three groups mentioned above. The companies were
given a complete set of financial characteristics based on
Dun and Bradstreet key financial and profitability ratios.
The profile itself is the culmination of intensive research
into the characteristics of the industry based on data
developed from the Census of Manufactures, Standard & Poor's
and Moody's financial services, 10K Reports filed with the
Securities and Exchange Commission and access to a question-
naire sent out by industry trade associations.
These models were then impacted with the control costs of
Levels I, II and III technologies and the impact on profita-
bility and risk were observed. In all cases the impact is
substantial, but in all cases it is expected that the
incremental costs associated with effluent control would be
offset by price increases.
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Table 1
Soap and Detergent Processes Expected To Require
Modification Due To Guideline Recommendations
Soap Manufacture
Code Processes Level I Level II Level III
101 Kettle Boil Soap X X C
102 Fat Splitting N X C
102H Fatty Acid Hydrogena-
tion N N N
103 Soap From Fatty Acid
Neutralization N N N
104 Glycerine Recovery X X C
105 Soap Flakes & Powders N N N
106 Bar Soaps N X C
107 Liquid Soap N N N
Detergent Manufacture
201 Oleum Sulfonation X X N
202 SOo Sulfonation X X C
203 S0q Vacuum Sulfonation N X N
204 Sulfamic Acid Sulfation X X C
205 Chlorosulfonic Acid Sul-
fation X X C
206 Neutralization of Sul-
famic Acid Esters etc. N N N
207 Spray Dried Detergents N X C
208 Liquid Detergents X X C
209 Detergent Dry Blending N N N
210 Drum Dried Detergents N N N
211 Detergent Bars & Cakes N X C
Note: The code numbers refer to the effluent limitation
guidelines report.
X indicates modification is required for the process in the
appropriate Level to meet effluent limitations.
N indicates no change is expected to enable process to meet
the guideline recommendations.
C indicates the process is a new point source where there
may be an economic disadvantage over already in-place capital
with regard to a net addition to total cost.
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IMPACTS
Prices
It is hazardous to estimate the price impact of the proposed
effluent standards and guidelines since so much depends on
EPA rulings regarding publicly-owned treatment and the actions
of the publicly-owned treatment plants in their interpreta-
tions and subsequent assessment of charges. Also, many of
the larger companies can revert to point source if publicly-
owned treatment charges become too burdensome. The point
source guidelines to them represent an opportunity cost of
publicly-owned treatment. Retail sales prices in this industry
generally run two to three times the profited plant cost for
consumer products. A mark-up of 40-50% over the plant
profited cost is typical of industrial products. Thus, a
%C/lb increase in plant cost could mean a l%C/lb increase in
retail sales price or a %C/lb increase in the price of an
industrial chemical.
Plant Closings
No plant closings are anticipated.
Unemployment
No unemployment is anticipated from guideline imposition.
Community Impact
No community impacts are anticipated.
International Trade
As the international balance of payments shifts there may
be some change in capital allocation within the multinational
Segment I companies, but the total capital necessary to meet
the Level I and II guidelines to have solely point source
plants is still modest for such substantial companies, i.e.,
under $30 million. Accordingly, no major shifts are antici-
pated, nor are prices likely to have to be increased
sufficiently to increase imports of SIC 2841 products.
Other
Through three trade associations, The Soap and Detergent
Association, The Chemical Manufacturers Specialties
Association, and the Industrial Sanitary Supply Association,
the economic impact contractor is conducting an information
s tudy.
Pertinent economic information has been elicited from member
companies on a confidential basis. The study deals with
10
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company finances and requests information regarded as very
sensitive and also the replies are voluntary. Some
companies are answering a question in detail that other
companies decline to answer at all. Twenty-two company
replies received to date represent a helpful mosaic which
was used in constructing the model plants in this report.
Also, the study confirms the vulnerability of a number of
small companies to any increase in sewer charges from
publicly-owned facilities.
LIMITATIONS
The great uncertainty in estimating the impact of point
source guidelines on a non-point source industry is the
further actions which will be taken by EPA and municipali-
ties. For example, on July 19, 1973, during preparation
of this report, EPA proposed pretreatment standards for
industrial contributions to publicly-owned treatment works.
These proposed standards classify three pollutants quanti-
fied in the contractor's guidelines: fats and oils, chemical
oxygen demand and surfactants as incompatible pollutants.
Incompatible pollutants, under certain circumstances, then
must be subjected to best practicable control technology
currently available as pretreatment'. If this definition
of compatability stands and if pretreatment is required
for these pollutants, the costs of the point source guide-
lines to this industry will increase tremendously. The
economic effect of such a ruling is not covered in this
report and would require an additional s-tudy.
11
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INDUSTRY PROFILE AND SUBGROUPS
DEFINITION OF THE SOAP AND DETERGENT INDUSTRY
This report deals with the soap and detergent industry
as it is described under Code 2841 in the Standard Indus-
trial Classification Manual prepared by the Statistical
Policy Division of the Office of Management and Bud-
get. Neither code number nor definition of this indus-
try changed between 1963 and 1967.
As defined, this industry comprises establishments pri-
marily engaged in manufacturing soap, synthetic organic
detergents, inorganic alkaline detergents or any combina-
tion thereof, and also establishments producing crude and
refined glycerine from vegetable and animal fats and oils.
Establishments primarily engaged in manufacturing shampoos
or shaving products, whether from soap or synthetic deter-
gents and also establishments producing synthetic glycerine
are classified elsewhere.
Value of shipments and other receipts of the soap and
detergent industry in 1967 totaled 2.3 billion dollars,
volume for 1973 is estimated to be 2.8 billion dollars;
see Table 2.
The detailed list of products and their basic quantity
measure as reported in Census are shown in Table 3.
The 2841 grouping includes a number of separate distinct
business areas which are discussed separately below:
1. Household Soaps and Detergents
2. Industrial and Institutional Cleaners
3. Glycerine
4. Fatty Acids
Following is a discussion of these business areas.
13
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Table 2
SUMMARY VALUE OF SHIPMENTS OF SOAPS AND DETERGENTS - SIC 2841
MANUFACTURERS' LEVEL
(After 1967 Census of Manufacturers)
1963
(in millions)
1967
(in millions)
Estimated 1973
(in millions)
All Soaps
Glycerine
Natural
Kilograms Pounds Dollars Kilograms Pounds Dollars Kilograms Pounds Dollars
605.1 1332.8 355.0
63.6 140.0 26.0
Alkali De-
tergents 519.0 1143.2 200.2
Acid Type
Cleaners
156.1 343.8 35.2
Synthetic Org.
Det. House-
hold 2098.7 4622.7 1029.4
Synthetic Org.
Det. Non-
Household 287.2 632.6 115.3
Soap and Other
Det., NSK 38.6
85.0 17.6
Grand Total
Soaps and
Detergents 3768.3 8300.1 1778.7
563.1 1240.3 383.9 53TT
65.8 145.0 36.0 68
670.1 1476.0 279.6 888
256.1 564.0 61.7 399
2513.5 5536.4 1235.4 3170
357.5 787.4 141.1 443
166.2 366.0 73.2 332
4592.3 10115.1 2210.9 5840
1190
150
1955
878
6982
976
732
415
35
385
101
1565
167
146
12864 2814
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CODE
SOAPS AND OTHER DETERGENTS - SIC 2841
DETAIL PRODUCT LIST
QUANTITY MEASURE
2841
28411
28411 11
28411 13
28411 15
28411 17
28411 21
28411 23
28411 25
28411 27
28411 71
28411 75
28411 79
SOAP AND OTHER DETERGENTS - MC-28F
(finished weight)
ALKALINE DETERGENTS AND ACID-TYPE CLEANERS
Alkaline detergents, household (products sold in containers
holding 25 pounds or less and 1 gallon or less and for use
by family units)
Machine dishwashing compounds
Liquid M gals .
Dry (solid) M Ibs.
Other alkaline detergents, household
Liquid M gals .
Dry (solid) M Ibs.
Alkaline detergents, nonhousehold (bulk products and products
sold in containers holding over 25 pounds or over 1 gallon,
and for industrial, institutional,or commercial use regardless
of package size)
Machine dishwashing compounds
Liquid M gals .
Dry (solid) M Ibs.
Other alkaline detergent, nonhousehold
Liquid M gals .
Dry (solid) M Ibs.
Acid-type cleaners containing an acid and/or wetting agent, and/or
inorganic fillers
Dairy and food processing cleaners M Ibs.
Metal cleaners M Ibs .
All other M Ibs.
TABLE 3
-------
CODE
DETAIL PRODUCT LIST
QUANTITY MEASURE
(finished weight)
28412
28412 15
28412 27
28412 61
28412 98
28413
ON
28413 11
28413 13
28413 22
28413 51
28413 61
28413 98
28414
28414 11
28414 31
28414 51
28415
28415 21
SOAPS, EXCEPT SPECIALTY CLEANERS, NONHOUSEHOLD
Nonhousehold soaps (bulk products and products sold in containers
holding over 25 pounds or over 1 gallon, and for industrial,
institutional, or commercial use regardless of package size)
Chips, flakes, granulated, powdered and sprayed, including
washing powders M Ibs.
Liquid (potash and other, excluding shampoos) Gals.
Mechanics' hand soaps, pastes, and bars, except waterless .... M Ibs.
Other soaps, nonhousehold M Ibs.
SOAPS, EXCEPT SPECIALTY CLEANERS, HOUSEHOLD
Household soaps (products sold in containers holding 25 pounds
or less and 1 gallon or less, and for use by family units)
Bars (excluding medical and medicated mechanics'hand soap
and shaving soap)
Toilet M Ibs.
Laundry and other household soaps (bars) M Ibs.
Chips, flakes, granulated, powdered, and sprayed, including
washing powders M Ibs.
Medical and medicated soaps (containing medicinal or
germicidal or other additives only as a deodorant), bars,
liquid, and paste
Mechanics' hand soaps, all types except waterless M Ibs.
Other soaps, household M Ibs.
GLYCERINE, NATURAL
Crude, 100-percent basis
High-gravity, dynamite, and yellow distilled, 100 percent basis
Chemically pure, 100-percent basis
M Ibs,
M Ibs
M Ibs
SYNTHETIC ORGANIC DETERGENTS, HOUSEHOLD
Household detergents (products sold in containers holding 25
pounds or less or 1 gallon and less, and for use by
family units)
Dry (solid)
Light-duty
M Ibs
-------
CODE
DETAIL PRODUCT LIST
QUANTITY '.: MEASURE
28415
28415 25
28415 31
28415 35
28415 39
28415 53
28416
28416 21
28416 29
28416 31
28416 39
28416 53
Heavy-duty
Anionic base
nonionic base or other base
Liquid (excluding shampoos)
Light-duty
Heavy-duty
General purpose cleaners
Scouring cleansers with or without abrasives
SYNTHETIC ORGANIC DETERGENTS, NONHOUSEHOLD
Nonhousehold detergents (bulk products and products sold
in containers holding over 15 pounds or over 1 gallon,
and for industrial, institutional, or commercial use
regardless of package size)
Dry (solid)
Anionic base
Nonionic base or other base
Liquid
Anionic base
Nonionic base or other base
Scouring cleansers with or without abrasives ,
(finished weight)
M Ibs.
M Ibs.
M gals.
M gals.
M gals.
M Ibs.
M Ibs.
M Ibs.
M gals.
M gals.
M Ibs.
TABLE 3 (cont'd)
-------
Household Soaps and Detergents
This business is segmented by broad product groupings as
follows:
Typical Name Brands
Bar Lux (Lever), Ivory (P&G), Sweet-
heart (Purex), Palmolive (Colgate-
Palmolive)
b) Package Ivory Flakes (P&G)
Synthetic Detergents
a) Heavy duty powders Tide (P&G), All (Lever), Fab
(Colgate-Palmolive)
b) Light duty powders Dreft (P&G)
c) Heavy duty liquids Wisk (Lever), Dynamo (Colgate),
Era (P&G)
d) Light duty liquids Joy (P&G), Trend (Purex), Vel
(Colgate), Dove (Lever)
Soaps
Total soap sales are estimated at 1.19 billion pounds in
1973 including 225 million pounds of industrial soaps val-
ued at 55 million dollars and 965 million pounds of house-
hold soaps valued at 360 million dollars. The soap busi-
ness is presently static in terms of volume with about a
47o/yr. growth in dollar sales due to inflation. However,
this last year with the prices of fats and oils soaring
and such key oils as coconut and tallow doubling in cost
in 12 months, the soap business may in the future suffer
a serious decline as on a cost effectiveness basis it be-
comes increasingly uncompetitive. On the other hand soap
today is more a cosmetic personal care product and is not
purchased by the consumer on a cost effectiveness basis.
The household soap business is strongly dominated by Proc-
ter & Gamble with Ivory and Camay, while Lever Brothers with
Dove, and Colgate with Palmolive have far lesser shares.
Synthetic Detergents
The heavy duty powders are used for home washing of cotton
and synthetics. The light duty powders are used for fine
fabric washing. The light duty liquids are designed for
hand dishwashing, while the heavy duty liquids compete with
the heavy duty powders for home laundry use.
18
-------
The heavy duty powder represents almost 70% of the dollar
volume and the liquids 3070 of synthetic detergents. About
3.8 billion pounds of solids are estimated to be sold in 1973
and one billion pounds of liquids. P&G has over half the
market on the solids, Lever and Colgate each have about 15%
and all other producers such as Sears, Winn-Dixie, Purex,
etc. about 15%.
Retail sales price for solids averages 30C/lb. making total
retail value about $1.1 billion.
In liquid synthetics P&G has 3570 of the market with Col-
gate at 10% and Lever at 20%. The other 35% is held by a
host of companies with Purex the largest at about 570
Retail sales price for the light duty liquids for dish-
washing is 42c/lb.
Heavy duty liquids sell in the 45c/lb. range, making the
total retail value of liquids about $425 million.
The other important categories of household detergents
are machine dishwashing compounds estimated in 1973 to
be $133 million and general purpose household cleaners
$200 million.
Industrial and Institutional Cleaners
Industrial and institutional cleaners are a large and fast
growing market estimated to be $650 million in 1973. In-
cluded in this group are industrial machine dishwashing
compounds ($100 million) dairy and food processing cleaners,
metal cleaners ($135 million), car washing compounds, com-
mercial laundry products, commercial rug cleaners, floor
cleaners, tank car cleaners and a host of other specialty
applications. The dominant companies in this business are
DuBois, division of Chemed (a division of W.R. Grace),
Stauffer and BASF but there are hundreds of small firms
manufacturing specialty industrial cleaning compounds. Capi-
tal requirements are low. All that is required is the know-
ledge of a special cleaning need and an ingenious compounder
to come up with a satisfactory product to start up a business
Advertising and distribution costs are modest.
Glycerine
Another area of overlap in guideline writing concerns gly-
cerine. The contractor has recommended a guideline on natu-
ral glycerine. Synthetic glycerine is covered in industry
19
-------
2869 (per the 1972 SIC Manual), U.S. glycerine production
is estimated as follows:
Table 4
United States Glycerine Production
(in million pounds) '•
Year Natural Synthetic Total
1972 150 198 348
1971 134 201 333
1970 130 189 339
1969 148 200 348
1968 160 202 362
Total U.S. production of glycerine rose from 160 million
pounds in 1940 to 339 million pounds in 1970. Since 1968
production has been fluctuating in the 330 to 370 million
pound range, as can be seen above. Current U.S. synthetic
capacity is 320 million pounds/yr. The list price for gly-
cerine has fluctuated between 18C per pound and 30c per
pound over the period 1955 to the present. The current
price is 23%C/lb. as of July 1973.
The natural glycerine producers are the key to the pricing
on this product since they must market their product - a
by-product of soap and/or fat splitting - regardless of
price. The synthetic producers follow the pricing set by
the natural producers.
The cost of recovering natural glycerine will increase if
the recommended guidelines are adopted. This could result
in a small price increase. The market price leader in gly-
cerine is Procter & Gamble. It is expected that Procter
& Gamble would increase prices to cover pollution abatement
costs. The increases involved are not large enough to af-
fect market elasticity. Specific costs are discussed under
the process heading.
Fatty Acids
An area not covered entirely in Table 2 is the fatty acid
business. Where fatty acids are produced and used captively
by the major soap companies in soap production, they are in-
cluded as intermediates in the soap figures as shown in
Table 3, since they are key intermediates in the manufac-
20
-------
ture of soap. On the other hand fatty acids that are pro-
duced for sale by non soap companies are not included in
Table 1. Production of three important acids is:
Table 5
Production of Selected Fatty Acids
(in million pounds)
Year
1972
1971
1970
1969
1968
Laurie &
Myristic
20.8
24.4
25.0
25.0
18.0
Stearic
300.0
279.0
283.0
302.6
280.6
Source: Fatty Acid Producers Council
In writing guidelines for the soap and detergent industry,
the contractor took the building block approach and divided
the industry into eighteen processes. It was thus nec-
essary to write a guideline for the process of fatty
acid manufacture as employed by the soap companies in their
manufacture of soap. In so doing a guideline was inadver-
tently created for fatty acid manufacture in other than the
soap and detergent industry, even though, interestingly
enough, fatty acids are not per se included as a part of
the soap and detergent industry as defined in SIC 2841.
The recommended guideline may be equitably applied to all
fatty acid production, that which is incidental to soap
manufacture as well as that which is produced specifically
for outside sale.
21
-------
II
ECONOMIC AND FINANCIAL CHARACTERISTICS
INTRODUCTION
The purpose of this chapter is to establish a framework for
testing the economic feasibility of the effluent limitation
guidelines and standards of performance proposed for the soap
and detergent industry. The economic and financial charac-
teristics of the industry are explored in order to establish
relatively homogeneous groups of companies within the in-
dustry, to facilitate the impact analysis. The establishment
of such groups permits tentative judgments to be made rela-
tive to the expected impact of the effluent limitation guide-
lines and standards on representative elements of the industry,
Census data, rather than data from the Annual Survey of Manu-
facturers is used in this study because of the greater relia-
bility and comparability of the Census data with other data
used in this study.
MACROANALYSIS (Analysis of Aggregate Data)
The soap and detergent industry as described in the Stan-
dard Industrial Classification Manual is composed of "es-
tablishments primarily engaged in manufacturing soap, syn-
thetic organic detergents, inorganic alkaline detergents,
or any combination thereof, and establishments producing
crude and refined glycerine from vegetable and animal fats
and oils." The inclusion of any particular company or
establishment in this industrial classification is based
upon the fact that it produces a primary product of the in-
dustry as defined above, and further, that that product has
a value greater than the value of other products it may pro-
duce but which are not included in the above definition.
For example, Company X produces soap and food products, but
its primary value product is soap. Consequently, it is not
classified in the food product industry but instead is
classed as a member of the soap and detergent industry.
The Census of Manufacturers indicates that for the year 1967,
the most recent census year for which there is data, the
soap and detergent industry establishments shipped product
with a total value of $2,593.4 million of which $1,990.2
million represented primary products, the basic product of
an industry as indicated under the Standard Industrial Code;
$405.7 million represented secondary products, products pro-
duced by establishments within the industry with a total
value that is less than that of the primary product; and
$197.5 million represented miscellaneous receipts. The
primary product specialization ratio is 83, indicating a
high proportion of primary product to total product for the
industry. As defined by the Department of Commerce, the
specialization ratio is the ratio of all primary product of
23
-------
establishments in the industry to the total of primary plus
secondary products. For the same year, 1967, the total
primary product made in all industries was $2,200.8 million,
which includes $210.6 million of primary product made by
other industries. These data yield a coverage ratio of 90,
indicating a high proportion of total production of primary
product within the industry as defined. The coverage ratio
is the value of the primary product made within the defined
industry divided by the total primary product made by all
industries.
Table 6 below presents industry data classified by the num-
ber of workers employed by establishments for the year 1967.
The term "establishment" is not comparable with "company."
It is more comparable with "plant" since respondent companies
were required to report separately for each location.
Industry Concentration - 1967 Data
The number of establishments and size distribution in Table 6
indicates that of the 668 establishments in the industry,
287, or 437o of the establishments, employ 1.770 of all employ-
ees and 27o of all production workers; while 4 establishments,
or 0.670 of total establishments, employ 19.570 of all employ-
ees and 22.57o of production workers. In addition, 12
establishments, or 0.87o or the total, employ 37.77o of all
employees and 4270 of production workers and 28 establishments,
or 4.270 of the total, employ 57.570 of all employees and
64.57o of production workers.
These data indicate a relatively high degree of concentra-
tion of productive facilities within the industry. The de-
gree of concentration is probably understated since the data
are presented on an establishment basis rather than a com-
pany basis. Since the larger the company the more likely
it is to be a multi-plant producer, presentation of the data
on a company basis should increase the level of concentration.
Industry Productivity - 1967 Data
Assuming for the present that these observations concerning
concentration in the industry are correct, it is useful to
consider the relationship between concentration and produc-
tivity. Again, because of the limited nature of the data
with respect to the method of reporting "establishments"
rather than companies, only tentative conclusions can be
drawn concerning the relationship between concentration and
productivity on a company basis. Referring again to Table 5,
we can utilize "Value of Shipments" and "All Employees, Num-
ber" to derive a measure of employee productivity. Such a
measure is indicative of the value of output per unit of
24
-------
Table 6
General Statistics, by Employment Size of Establishment: 1967
Esta-
blish
ments
2841 - Soap and Other
Detergents
Estabs.' Total
Estabs. With an Average of
1-4 Employees6
5-9 Employees
10 - 19 Employees
20 - 49 Employees
50 - 99 Employees
100 - 249 Employees
250 - 499 Employees
500 - 999 Employees
1000 - 2499 Employees
Estabs. Covered by Admin.
Records^6
668
287
85
- 89
105
50
24
16
8
4
238
All employees Production Workers
Pay- Man-
Number roll Number hours Wages
30.3
(1000)
243.0 20.0
(mil-
(mil- lion
lion) $)
40.1 145.3 1403.7
1
3
3
3
6
5
5
.5
.6
.3
.5
.5
.6
.0
.5
.9
3
3
8
23
24
25
50
52
50
.0
.8
.7
.7
.8
.4
.6
.5
.8
1.
1.
2.
4.
3.
4.
4
3
7
6
9
3
5
9
5
1.
3.
3.
4.
9.
8.
8.
6
6
3
2
8
4
1
2
8
1.
1.
3.
9.
10.
13.
34.
35.
35.
6
7
4
1
9
4
5
0
8
Value
added by
manufac-
ture
(mil-
lion
Jl—
Cost
of
mate-
rials
(mil-
lion
$)
Value
of
ship-
ments
(mil-
lion
$)
Capital
expendi-
tures ,
new
(mil-
lion
$)
End-of
year
inven-
tories
(mil-
lion
$)
1202.0 2593.4 48.1
10
10
30
81
104
148
352
352
312
.3
.3
.4
.4
.7
.2
.6
.8
.9
9
11
31
81
99
103
310
325
228
.2
.5
.6
.5
.9
.2
.9
.7
.6
19
21
61
162
203
249
662
675
537
.4
.8
.5
.0
.8
.8
.5
.4
.1
5
2
3
3
11
11
9
.2
.4
.7
.1
.8
.2
.8
.4
.4
250.5
1.8
2.0
5.3
14.3
17.9
26.0
59.
62.
.5
.1
.4
2.2
.4
.5
1.3
8.3
7.4
15.7 (Z)
61.6
1.7
eOver 30 percent of the data for this line was estimated.
^-Report forms were not mailed to companies that operated only one establishment and which Social Security payrolls indicated
had fewer than 10 employees. Actual payrolls (and sales) for 1967 were obtained from administrative records of the Federal
Government. The other statistics for these establishments were estimated from industry averages.
Source: Census of Manufacturers, 1967
Ni
Ln
-------
labor input only. It is not, for example, a measure of
physical output per unit of labor input...
Value of Shipments per Employee
Value of Shipments per employee, for-the industry as a whole,
is $85,590, with a range of $36,333 - $122,800 ,per, employee.
For the 28 largest establishments representing 4.2% of all
establishments, the value of shipments per employee is in
excess of the industry average by upwards of 6.47,
Value of Shipments per Production Worker Man-Hour
The 4 largest establishments do not appear to be the most
productive based on this measure of labor productivity.
Value of shipments per production worker man-hour, is $64.70
for the industry as a whole, with a range of $32.30 - $82.40
per production worker man-hour. The value of shipment per
production worker man-hour for .the 4 largest establishments,
however, is $61.00, below the industry average by a signi-
ficant amount. The next 24 establishments have an average
value of shipment per man-hour in excess of the industry
average by upwards of 12.5%
Value Added per Employee
Value added per employee for SIC 2841 in 1967 is $46,327.
The range for establishments by employment size is $17,167 -
$64,154 per employee. One finds that the largest 28 estab-
lishments previously mentioned, representing 4.270 of all
establishments, have a value added per employee in excess
of the industry average by an average of at least 1570. It
is interesting to note here, as well as with regard to data
presented below, that the 4 largest establishments show a
lower productivity differential than do the next 24. It
may be that the optimum sized establishment lies within the
range of 500 - 999 employees, the average size consistently
showing the greatest labor productivity of all establish-
ments. However, any conclusions on this point based on
such limited data would be tenuous.
Value Added per Production Worker Man-Hour
Lastly, the measure, value added per production worker man-
hour, has a range of $17.20 - $43.00 per hour, with an over-
all industry average of $35.00 per hour. The 28 establish-
ments representing 4.2% of all industry establishments have
an average value added per production worker man-hour of 170
or more in excess of the industry average.
26
-------
At no time have any of the rankings, vis-a^vis other indus-
tries, appeared below the first quartile.
A Reconciliation of Establishment and Company Data
It is axiomatic that eggs and oranges cannot be compared.
With this in mind, the next step is to compare the data de-
veloped for establishments with that developed for companies
in order to determine whether establishment data are a good
proxy for company data. The problems here are twofold:
(1) the latest establishment data are from the 1967 Census
while the latest company data are from the 1963 Census;
(2) establishments conform more to plant data than to com-
pany data.
First, comparing summary data for establishments and for
companies for 1963, we find striking similarities. Reference
to Table 6 indicates that the differences in per employee
data are so small as to be insignificant while the differen-
ces in the man-hour data are also very small and, in fact,
may be magnified due to rounding. Second, one may recall
that, based on the value of shipments between 1963 and 1967,
there was a reduction of 2 percentage points in the concen-
tration figures for first-4 companies and first-8 companies,
or a decline of 2.8% for first-4 companies and 2.5% for
first-8 companies, and there was no change in the first-4
for 1970 and a 1 percentage point increase for the first-8.
Therefore, one can conclude that there has not been an ap-
preciable change between the 1963 census and the 1967 cen-
sus with regard to the first-4 and first-8 companies in
the indus try.
Table 7
SELECTED INDUSTRY DATA ON AN ESTABLISHMENT
BASIS AND ON A COMPANY BASIS - 1963
Value of
Census Shipments
Value of Value Added Value Added
Shipments by Manufact. by Manufacture
Year per Employee per Man-Hour per Employee per Man-Hour
1963
As reptd.
for $69,084
Estab.
1963
As reptd.
for $69,098
Cos.
$51.89
$52.00
$36,929
$36,937
$27.74
$28.00
27
-------
One may therefore feel justified in making the following
assumptions with regard to these data: .(1) 1963 establish-
ment data for SIC 2841 are a good proxy for 1963 company
data, at least for the largest companies, and (2) there is
little reason to believe that anything has happened within
the industry since 1963 to change that relationship.
MICROANALYSIS (Analysis of Specific Industry Data)
The soap and other detergent industry data have thus far
been analyzed in a highly aggregate form. At this point,
the analysis will move to an examination of the general
characteristics of this industry and the participants within
the industry.
Industry Growth
Sales of soap and other detergents will probably show con-
tinued growth through the decade at approximately 37o per
year. Synthetic detergents continue to be the strongest
factor in the industry showing a year-to-year growth rate
of 8%
Almost 5 billion pounds of synthetic detergents are used
annually for home laundering. Commercial laundries are
shifting to the use of synthetic detergents as they replace
worn out equipment which required the use of soap, water
softening equipment and high operating temperatures.
In 1971 the annual growth rate for value of product ship-
ments, 1967-1971, was 5% per year. The ratio of net profits
to net worth was 137».
Industry Geography
The major producing areas for the industry in the United
States are the East, North Central and Middle Atlantic
States. The North Central Region provides about 50% of the
industry's total shipments.
The Market Participants and Products
As has already been demonstrated, the soap and other deter-
gents industry is a highly concentrated industry, regardless
of the method used to determine the number and size distri-
bution of the companies in the industry.
Since the Bureau of Census does not make public the identity
of the companies it surveys, one can only estimate the number
of companies that can be classified as SIC 2841. From an
inventory of companies undertaken for this study, using
28
-------
various sources to classify the companies, it is estimated
that there is a total of somewhere between 325 and 350
companies in the industry. The census data, by establish-
ments, would indicate there are a greater number of com-
panies .
Because of data limitations, these micro data are not al-
ways comparable with the macro data of the Census. This
analysis must proceed on the basis of the net sales of the
participants and other company income statement and balance
sheet data. On a net sales basis, the first-4 and first-8
companies are shown in Table 8.
Table 8
FIRST-4 AND FIRST-8 COMPANIES SIC 2841
First-4 Participants are:
Procter and Gamble Company
Lever Brothers
Colgate-Palmolive Company
Purex Corporation Ltd.
First-8 Participants are:
Procter and Gamble Company
Lever Brothers
Colgate-Palmolive Company
Purex Corporation Ltd.
Amway Corporation
Armour-Dial, Div. of Greyhound Corporation
Economics Laboratory, Inc.
Chemed, Div. of W. R. Grace Company
These companies are in SIC 2841 primarily through the sale
of household laundry and cleaning products such as soaps
and other detergents. Because of the high degree of con-
centration in this market, it is conventional in the industry
to group the first-3 companies, known as "the big three";
i.e., Procter and Gamble, Lever Brothers, and Colgate-Pal-
molive. These first-3 companies account for between 80?0 and
85% of the package detergent market. Therefore, the remain-
ing companies account for 15% to 2070 of the market.
29
-------
Procter and Gamble Table 9
PROCTER AND GAMBLE COMPANY
FIVE YEAR FINANCIAL HISTORY
($ MILLIONS)
Total Income Net Ratio Net
Foreign Domestic Net Before Net Profit Income to
Sales (a) Sales (a) Sales Tax Income Margin Net Worth
1972 973 2541 3514 515 276 7.9 18.50 (b
1971 788 2390 3178 447 238 7.5 17.0
1970 739 2240 2979 435 212 7.1 16.7 .
1969 671 2036 2708 376 187 6.9 16.1
1968 631 1912 2543 355 183 7.2 16.5
(a) Based on fact that net income from foreign operations
was 27.7% in 1972, 24.8% in 1971. Latter proportion
was used to adjust sales 1968-1971.
(b) Based on a net worth for period.
The company is engaged primarily in a single line of business,
household products, which accounts for approximately 85%, of
net sales. No single part of the remaining institutional and
industrial business amounts to as much as 10% of sales.
The company's principal products include: laundry and
cleaning products such as detergents, soaps, fabric softeners,
cleaners and cleansers; personal care products such as bar
soaps, toothpastes, mouthwash, deodorants, shampoos, paper
tissue products, paper towels and disposable diapers; food
products such as shortenings and oils, cake mixes, peanut
butter and coffee; and other miscellaneous products. The
household products are distributed, principally, through
grocery stores and other retail outlets.
In 1972 laundry and cleaning products accounted for 43% of
net sales. For the period 1968 to 1972, laundry and cleaning
products accounted for between 43% and 46% of net sales .
International operations consist, to a very large degree,
of the manufacture and sale of household products in Europe,
Great Britain, Canada and parts of Latin America, Asia and
Africa.
For the five years 1968 to 1972, net sales increased from
30
-------
$2,542,615 thousand to $3,514,438 thousand, or 38%. For
the same period, net income after taxes increased from
$202,026 thousand to $276,310 thousand, or 37%. The return
on common equity was 18.5% for 1972.
The company employs 30,000 people in the United States.
Lever Brothers
Table 10
UNILEVER N.V./LEVER BROTHERS
FIVE YEAR FINANCIAL HISTORY
($ MILLIONS)
Year
1972
1971
1970
1969
1968
Unilever N.V.
Sales
5770
5615
5203
4516
4154
Lever Brothers
U.S.
Net Sales
527
522
525
491
452
U.S.
Net Income
12.7
11.1
8.8
5.2
11.9
% U.S.
Net Profit
Margin
2.4
2.1
1.7
1.1
2.6
The data for Lever Brothers are limited because the company
is a subsidiary of Unilever N.V., a Dutch holding company
whose sales are also shown for compatison. Household products
are an estimated one-third of the sales of Lever Brothers.
For the five years 1968 to 1972, sales for Lever increased
from $452,000,000 to $527,000,000, or 17%. Net income
increased from $11.9 million to $12.7 million, or 7%, for
the same period. No data are available for the rate of
return on common equity.
31
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Colgate-Palmolive
Table 11
COLGATE-PALMOLIVE
FIVE YEAR FINANCIAL HISTORY
($ MILLIONS)
Total Income
Foreign' Domestic Net Before
Sales Sales Sales Tax
Net Ratio
Net Profit Net Income
Income Margin Net Worth
1972
1971
1970
1969
1968
940
802
702
636
605
868
802
761
747
710
1808
1604
1.463
1383
1316
139
121
104
105
100
68
56
50
48
46
3.7
3.5
3.4
3.5
3.5
13.5
12.6
11.9
11.7
11.7
The company is engaged largely in the household and personal
care fields. Household products account for approximately
77% of net sales.
Colgate's principal household products are laundry deter-
gents, laundry pre-soaks, laundry bleaches, dishwashing deter-
gents, cleaners and window cleaners, kitchen towels, plastic
bags, food wraps, air fresheners, spray starches, non-liquid
heating materials and moth control substances.
Colgate's products are manufactured and distributed in both
the United States and more than 40 foreign countries. Their
distribution varies to meet local requirements.
In 1972 the company acquired the Kendall Company, a manu-
facturer of professional products for hospitals and health
care institutions.
During the period 1968 to 1972, laundry and dishwashing
detergents, included under household products, contributed
from 30% to 33% of net sales. In 1972, they accounted for
30% of net sales.
Between 1968 and 1972, international operations accounted
for about 46% to 52% of net sales with the 1972 figure being
52%. Approximately 61% of consolidated net sales outside
the United States during 1972 was concentrated in Australia,
Canada, France, Germany, Great Britain, Italy and Mexico. No
one country represented more than 16% of such sales.
32
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For the five years 1968 - 1972, net sales increased from
$1,315,559 thousand to $1,807,632 thousand, or 37%. For
the same period, net income, after taxes, increased from
$45,874 thousand to $67,541 thousand, or 47%. The return
on common equity in 1972 was 13.5%. This includes the
Kendall Company acquired in 1972.
The company employs 17,500 people in the United States.
Purex Corporation Table 12
PUREX CORPORATION LTD.
FIVE YEAR FINANCIAL HISTORY
($ MILLIONS)
Income % Net % Net
Before Net Profit Income to
Tax Income Margin Net Worth
1972 364 29 15 4.1 13.5
1971 352 27 13 3.8 12.8
1970 327 26 13 3.9 12.4
1969 287 31 14 5.0 13.1
1968 256 24 13 5.1 14.5
The company produces products under the following classi-
fications: consumer products, automotive engine services
and industrial, institutional and commercial products.
Consumer products include a broad line of bleaches, soaps,
detergents and scouring and other cleaning products for
household use, a line of drugs and toiletries, certain
agricultural products, some specialty foods and swimming
pool chemicals and equipment.
The principal household products manufactured and sold by
Purex are liquid and dry bleaches, liquid and dry deter-
gents and soaps, several varieties of toilet bar soaps -
including deodorant bar soaps - scouring cleansers, bluing,
disposable steel wool soap pads, cleanser pads, copper
stainless steel cleaners, a fabric softener, ammonia and
starch. The company also manufactures liquid and dry
bleaches, cleansers, bar soaps and detergents for sale
under the private labels of grocery store chains and drug
stores.
33
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The company sells its product in both national and regional
markets.
Certain household products such as Brillo steel wool
Products, Dutch Cleanser and various bleaches are manu-
actured in Purex-operated plants in England, Ireland,
Australia and Canada and in licensee-operated plants in the
Philippine Islands and Mexico.
The company employs 8,300 persons.
For the period 1968 to 1972, consumer products accounted
for 60.5% to 63% of sales and revenues of the company. In
1972 the proportion was 61%.
For the same five year period, sales and revenues increased
42% from $255,667,000 to $363,722,000. Net income after
taxes increased 16% from-$13,014,000 to $15,033,000. The
return on common equity for 1972 was 13.5%.
Amway Corporation
The Amway Corporation is a privately held company located
in Ada, Michigan. Through a network of home dealers, Amway
sells personal care items to households throughout the
country. A substantial plant is located at Ada, Michigan
where detergent products are manufactured. Total sales
volume in 1973 of Amway is estimated at 150 to 200 million
dollars. It was not possible to obtain any detailed finan-
cial data due to the fact that this is a privately owned
company.
Armour-Dial Division of Armour & Co., Subsidiary
of Greyhound Corporation""
Armour-Dial manufactures a wide variety of products includ-
ing soaps, deodorants and other personal care products;
ironing aids, floor waxes, detergent and other household
products, canned meats, pizza mixes and other packaged food
products as part of their grocery products line. They also
manufacture ethical prescriptions for humans and animals.
Their 1971 sales were apportioned as follows:
Personal care products 34%
Household products 9%
Food specialties 3778
Pharmaceuticals 16%
Other 4%
34
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Sales and financial history show:
Sales
Net
Income
Common
Stock
Capital
Surplus
Earned
Surplus
1972 1971
$260,441,450 $235,625,945
10 mos. to
11/2/68
$168,284,000
$15,808,553 $13,413,843 $ 9,289,000
10,319,169
shares
10,317,000
shares
$42,640,768 $42,602,636
$44,509,716 $30,764,914
10,317,000
shares
$ 43,216,000
$ 9,289,000
The Armour-Dial Division employs 2,700 people. Since
Armour & Company and Armour-Dial have been consolidated
into Greyhound, data on Armour-Dial as an entity is not
now available.
Economics Laboratory, Inc.
The company develops, makes and sells chemical products
for cleaning and sanitizing uses. Principal products in-
clude detergents, disinfectants, drying agents and sol-
vents for institutional, commercial and custodial use.
Products are also made for warehouse washing, food service,
hospital, animal care, bakery and laundry sanitizing.
The company also makes detergents and rinse additives for
home washers and many other specialized cleaners.
The company employs 3,600 people.
For the five years, 1968 to 1972, sales increased 73% from
$89,063 thousand to $154,263 thousand. Net income for the
same period increased from $5,420 thousand to $9,652 thousand
or 77%. The rate of return on the common equity for 1972
was 17.5%.
Chemed Division of W. R. Grace & Company
This division of W. R. Grace & Company, a highly diversified
conglomerate corporation, is one of the chemical divisions
of the company. Chemed accounted for 6% of net sales of
the parent company in 1971.
35
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Chemed's products include amino acid chelating agents,
sarcosine surfactants and other specialties used in soap
and detergent manufacturing., textile processing, water
treatment and other industrial applications.
Sales of Chemed rose from $83 million in 1968 to $124 mil-
lion in 1971. For that 4 year period, sales increased
by 49%. In 1971 Chemed, after taxes, contributed 13% to
W. R. Grace and Company's'income.
Industry Segmentation
At this juncture, having examined the number and size dis-
tribution of the industry members, it is possible to
divide the industry into three groups for further study.
Given the fact that the first-3 companies represent be-
tween 80% and 85% of the package market, it would seem
logical to use the first-3 companies as the first group.
This, however, would make the analysis of impact more dif-
ficult since census data are published in groupings of not
less than 4 companies. Therefore, since the census data
are a very important source of data, it is necessary to use
the first-4, and the first-8 designations in the industry.
For this reason, the industry is grouped as follows:
TABLE 13
SIC 2841 IMPACT
Segment I
Procter and Gamble Company
Lever Brothers Company
Colgate-Palmolive Company
Purex Corporation Ltd.
Segment II
Amway Corporation
Armour and Company (formerly Armour-Dial)
Chemed Division of W. R. Grace & Company
Segment III
All other companies in the industry
The impact analysis revolves around separately impacting
each of the three groups in order to determine the effect
of the effluent limitation guidelines and standards of
performance. In addition to publicly available data, data
has been obtained via a questionnaire that was prepared
for the purpose.
36
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Plant Data - No individual plant data are available at this
point in the study. The only source of any usable data is
the 1967 Census of Manufacturers, establishment data.
The 1967 Census data are arranged as follows:
Group I - The first 4% of total establishments on
a value of shipments basis.
Group II - The first 7% of total establishments on
a value of shipments basis.
Group III- Must necessarily be a residual. It is
what remains after Groups I and II have
been constructed.
Plant Efficiency - Since no disaggregated plant data are
available at this point in the study, an estimate of aggre-
gate plant efficiency by Group will be made based on the
previously discussed measure of labor productivity, i.e.,
value of output per unit of labor input. Although there
may be many arguments against the use of such a measure, it
is still a reasonable gauge of plant efficiency. Reference
to Table 14 will show these relative measures of plant
efficiency on an aggregate plant basis. (This is really on
an approximate company basis since there is no method to
disaggregate the establishment data further.)
37
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TABLE 14
VALUE OF SHIPMENTS AND VALUE ADDED
AS MEASURES OF EFFICIENCY
BY INDUSTRY GROUP
FROM ESTABLISHMENT DATA, 1967
Value of Shipments
Value Added
$
Mil.
$ Per
$ Per Worker $
Employee Man-Hour Mil.
$ Per
Employee
Group
First-28
Establishments 1,875.0
107,759 71.84 1,018.3 58,523
$ Per
Worker
Man-Hour
39.02
Group II
Next-24
Establishments
Group HI(c)
All Remaining
Establishments
Industry
Average
249.8 69,389 56.77 148.2 41,167 33.68
468.6 49,851 49.33 237.2 25,234 24.97
2,593.4 85,590 64.67 1,403.7 46,327
35.00
Source: 1967 Census of Manufactures, page 28D 10.
'a)Should be 26.72 establishments therefore data are
probably understated but not significantly, since
it agrees with 1963 concentration ratio. 1963
company concentration ratio: 72% for value of ship-
ments. Group I concentration ratio: 1,875.0/2,593.4 =
72.3%.
Should be 20.04 establishments therefore data are
probably understated. 1963 concentration ratio = 80%,
for value of shipments. Group I and Group II = 81.9%.
^°'Group III is therefore probably understated. Based
on 1963 concentration ratio = 20%. Group III = 18.1%.
("'Includes only production workers.
Group I Relative to the Industry Average - The only above
average group of the three groups is Group I. When one con-
siders that Group I represents 28 of 668 establishments one
must be impressed at its effect on the average and at its
performance relative to the rest of the industry. Its level
38
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of labor productivity is significantly above Group II.
Taking the per worker man-hour figures, Group I's value
of shipments per production worker man-hour is 26.5%
greater than that of Group II. For value added per pro-
duction worker man-hour, Group I exceeds Group II by 16%.
Group I exceeds Group III in these two measures of
productivity by 45.4% and 56.4% respectively.
Group II and III Relative to the Industry Average - When
comparing Groups II and III to the average for the industry
one finds that Group II is below the average on value of
shipment per production worker man-hour by about 1270 and
below the average value added per production worker man-
hour by about 4%, quite close to the average. Group III is
below the average for the industry for these same two
measures of productivity by 24% and 29%, respectively.
Summary of the Data - These data would seem to suggest that
the Group I establishments are very efficient, Group II
establishments are about average and Group III establish-
ments are quite a bit below the average efficiency of the
industry. (Group III being 616 of 668 establishments in the
industry as a whole but representing only 18% of the value
of shipments.)
One more point should be discussed here. A striking fact
concerning this analysis is that when comparing Group III
to the industry average one finds that Group III is lower
relative to the average for value added per worker man-hour
than for value of shipments per worker man-hour - a situation
not found with Group II. The reason for this may be that
Group III establishments have a relatively high cost of
materials and no market power with respect to price; i.e.,
a profit squeeze.
Key Operating Ratios - In order to verify this last point
and to get a further insight into the efficiency of the
three groups, a series of operating ratios were calculated
on a group basis (Table 15)•
39
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TABLE 15
SELECTED OPERATING RATIOS, 1967
(IN PER CENT)
Prod. Worker
as a %
of Total
Employment
Group I
Group II
Group III
Industry
Average
74
64
52
66
Cost of
Materials
Per Dollar
of Shipments
46
41
50
46
Cost of
Materials
and Payroll
Per Shipment $
54
51
64
56
Payroll as
% of
Value
Added
15
17
27
17
Columns two and three in Table 15 seem to verify the obser-
vation that Group III has a relatively high cost of materials
The ratio cost of materials per dollar of shipments is above
average while cost of materials and payroll per dollar of
shipments is above average by an even greater proportion.
This latter fact suggests that Group III is a higher cost
group than the others with respect to materials and labor.
In addition, payroll as a per cent of value added is highest
for Group III, yet another indication of the relatively high
cost operations of Group III.
Note that in columns 2 and 3, the lowest cost of materials
as well as materials and labor is not Group I but Group II.
It is further noted that in column 2, Group I is equal to
the average, while in column 3, Group I is below the average.
Nevertheless, in the important measure of efficiency,
payroll as a per cent of value added, Groups I, II and III
are ranked in just that order. In the relationship between
production workers and total employment, the Groups also
ranked: Group I (1), Group II (2) and Group III (3).
The observations made here leave one further observation to
be made: Group I has a high materials cost and a low labor
cost. The reason may be attributable to the fact that Group
I companies make a higher value product mix than do the
other groups. The value of shipments per employee is signi-
ficantly higher than for the other groups.
Economic Impact - It would be premature at this time to
evaluate the economic impact of Effluent Limitation Guide-
40
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lines and Standards of Performance without having applied
the incremental cost of the new standards to the cost
structure of the companies or plants. However, although
nothing can be said with regard to the absolute impact on
any of the groups, something can be said about the relative
impact of incremental cash outlays that will not generate
any offsetting cash inflows. Certainly it can be seen from
the data already developed that the relative impact of the
incremental cash outlay on Group I will be light while the
impact on Groups II and III will be heavier with Group III
bearing the heaviest impact.
Group III companies are smaller. They depend on the price
umbrella extended by the big three and are probably the
highest cost producers. They are also probably more subject
to price competition because of their size and the probability
that some of them, at least, operate in regional or local
markets rather than in the national markets of the Group I
and at least part of the Group II companies. In addition,
the ability to raise capital probably varies greatly between
groups, going from zero difficulty, at least for the "big
three," to significant difficulties for some, if not all,
Group III companies.
Any further comments concerning the economic impact will
have to await the estimation of the absolute impact.
Financial Profiles
The financial profiles have been derived from the models.
They are based upon known manufacturing costs and data re-
ceived in the questionnaires.
Constraints on Financing Additional Capital Assets
As previously indicated, there are probably no constraints
whatsoever on the "big three" with regard to their ability
to finance additional capital assets within reasonable limits.
Certainly it is very unlikely that they would have any
difficulty whatsoever in sourcing funds to pay for in-house
process modifications and treatment equipment. Any one of
these three companies could probably expense these items if
it chose to do so.
Group II and Group III companies will require more analysis.
More crucial here is the cost of the equipment, since the
magnitude of the capital sourcing is of great importance in
coming to any conclusions. The ability to source capital is
a function of several variables. The ability to source
capital is a function of risk. Risk can be broken down into
two types, (1) business risk and (2) financial risk. Business
risk refers to the variability of returns to the business
41
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resulting from exogenous forces beyond the control of
management. They are inherent in the nature of the busi-
ness. (Business risk can, however, be reduced through the
diversification of assets.) Financial risk refers to the
risk associated with the method of financing the business.
It relates to the use of leverage, i.e., the addition of
debt to the equity base in the sourcing of capital. The
existence of these risks and the magnitude of the risk is
perceived in the marketplace for funds.
Tne Kisk - Keturn Ratio - The inducement to save rather than
to consume is the return available on the funds saved. That
return is a function of the risk involved in lending or
investing funds. Thus, any consideration of the ability to
source capital funds must consider the risk-return relation-
ship. The greater the total risk perceived in the marketplace
by suppliers of funds, the greater will be their demand for
additional return to assume the additional risk, whether it
be the equity investor who sells shares because the return
on his investment no longer compensates him for the level
of risk involved, or the potential buyer of equities who
waits for a "reasonable price;" i.e., a price that provides
a rate of return commensurate with the risk involved.
In the case of the market for borrowed funds, the same
relationship exists, although the institutional arrange-
ments may be different in some cases. Aside from trade
credit, which arises out of the need of the seller of goods
to extend credit in order to finance his sales, the commer-
cial bank is traditionally the initial institutional
source of borrowed funds for a business establishment.
Trade credit tends to be shorter term than bank borrowing.
The banks, as well as other institutional lenders, operate
on the risk-return relationship; however, there are (1)
levels of risk beyond which they will not lend and (2)
limits to how much they will lend. These limits are set
by the risk level, the availability of funds, the nature
of the relationship between borrower and lender and statu-
tory constraints.
The ''Seasoned" Company - The borrower is in somewhat of a
paradoxical positron. He requires funds to permit his
business to expand and grow. Expansion and growth will
increase profits, increase the equity in the business and
induce lenders to lend; i.e., the company becomes financially
"seasoned." Therefore, in order for the small company to
become financially seasoned it needs funds, but in order to
get funds, it must be seasoned. Because of this situation,
it is difficult for small businesses to secure capital. Once
they do secure capital and they become profitable and known
42
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among lenders, they become seasoned and can "shop around
for funds." In addition to the commercial banks, the
seasoned corporation has access to private placement
financing and public offerings of their debt and equity
instruments.
Group I represents well seasoned companies. Group II
represents companies which, for the most part, have sources
of capital in addition to bank borrowing. Group III pro-
bably represents various levels of capital sourcing limita-
tions.
Pricing in This Oligopolistic Market
The soap and detergent industry can be described as essen-
tially oligopolistic with few sellers having relatively
large degrees of market power. With the exception of one
product line, light duty liquid detergents, the industry
exhibits no apparent price competition. The static nature
of prices in the industry results from an awareness that
price competition is not in the interest of the industry.
There is, therefore, no tendency for prices to either increase
or decrease except in response to increase in cost or de-
clines in demand.
The very high degree of concentration leads to a situation
whereby the so called "big three" extend a price umbrella
over the household soap and detergent industry. Such an
umbrella creates oligopolistic profits since it is not based
on the cost structure of the most efficient producer. In
highly concentrated markets the large competitors cannot
help but be aware of each other's cost situation, particu-
larly any changes in these costs. Therefore, price
increases will take place in keeping with an attempt to
maintain some type of target profit margins. When these
margins get squeezed there is pressure to raise prices.
By the same token, downward price movement is induced by a
decline in demand, not a current expectation in the soap
and detergent industry. Oligopolists recognize their mutual
interdependence. Price competition can lead to ruinous
price wars, particularly if an industry is confronted with
heavy fixed charges.
The Oligopolists Behavior - The oligopolists behavior can be
described by a"kinked demand curve which illustrates the
tendency of prices in the industry to remain static. As one
can see in the figure below, the upper part of the demand
curve has a slope obviously different from the slope of the
lower part of the curve.
43
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DEMAND CURVE FACED BY A SELLER
IN AN OLIGOPOLISTIC MARKET
W
Pn
w
---^ —— • Going Price
QUANTITY SOLD
Because of this relationship one can see that any change in
price, whatever the direction, will not benefit the price
changer. If he increases his price above the going market
price and his competitors do not follow, he will lose part
of his market share, as well as suffer a decline in total
revenue. This is so because the product of his competitors
can be purchased at lower prices. If the price changer were
instead inclined to decrease his prices and increase his
market share at the expense of total revenues, a clear threat
to the rest of his competitors, they must immediately retal-
iate or suffer a loss of market share. Retaliation may
result in merely disciplining the price cutter and bringing
him back into line or, if the reaction to the price cutting
is severe, it could lead to a price war.
There is an additional reason why there is no tendency to
decrease prices. Product differentiation creates a rela-
tively inelastic demand curve for the seller with respect
to price. When the demand curve is inelastic a decrease
in price results in a decrease in total revenues and profits.
44
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By the same token, an increase in price leads to an increase
in total revenues and profits.
Product Differentiation - It is obvious that it is in the
interest of tEe oligopolist to avoid price competition. It
does not mean, however, that there is no competition in an
oligopolistic market - it only means that there is no price
competition.
Product differentiation, coupled with a large advertising
budget, is another method of competing. The more the
product can be differentiated the fewer close substitutes
there will be to compete with it, regardless of relative
price increases. Product differentiation involves imparting
qualities, either real or imaginary, to a product through
advertising, packaging, changing its physical properties,
etc. The large advertising budget can constantly keep
before the consumer the name of the product made by a
particular manufacturer and impart to it differentiated
qualities which cause the consumer to purchase it instead
of a competing product, even though chemically the competing
products are identical. A perfect example of this is liquid
chlorine bleach.
Product differentiation and advertising play an important
role in the soap and detergent industry, as can be seen from
the following extracts from the Securities and Exchange
Commission 1972 10K Reports completed by the Proctor and
Gamble Company and Colgate-Palmolive Company respectively.
Procter and Gamble
The Company is one of the major producers in the
household products field. The market in which
these products are sold is highly competitive. In
view of this competitive situation, the Company's
products are constantly evolving to meet the
changing needs and preferences of consumers. In
addition to product improvements, new products
designed to attract the consumer's favor enter the
market in which the company does business. Adver-
tising is used in conjunction with an extensive
sales organization because this combination provides
the most efficient method of marketing this type of
product.
45
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Colgate-Palmolive
Colgate's products are sold under highly competi-
tive conditions in the United States and abroad,
primarily through retail grocery, drug, variety and
department stores. Competition, based primarily on
brand acceptance and marketing capability, is strong
in terms of product quality and the number and size
of competing companies.
Price Elasticity of Demand - Based on the Wholesale Price
Index (WPI) the products of the soap and detergent industry
are price inelastic with the one exception of liquid syn-
thetic detergents. In the case of these liquids, the WPI
shows an almost continuous decline in price since data
became available in 1957. In 1960 the WPI for liquids
was at 95 (1957 - 1959 = 100), by 1971 it was 83, a decline
of 12 percentage points. For the same period, liquid
detergent sales in billions of pounds went from 1.24 to
2.55 (est.), an increase of 106%. For the industry as a
whole, the WPI rose from 101 in 1960 to 111 in 1971; deter-
gents, total soaps and synthetics, went from 5.17 billion
pounds in 1960 to 6.88 billion pounds in 1971.
The reason for the price elasticity in the case of liquids
probably stems from the fact that the companies have not
been as successful in achieving brand loyalty with this
product as they have with solids. This fact, plus the
relatively lower barriers to entry into the liquid market
because of the smaller capital requirements has caused
competition to increase in this submarket, attracting
entrants to exploit the available returns on investment.
The relative success in product differentiation with regard
to the solids no doubt accounts for the fact that there has
been no significant evidence of cross elasticity between
liquids and solids. The advent of the newer non-phosphate
formulae in liquid form could upset this classic relation-
ship.
46
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Ill
INDUSTRY MANUFACTURING PROFILE
INTRODUCTION
Technical Differences - Soaps and Synthetic Detergents Raw
Materials'
Soaps are made from natural fats, oils cr fatty acids of
either animal or vegetable origin. To be technically cor-
rect one should acknowledge the manufacture of "fatty acids"
via synthetic means in Russia and Europe, but not in the U.S.
as yet.
Tallow, coconut oil and palm oils are the items of greatest
volume used in the manufacture of soaps and the acids de-
rived from fats and oils > Tall oil, a by-product of the
paper industry, is also used, primarily for the preparation
of industrial soaps and lubricants.
Synthetic detergents are prepared from hydrocarbons and hy-
drocarbon derivatives almost exclusively of petroleum origin.
The hydrocarbons are frequently the linear alkylates of ben-
zene. The derivatives include long chain alcohols as well
as ethoxylated products made by reacting the alcohols with
ethylene oxide.
The most apparent significant difference between the start-
ing materials of soap and synthetic detergents is that the
natural fats and oils are already oxygenated and require
only modest further processing whereas the synthetic deter-
gent starting materials must first have an oxygen-containing
group added and then be processed similarly to soaps.
Processing
Soap processing from fats and oils has not changed much in
over 100 years. Process control has become automated with
raw materials charged in at predetermined programmed rates,
but the equipment and methodology is largely unchanged. A
new dimension has been added within the past thirty years;
namely, the preparation of soaps from fatty acids which were
obtained by the splitting of natural fats.
Technology very similar to that employed by the chemical pro-
cess industry is used to process the hydrocarbons and their
derivatives into synthetic detergents.
Capital outlays for the soap and synthetic detergent industry
are quite modest ($6 - $100/1000 Ibs of annual capacity) when
compared to the needs of the chemical process industry ($100 -
$200/1000 Ibs of annual capacity), with some of the more in-
volved chemical processes requiring as much as $400/1000 Ibs
47
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of annual capacity.
Process Economics
The soap and detergent industry is a low capital-intensive
business. The large investment requirements are for pur-
chase of raw materials and marketing. Over 80% of the manu-
facturing cost is attributable to raw materials, the balance
to processing and amortization charges.
Two factors account for the relatively low capital require-
ments. First, the processing is relatively simple, requiring
no high pressure or high temperature. Corrosive conditions
are met only in the fat splitting operation. Second, the raw
materials and intermediates are very low in mammalian toxicity,
thereby requiring no special precautions against leaks, spills
or upsets. In the more difficult chemical processes as much
as 5/8 additional capital is required to allow for such pre-
cautions .
Process Cleanliness
Several of the soap and detergent processes are essentially
"contaminant-free" in that the process consumes all of the
raw materials without generating any unusable by-products
which end up in wastewater streams. However, even in the
case of such units some allowance has been made in the guide-
line recommendations to accommodate the occasional upset,
cleanout or spill. Such a small allowance gives a more eco-
nomic operation without damaging the environment than would
be the case were no discharge mandated.
The concentration and distillation of glycerine is one of the
highest contaminating processes of the industry. Average 50053
are many times greater than those found in any of the other
soaps and detergent making processes. The reason for this is
readily apparent. The employment of barometric condensers to
reduce the pressure in the equipment causes a significant a-
mount of product to be entrained and carried out in the con-
denser water. A significant quantity of product (glycerine)
is lost in the water stream.
Two of the synthetic detergent processes are worthy of special
mention; namely, spray drying and liquid detergent manufacture.
The restrictions placed upon the operation of spray drying to-
wers by stringent air pollution regulations have resulted in
dilute wastewater streams of large volume which are run to dis-
posal. Liquid detergents also face an equally large problem in
the disposal of significant volumes of dilute detergent streams,
Because of frequent changes in the products being made and
packaged, the mixing and bottle filling equipment must be
cleaned out. This usually results in having to handle a greater
48
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volume of dilute detergent than can be recycled back into
the product, hence it is sent to disposal.
MANUFACTURING PLANT SEGMENTATION BY UNIT PROCESS
In the "Draft Development Document for Effluent Limitations
Guidelines and Standards of Performance - Soap and Detergent
Industry", the industry was categorized by the processes
used for manufacture in order to develop guidelines, as shown
earlier. In this section these same segments or categories
will be used in briefly reviewing the manufacturing economics
of the industry.
SOAP MANUFACTURE
The soap market has a sales volume of about $400 million per
year. The preponderance of the market is in the preparation
and marketing of toilet bars for personal cleanliness.
There are two major processes for the manufacture of soap -
kettle boiling and the neutralization of fatty acids - which
will be treated in a later section. Kettle boiling is now
employed in more than 24 locations in the U.S. In practically
every instance the equipment is fully amortized.
Batch Kettle
If a new kettle boiling plant were to be built today, it would
require approximately $100/1000 Ibs of annual capacity - pro-
vided the volume approached 20 million pounds per year. It is
doubtful that any new capacity would go in as a kettle boiling
process. The major contender is the fatty acid neutralization
which has a much lower capital requirement ($20/1000 Ibs of
annual capacity) but a higher raw material cost in the pur-
chase of fatty acids vs. oils.
Another alternative for a new facility would be the continuous
saponification of oils carried out in a series of centrifuges
used as reactors. In this instance the capital requirement is
roughly $40/1000 Ibs of annual capacity. This process re-
sults in about a l
-------
A dilute glycerine stream is drawn off as a by-product of soap
manufacture. It is concentrated into 60 - 80/0 solution and
sold to a glycerine processor or distilled at the same plant
location to a marketable 98+% product.
In the batch kettle processes the processing cost is roughly
1.6c/lb, including amortization. The raw material cost is
about 16
-------
A significant portion of manufacturing processing involves
the use of the barometric condenser (for vacuum) in distil-
lation of the acids. The guideline recommendations establish
a low enough BOD5 value to require some modification of this
type of equipment,, possibly replacing it with a surface con-
denser. Such an addition would add about $1/1000 Ibs of an-
nual capacity. Here again, the decision to enter the fat
splitting business will not pivot upon the capital expendi-
tures required to meet effluent guidelines requirements.
Normally, the volume required to make this type of operation
competitive is sufficient to make it a business capable of
standing by itself. There are fat splitting plants which
have a continuous soap making plant in tandem with the fat
splitter, making a completely integrated unit.
Glycerine coming out of this operation is often run through
a triple effect evaporator, then distilled overhead, ready
for market at 98+70 assay.
Soap From Fatty Acid Neutralization - Another way in which
neat soap is made is by the reaction of caustic with fatty
acids obtained from the splitting of fats and oils. A mix-
ture of 80/20 tallow fatty acids/coconut fatty acids is
charged to a kettle either on a batch or continuous basis
to form the same neat soap described in the batch kettle
process.
Capital requirement is around $20/1000 Ibs of annual capacity
with a processing cost of about 1.5
-------
Glycerine Recovery - Very dilute glycerine streams (8%) are
run into batch concentrators where they are enriched to the
60 - 807o level and most often sold to a glycerine processor,
who in turn finishes the job by overheading the glycerine in
a still to make 98+% glycerine.
Glycerine concentration requires about $25/1000 Ibs of annual
capacity at the 10 million pound level (utilizing triple ef-
fect evaporators) with an operating cost of around 2c/lb.
The glycerine still has a capital requirement of about $15/1000
Ibs of annual capacity and ah operating cost of roughly
1.4
-------
The process is quite clean, facing no particular difficulty
in meeting the guideline recommendations.
In summary, the larger soap operations will be only mildly
impacted by the guideline recommendations; certainly not e-
nough to make the meeting of the limitations a go/no-go si-
tuation when considering the possible profitability of any
given enterprise.
Bar Soaps - Neat soap made from one of the previously des-
cribed processes is blended with a variety of fillers, per-
fumes and oils and then formed into bars via a molding oper-
ation. The resulting product is a toilet bar used for per-
sonal cleanliness. Since 1963 toilet bars have been in-
creasing in volume slightly but steadily from 635 million
pounds per year to 700 million pounds per year in 1973.
Mechanics' hand soap and laundry bars have been decreasing
substantially over the same period of time.
One of the most important activities that takes place during
the formation of bar soap is the reduction of the moisture
from the neat soap level of 30% to around 8% - 10% in the
final bar. Moisture control and the way it is attained is
particularly critical. There are many different ways in
which the moisture content is reduced. Some of them result
in no wastewater effluent at all while others have a signi-
ficant loading of a wastewater stream.
As has been seen in a number of previously described proces-
ses, the barometric condenser is used to assist in the dry-
ing operation. Guideline recommendations for Level II will
require some modification of the bar soap activity to reduce
the effluent loadings to the levels recommended. If the
barometric condensers are replaced, the capital requirements
of a 20 million pounds per year plant will go up from $25/1000
Ibs of annual capacity to $27/1000 Ibs. The operating cost of
such an operation comes to a little over 2c/lb.
The additional capital requirement identified above as reused
to meet Level III guideline recommendations are very small
and therefore hardly seem sufficient to be solely responsible
for a go/no-go decision to enter the business.
Raw materials were not included in this statement since it is
basically dependent upon what process was used to make neat
soap as to what the resultant incoming raw materials will cost.
As noted earlier, they will vary considerably whether the neat
soap is from kettle boiling operations or fatty acid neutrali-
zation and whether the bar soap operation is part of an inte-
grated train of prior steps.
Liquid Soaps - This is the simplest process in soap making.
Neat soap - usually made from fatty acid neutralization - is
run into a batch mixing vessel where other ingredients are
blended for the particular performance market needed. In some
instances the final product is filtered before being drawn off
53
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into cans or barrels. Another low capital process, roughly
$30/1000 Ibs of annual capacity is required for this type
of processing. Raw materials cost about 12%0/lb and the
manufacturing or processing costs approximately 1.2c/lb.
There is negligible contamination from this process, so
that it is not impacted by the guidelines.
DETERGENT MANUFACTURE
Oleum Sulfonation & Sulfation and Air-S03 Sulfation and Sul-
fonation - Both the oleum (sulfur trioxide dissolved in sul-
ruric acid) and gaseous sulfur trioxide are used for the
initial modifying step of hydrocarbons and hydrocarbon de-
rivatives on their way toward becoming synthetic detergents.
There are many processes in which this kind of chemistry is
handled. The two methods cited above account for the vast
majority of materials so processed. The oleum process requires
about $15/1000 Ibs of annual capacity of capital while the
803 process needs about $32/1000 Ibs of annual capacity.
The corresponding operating costs range between 0.56
-------
pounds per year and involve methods of washing out equipment
which will be in excess of the effluent limits recommended
for these processes.
Neutralisation of Sulfuric Acid Esters 6s Sulfonic Acids - Af-
ter one of the above reactions described previously, the re-
sulting acid product is neutralized with caustic. The capi-
tal requirements are quite modest - $2/1000 Ibs of annual ca-
pacity. In almost every instance the firm which sulfonates
also carries out its own neutralization.
Spray Dried Detergents = This process is the most important
and most critical one in the synthetic detergent industry.
Typically, the neutralized material from the previously des-
cribed process is run into a crutcher, mixed with other in-
tredients and pumped as a 7070 slurry to the top of the spray
rying tower. The tower is around 150 - 200 feet tall and
25 feet in diameter. The slurry is sprayed through a ring
of spray nozzles around the top of the tower and falls through
an ascending flow of hot air. By a delicate balance of slurry
viscosity, air temperature and air velocity, the synthetic de-
tergent particles of just the right size, density and surface
area are produced.
Reduced and no-phosphate formulations have required extensive
reformulation including the use of surfactants having markedly
different responses to temperature and humidity. Air emission
standards have simultaneously been tightened, resulting in
heavy discharging of contaminant into wastewater streams as-
sociated with the spray tower. There are indications that the
problem will become more universal before it is resolved.
Guideline recommendations have acknowledged the dilemma for
the present, but insist upon modifications of the process to
accommodate a significant reduction in wastewater generation
and loadings during the drying operation. In Phase II the im-
pact will be evaluated as to how these requirements may effect
the essentially independent operator vs. the highly integrated
firm. Here again, there are a few very small firms who also
own and operate spray drying towers. What the financial effect
or the influence on their competitive ability will be is yet
to be established.
For a capacity of 300 million pounds per year in the spray to-
wer, the capital is about $17/1000 Ibs of annual capacity. The
processing costs amount to about 0.8c/lb and the raw material
cost runs in the neighborhood of ?C - 9
-------
of liquids; household and industrial. The household variety
assists in all types of cleaning tasks from dishwashing to
general house-cleaning. The industrial products are usually
a good deal harsher chemically and handle an equally large
variety of cleaning activities.
In the household area, the product is mixed in large batch
units and then piped to the conveyor lines for filling. Be-
cause of frequent product change, the tanks- and lines are
washed clean - and most of the resulting wastewater is run
to the sewer. In the larger, more integrated plants they are
able to minimize this disposal problem by blending the wash
water back into the product. The smaller operators have con-
siderable difficulty providing that kind of efficiency.
Capital requirements for liquid detergent manufacture runs
about $24/1000 Ibs of annual capacity with operating costs
of around 1.4
-------
Guideline recommendations insist upon an improvement over
the current rather "dirty" operations which is essentially
a high.loss due to product processing. It is believed that
with reasonable diligence the technique can be improved and
the guideline met.
EFFLUENT TREATMENT
Most of the soap and detergent manufacturing plants discharge
their wastewater effluents into municipal treatment plants.
Frequently there is some pretreatment given the raw waste.
It is often a fat skimming and settling operation.
Of the plants which are point source dischargers into public
waters, the treatment varies both as to the length of time
and methodology.
Table 16 gives some insight into the expected operating
characteristics of a secondary treatment plant handling the
wastewater effluent of an integrated soap and detergent op-
eration. The treatment plant is expected to handle all of
the industrial wastes coming from the manufacturing plant's
combined process streams. Sanitary streams are handled
separately.
The raw flows are sent to an equalization basin, given chem-
ical treatment (alum), clarified and then run into an acti-
vated sludge aeration pond. The effluent is regarded as a
point source discharge into a natural body of water.
Table 16
Operating Characteristics of a Secondary Treatment Plant
Raw Influent Effluent
pH 6-11 6.5-8.5
BOD5 1350 mg/1 50 mg/1
COD 3400 mg/1 150 mg/1
Suspended Solids 400 mg/1 30 mg/1
Phosphorus (total) 30 mg/1 ** mg/1
MBAS 520 mg/1 15 mg/1
Dissolved Oxygen 0 1 mg/1
The capital cost of such a plant is expected to be
$2.50/gallon of daily capacity and to have an operating cost
of roughly 32c/gallon/year of plant sewage treated.
57
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IV
THE SCOPE OF THE IMPACT ANALYSIS
Since well over 98% of the plants in the Soap and
Detergent Industry are not point sources of effluent, but
send their effluent to publicly-owned treatment facilities,
the immediate obvious impact of point source guidelines
on this industry must be very small. On the other hand,
the industry may face very heavy forthcoming sewer Charges
from publicly-owned treatment plants as these plants
endeavor to meet their new treatment standards and guide-
lines. If this occurs, the true economic impact of the
point source guidelines will readily become apparent. For
the very large plants, most of whom have access to navi-
gable water, the point source guidelines establish the point
at which it becomes less costly to install their own treat-
ment facilities.
Conversely, were the present situation reversed and 98%
of the plants represented point sources and possessed
their own treatment facilities, the cost of meeting guide-
line requirements would fix the point at which it would
be economically advisable to utilize publicly-owned treat-
ment facilities.
This then, is one of the economic impacts of point source
guidelines on the large plants of an industry which is not
at present a point source industry - namely, to fix or
delineate the point at which that portion of industry must
consider so far as practicable the alternative to publicly-
owned treatment.
The guideline contractor has made such an analysis pos-
sible by using the same method he used to categorize the
industry. The industry was broken down into its basic pro-
cess building blocks. A summary of the impact on unit
processes is shown in Table 1.
Utilizing the building block processes which are described
in the guidelines report, any detergent or soap plant can,
theoretically, be created.
The small company, in contrast to the large producer, is
presently using publicly-owned treatment facilities. The
small producer s options in regard to becoming a point
source are severly limited by:
1. Geography - the small plants are
frequently located within the con-
fines of a major metropolitan area
with no access to navigable water.
59
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2. Technology - industrial wastes, such as
those from a small soap and/or detergent
plant, would preclude smooth operation of
a small package treatment plant. The
technical and laboratory staff to" provide
supervision of a package treatment plant
under frequent upset conditions would be
economically unsupportable.
For the small producer who must then use publicly-owned
treatment facilities, an important possible effect is the
impact of the recommended guidelines and standards on
publicly-owned pretreatment requirements. It is possible
that the municipalities might take the waste loadings for
the well operated plants in the Level I guideline recommenda-
tions and require them as pretreatment standards.
The recommended guidelines very specifically caution that
small plants must be given special consideration.
The economic impact statement contained herein builds and
costs three model plants such as would be found in:
1. A small soap company
2. A small liquid detergent company
3. A very large integrated soap and deter- .
gent company.
All of the models are postulated to be single plant companies.
The in-process changes necessary to enable the small plants
to meet the guideline raw waste loadings are postulated and
costed. It is evident from this study that if these raw waste
loadings were required as pretreatment standards requisite to
effluent disposal through a publicly-owned sewage plant,
the viability of the small companies would be in jeopardy.
The large integrated soap and detergent company is costed to
meet the recommended raw waste loadings. Then secondary
treatment is given to the wastes to meet the guideline
recommendations. Although the costs are significant, they
are supportable within the economics of the large plant.
One assumption had to be made to bring out the effect of the
guidelines, namely, each plant had to be considered as a
separate profit center and company in itself. This is not
general industry practice - usually a product is considered
to be a profit center and not the various plants manufacturing
that product. Profitability is calculated on a product basis,
not a plant basis. Costs assignable at all plants making the
60
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product are combined into one product cost number to arrive
at product profitability. Attempting to establish guidelines
costs relative to such accounting practice would be impossibly
complex.
The Level III case in each instance is evaluated as a square
case representing a new facility operated at manufacturing
capacity from the initial on-stream date. Each process unit
necessary to operate the total plant at capacity is treated
similarly.
The study of the models bears out the phase I groupings and
confirms the potential seriousness of the guidelines to the
small operator. The price effect is discussed in the economic
impact and it is obvious that if the small companies are to
install process changes to reduce raw waste loadings, prices
will have to be raised. For the small soap company at least
to remain in business there is no choice.
It is pointed out that the market is inelastic and should
thus support a price increase. Here again, the c/lb cost
increment necessary for the small company is substantially
higher than that for the larger firm indicating a potential
deterioration in the company's overall business position.
61
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V
MODEL PLANTS
To facilitate economic impact assessment, three hypotheti-
cal plants representing small, medium, and large operations
were synthesized. The creation of these theoretical, com-
posite models was necessitated by the fact that there was
no typical manufacturing facility in the soap and detergent
industry which could be scaled up or down to give a satis-
factory picture of the impact of guideline requirements
upon the entire industry. For example, there are a few
small to moderate sized plants which manufacture soap pro-
ducts exclusively - and at that, not only bars and chips
but liquid products as well. In the detergent field, there
are a number of moderate sized plants which custom manufac-
ture spray dried detergents to the exclusion of soaps and
other types of detergent products. There are many liquid
and solid detergent blending plants, especially in the in-
dustrial surfactant part of the business, which do not manu-
facture soap products. As one might expect, there are a
few very large, fully integrated plants which manufacture
both soap and detergent products. Some of these plants
carry on fat splitting operations and operate substantial
glycerine recovery and distillation units. Given this back-
ground, it was necessary to postulate model plant operations
of varying sizes and degrees of diversification to observe
the financial effects of guidelines impact.
Of the eighteen manufacturing processes in the industry,
only six are heavy effluent generators. The guidelines rec-
ommended for these six will have sufficient impact upon their
economics to warrant intensive study to determine whether
overall plant profitability is significantly influenced.
These processes are:
101 - Batch Kettle Soap Manufacture
102 - Fatty Acid Manufacturing By Fat Splitting
104 - Glycerine Recovery And Distillation
106 - Bar Soap Manufacture
207 - Spray Dried Detergent Manufacture
208 - Liquid Detergent Manufacture
In the case of the first three processes above, it is rec-
ommended that barometric condensers be replaced by surface
condensers to reduce the high 6005 loadings presently found
in these processes. This will cause an increase in capital
cost.
In the case of glycerine recovery and distillation, the situ-
ation is particularly severe. Of all the soap and detergent
63
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processes, these are the heaviest contributors of 300$ to
wastewater streams per 1000 Ibs of anhydrous product manu-
factured.
In the spray drying of detergents, ways are presented for
reducing the wastewater loading and concomitantly, reducing
the BODs sent to sewer. The reduction is accomplished by
the introduction of a dual system of water scrubbers to
clean the effluent air coming out of the spray towers.
Coupled with the scrubber is a refrigeration unit to keep
the scrubber waters at an effective chilling and absorbing
temperature.
Household liquid detergent manufacture offers a different
kind of challenge. This process involves filling of small
containers (pints, quarts, etc.). The loss of product is
not so much from the actual filling operation on the con-
veyor belt, as it is from the numerous cleanouts which oc-
cur during normal manufacturing operations. Small manufac-
turers are expected to be more affected than the large in-
tegrated units because the initial investment of the
snail firm is usually more of a marginal nature and their
need to change product frequently much greater.
Model plants were created containing principally those op-
erations expected to be heavily impacted by the guideline
recommendations.
64
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VI
METHODOLOGY FOR ENGINEERING ANALYSIS
As essential background for the model building, detailed
flowsheets of all eighteen processes involved in the
manufacture of soap and detergent products were developed.
Their accuracy and completeness were verified by visits
to soap and detergent installations and by discussions
with industry experts. From the detailed flowsheets,
capital equipment requirements were estimated for each
individual process. With the capital in hand, the pro-
cess costs were established for each class of products in
the industry.
In the case of processes producing formulated products,
careful structuring of the current formulations was car-
ried out. The use of these formulations was confirmed by
reference to currently published reports on the matter and
conversations with those experts in the trade.
To insure that the cost values being obtained were reason-
ably accurate, they were constantly compared with the pub-
lished prices of many of the intermediates used in the
processes.
There was continuing communication with the contractors
serving the industry to obtain up-to-date capital and op-
erating expenses for new processes. In a number of cases
the capital and operating expenses are the result of these
communications and are actual quotations for "turn-key"
plants which could be constructed now.
To further insure the up-to-date nature of the cost factors,
whenever capital or operating expenses were available from
previous estimates made in the literature, etc., the appro-
priate engineering indices were applied to up-date the eco-
nomics .
In summary, all of the conventional chemical engineering
practices normally employed in the estimation of process
economics were applied to develop the most meaningful and
current measurement of capital and operating expenses pos-
sible short of complete detailed engineering design.
\
Current spiraling inflationary pressures have confused the
process of selecting appropriate raw material costs to be
applied in each instance - particularly to the soap side of
the business. Even as this review is written, the fats mar-
ket is going through a very trying time. Reflecting the
current shortage of beef for the consumer, the derivative
tallow is also becoming difficult to obtain in sufficient
supply to maintain operations at a level adequate to meet
65
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demand. In the newspapers recently, some major soap manu-
facturers have indicated the distinct probability of having
to shut down part of their soap making operations due to a
lack of fats.
On the detergent side, the problem is not severe, in that
almost all of the raw materials are synthesized from, or
are one or two step derivatives of, petroleum products.
The petrochemicals used in the manufacture of detergents,
however, have many alternate uses. Their availability is
subject to all the factors now causing a shortage of fats.
However, the petrochemicals do not usually undergo the ex-
treme supply-demand fluctuations associated with commodi-
ties related to agriculture.
66
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VII
METHODOLOGY FOR FINANCIAL ANALYSIS
The financial analysis of the impact of the recommended
effluent control standards and guidelines is based on
three models of producers in the soap and detergent in-
dustry. Having developed a unit sales volume, an average
selling price and operating cost for time zero and for
Levels I, II, and III technologies for effluent control
from engineering estimates, a financial profile is derived
for each of the three models.
It is the nature of Levels I.and II and in all but the
most extraordinary cases, Level III control technologies
that they represent ex post facto costs to the company. These
costs are superimposed upon sunk costs representing in-
vestment decisions made and executed previously. In es-
sence, these incremental costs to the firm represent the
internalization of what were heretofore social costs; i.e.,
costs incurred by society as evidenced by the degradation
of water quality of rivers, streams, coastal waters, and
drinking water sources caused by the emptying of industrial
wastes into these bodies of water. Because they are cost
increments without any offsetting revenue inflow, this
analysis proceeds on a fully allocated incremental cost
basis rather than a discounted cash flow basis. Discounted
cash flow analysis is not an appropriate tool here although
it is useful in an ex ante situation where new investment
is being contemplated under the effluent control standards
and guidelines and the return on investment or net present
value of the investment proposal must be determined with
the additional control costs included in the overall in-
vestment proposal.
The financial profile consists of 1) a Statement of Income
and Expense, and 2) a Balance Sheet for each of the models,
for each of the conditions specified. The specified condi-
tions refer to the assumptions with regard to profitability
with specific reference to the after tax rate of return on
tangible net worth. For this purpose, use was made of "1971
Key Business Ratios", a publication of Dun & Bradstreet, Inc.
For firms in the SIC classifications 2841, 2842, 2843, and
2844, "Soap, Detergents, Perfumes, and Cosmetics", Dun &
Bradstreet provides key financial ratios, based on data from
sixty-four representative companies. The results of the Dun &
Bradstreet analysis are divided into quartiles and presented
as "upper quartile", "median", and "lower quartile" data.
Once sales were specified, use was made of these key ratios
to construct a balance sheet for each model company based on
each level of performance specified for this study. When
the balance sheet was completed, the ratio of net profits on
67
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tangible net worth was utilized to arrive at net profit
after tax for the bottom line of the income statement.
From this point a federal income tax rate was selected,
and the net profit before federal income tax, as well as
the federal income tax liability, was derived. From that
point the statement of income and expense was derived
using the key operating ratios provided in "Cost of Doing
Business Corporations - Soaps, Cleaners and Toilet Goods ,
one of 185 categories of businesses reported by Dun &
Bradstreet. While it is recognized that these data rep-
resent the results of industries other than the soap and
detergent industry as defined by the Standard Industrial
Classification Manual, it is felt that they are sufficiently
specific to provide a realistic approximation of the soap
and detergent industry for the purpose of providing financial
data for companies.
Each model represents a single-plant company. Of the three
models used, one represents a small successful producer of
liquid detergent; one represents a small marginal producer
of soap, and the third represents a large, successful, in-
tegrated multi-product producer. The first two models con-
form to Segment III establishments. The third model con-
forms to a Segment I establishment. There is no specific
model conforming to a Segment II establishment. Two of
the companies in Segment II are smaller analogs of the
Segment I companies and their financial analysis can be ex-
trapolated from Segment I. The other two companies in Seg-
ment II are more sophisticated versions of the Segment III
liquid detergent model and financial estimates are extrapo-
lated accordingly.
More specifically, each model is set up using the median key
balance sheet and return on tangible net worth ratios to set
them up as "average" companies. They are then each impacted
with the costs attendant on the various levels of effluent
control technology and the effects are noted. In addition,
each of the models is set up applying upper quartile data
in the case of the large integrated establishment and small
liquid detergent manufacturer and lower quartile data in the
case of the small soap manufacturer and again impacted with
the various levels of effluent control technology.
The reason that lower quartile data was used only for the
small soap manufacturing establishment is that this model
is the "acid test". This model is a marginal company. This
becomes obvious when one observes that the lower quartile
ratio of net profit after tax to tangible net worth is 4.88
percent. It would be unrealistic to use lower quartile data
for the other two models. The observed results of impacting
these model companies with the effluent control standards
and guidelines costs are summarized and generalized for the
industry as a whole.
68
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VIII
MODEL OF A SMALL SOAP PLANT
The model of a small soap plant used in determining whether
such a plant can tolerate the impact of recommended effluent
limitation guidelines is described in the following para-
graphs. It represents a marginal -producer with fairly well
amortized equipment, a rather well established market and a
minimal sales force. In these inflationary times, the firm
will have a particularly difficult time in purchasing raw
materials. If purchasing is timed correctly, it can make
more profit in a rising fats market than on the actual manu-
facture of soap. Contrariwise, if not hedged, it can suf-
fer severe losses in a declining market.
The model is postulated to produce 4,000,000 Ibs/yr of neat
(anhydrous) soap starting with the saponification of tallow
and coconut oil. An 80/20 mixture of these oils is charged
to a large steel kettle, the steam turned on, caustic added
and the reaction proceeds. The neat soap is then converted
into liquid soap and toilet bars.
There are numerous specialized soap products which are far
too small in volume to warrant attention by any but the
smallest soap manufacturer. Even in this market, the pro-
ducts are compelled to meet severe competitive situations
among the smaller firms. The products include specialty
industrial soaps, mechanics' hand soap, industrial bars,
etc.
Tallow has been charged in at l?C/lb and coconut oil at 23c.
These prices are double what they were one year ago and
are still rising.
In the model postulated here, glycerine has not been
credited as a by-product to the soap making process since
it is sent out as part of the product.
To meet the Level I guideline recommendations, the firm
will be required to install surface condensers to replace
the barometric legs used in refining the oil prior to saponi-
fication. This amounts to an incremental investment of
$120,000. To comply with Level II requirements, an addi-
tional $30,000 for the installation of hoods, piping, etc.,
will be required to modify the drying operation.
For Level III technology it is assumed that a new facility
would not be installed unless there were substantially
more business available and imminently expected. In the
kettle boil soap making process, the equipment is capable
of almost indefinite use. In this study it is assumed to
have a depreciable life of ten years. Because the corroded
upper five feet of the tanks can be replaced and the equip-
ment's life extended for another ten years, there is little
69
-------
incentive, therefore, either to replace the equipment or
build new facilities.
One advantage which kettle boiling has over the continuous
process is greater product flexibility in switching from
one type raw material and resultant soap to another. This
is lost to some degree in the continuous process.
A contractor now offers, on a turn-key basis, a fully de-
signed 17,500,000 Ib/yr plant for $890,000. This amounts to
a cost of $48/1000 Ibs of annual capacity in contrast to a
kettle boil plant cost of approximately $100/1000 Ibs of
annual capacity for an equivalent volume. In addition, the
continuous plant, when operating at the 4,000,000 Ib/yr rate
(which means operating only 80 days out of the year), shows
a ten year amortized manufacturing cost of 16.2
-------
FINANCIAL ANALYSIS
This company is a small soap manufacturer considered to
be a marginal company within the industry. Its annual
sales are small by industry standards, $960,000. Unit
sales are 4,000,000 pounds per year. This company will
be analyzed from the point of view of both a lower quar-
tile and median financial profile.
Lower Quartile Financial Data Analysis
The lower quartile data analysis is based on the use of
the following key ratios to impart lower quartile industry
financial characteristics to the marginal model company.
Table 17
Lower Quartile Ratio Data
Sales to tangible net worth 2.15 X
Current debt to net worth 70.0 %
Total debt to tangible net worth 107.8 %
Current ratio 2.19 X
Net sales to inventory 5.2 X
Average collection period 73 days
Fixed assets to net worth 46.7 %
Net profit on tangible net worth 4.88 %
Net profit after tax for this company is $21,790. The
net return on tangible net worth is 4.88 percent and the
net profit margin is 2.27 percent (Tables 2, 3 and 4).
In other words, the owners of this company have a return
on their investment of 4.88 percent. Excluding the current
money market and capital market conditions that have resulted
in sharply higher and continuously rising interest rates,
the return on equity for this company is considerably
less than normally available from mutual savings banks and
similar low risk thrift institutions. The net profit mar-
gin indicates that only 2.27 cents of every sales dollar is
brought down to net profit.
These data gain more significance when compared to median
data for the industry. The actual median return on tangible
net worth is 12.74 percent and the actual median net profit
margin is 3.83 percent. The company has a fixed charge
71
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coverage of long term debt of 3.36 times, a debt ratio of
107.8% and a ratio of long term debt to total capitaliza-
tion of 27.4%.
Level I Technology
The application of the Level I technology mandated by
July 1, 1977, involves a capital expenditure of $120,000
and an annual incremental cost of $54,900 for this model
company. At 4,000,000 Ibs/yr of product, this translates
into a cost per pound of 1.370. The effect of incurring
this cost is to increase total costs per pound of product
by 5.9% and to reduce net profit from $21,790 to a loss of
($22,623), which eliminates any positive return on equity.
Assuming that this capital expenditure is to be financed
by borrowing, debt increase by $120,000, the debt/equity ratio
increases to 134. 770 from 107. 87o, and long term debt to
total capitalization increases to 39.3% from 27.470. Assum-
ing that a before tax interest cost of 12% fixed charge
coverage on long term debt declines from 3.36 times fixed
charges to a negative number. It is assumed that the total
amount of interest expense shown in the statement of income
and expense is interest on long term debt.
Level II Technology
The application of the Level II technology mandated by the
year 1983 requires a capital expenditure of $30,000 in ex-
cess of Level I above. The annual incremental costs are
$2,000, which, based on 4,000,000 pounds per year of pro-
duct translates into an annual incremental cost per pound
of 0.215 cents. Since the Level II technology requirement
is based upon the placement of both Level I and Level II
equipment, the financial impact of Level II technology is
considered in combination with the Level I technology dis-
cussed above. Since the incremental cost of the Level II
addition is relatively small, it is likely that producers
would install all of the necessary equipment to meet Levels
I and II at the same time. This would probably result in
some cost reduction for installation.
The combined applicacic,u of Level I and Level II technologies
requires a capital expenditure of $150,000 with an annual in-
cremental cost of $63,500 in 1973 dollars. At 4,000,000
pounds of product per year, this translates into an annual
incremental cost per pound of. 1.59 cents. The effect of in-
curring this cost is to increase total cost per pound of
product by an increment of 6.9 percent above the cost at time
zero, and to increase the cumulative net income loss to
($31,223). There would be an increase in long term debt of
$150,000. It is assumed that long; term debt would increase
72
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Table 18
SMALL MODEL SOAP PLANT - LOWER QUARTILE DATA
IMPACT ANALYSIS FOR LEVELS I, II, AND III TECHNOLOGY
COLIN A. HOUSTON & ASSOCIATES, INC. - RECOMMENDED EFFLUENT CONTROL STANDARDS
Level I &
Present Level I Level II
Technology Technology Technology
Level III Technology
Batch Kettle Continuous**
9 977
L. . f. 1 /o
4PQ7
. OO/o
$32,277
$21,790
3.36x
107.8%
27.4%
$54,900
107*
. J/V
5 Q7
J ,~ lo
($22,623)
$120,000
134.7%
39.3%
$63,500
1^Q<">
. J~V
fi Q7
U . 7 /o
($31,223)
11
$150,000*
141 . 4%
41 . 6%
$125,000
1 ^ 57
1.J.JIO
($93,223)
$550,000
231.0%
61.7%
$120,800
3fi9/»
. V/£y
nO97
($88,523)
11
$840,000
295.9%
69 . 3%
1. Annual incremental cost
2. Annual incremental cost
per pound of product
3. Per cent change in total
uJ cost per pound of pro-
duct
4. Net profit margin
5. Return on tangible net
worth
6. Net profit before
federal income tax
7. Net profit after
federal income tax
8. Fixed charge coverage
on long term debt
9. Increase in funded
debt
10. Debt to tangible net
worth
11. Long term debt to
total capitalization
* Cumulative, $120,000 to reach Level I and an additional $30,000 to reach Level II.
-------
Table 19
SMALL MODEL SOAP PLANT - LOWER QUARTILI ,:DATA
STATEMENT OF INCOME AND EXPENSE
Net Sales $960,000
Less Cost of Goods Sold 724.107
Gross Margin '.. $235,893
Compensation of Officer's $ 42,720
Rent Paid on Business Prop-
erty 5,952
Repairs 5,184
Bad Debts 1,824
Interest Paid 13,632
Taxes Paid 14,016
Depreciation and Depletion 13,536
Marketing 96,864
Pension and Other Employee
Benefits9.888
Total Other Expenses $203,616
Net Profit Before Federal Income Tax $ 32,277
Federal Income Tax 10.487
Net Profit After Tax $ 21.790
74
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Table 20
SMALL MODEL SOAP PLANT - LOWER QUARTILE DATA
BALANCE SHEET
ASSETS
Current Assets
Cash $305,220
Accounts Receivable 194,667
Inventories 184,615
Total $684,502
Fixed Assets 208,561
Intangible and Other Assets 34,789
Total $927.852
LIABILITIES AND CAPITAL
Current Debt $312,558
Long Term Debt 168,782
Net Worth 446.512
Total $927.852
75
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by the full $150,000, the debt/equity ratio would increase
to 141.4 percent and long term debt to.total capitalization
increases from 27.4 percent to 41.6 percent. Fixed charge
coverage on long term debt declines from 3.36 times to near
zero (0.01 times).
Level III Technology
Level III technology involves a new source of manufacture;
a net addition to total plant capacity and, therefore, per-
mits a new design for the additional production facilities.
In the case of this company, Level III technology
requires a capital outlay of $550,000 for a batch kettle
process and $840,000 for a continuous process plant. Assum-
ing the same 4,000,000 pound capacity production per year,
this would mean an annual incremental cost over the present
cost of $125,500 for the batch kettle process and $120,800
for the continuous process. Given the relative incremental
costs per pound of product for the continuous process.is,
of course, cheaper per pound of product as well. Neverthe-
less, the impact of the higher total cost over the present
cost structure causes a loss of ($93,223) for batch kettle
and ($88,523) for the continuous process. Assuming that
such an investment could be financed under these conditions,
through borrowing,the debt equity ratio increases to 231%
for batch kettle and 296% for the continuous process. Long
term debt to total capitalization increases to 62% and 69%
respectively, and the fixed charge coverage on long term
debt is negative.
Median Data Analysis
The median data analysis is based on the use of the follow-
ing key ratios to impart median industry financial .character-
istics to this company.
Table 21
Median Ratio Data
Sales to tangible net worth 2.88 X
Current debt to tangible net worth 35.9 %
Total debt to tangible net worth 62.3 %
Current ratio 2.66 X
Net sales to inventories 7.6 X
Average collection period 51 days
Fixed assets to net worth 29.1 %
Net profits on tangible net worth 12.7470
Source: Dun & Bradstreet "1971 Key Business Ratios"
76
-------
Having used the small model soap plant as the marginal lower
quartile. company in the previous analysis, the same company
will now be given the financial characteristics of the
median data.in order to determine whether the financial
impact of effluent control is significantly dampened down
by increasing the profitability of the company to conform
with the median after tax return on equity for the industry.
While the sales of $960,000 remain unchanged, net profit
after tax rises to $42,467. The after tax return on tangible
net worth is now 12.74% and the net profit margin is 4.42%
(Tables 22 - 24.). In other words, the return on tangible
net worth has been increased by approximately two and one-
half times and the net profit margin has been increased by
approximately two times. This means that this is now a
relatively successful small soap manufacturer, not by any
means marginal in terms of the rest of the industry, however,
output has remained constant.
Level I Technology
The application of the Level I technology mandated July 1,
1977, involves a decline in net profit from $42,467 to
$10,604, or 75%. The net profit margin declines 3.32 per-
centage points from 4.42% to 1.10%, and the return on tang-
ible net worth declines 9.56 percentage points from 12.74%
to 3.18%. Assuming that this capital expenditure is to be
financed by borrowing, debt increases by $120,000, the debt
equity ratio increases from 62% to 98%, and long term debt
to total capitalization increases from 16 to 22%. Assuming
a before tax interest cost of 12%, fixed charge coverage
on long term debt declines from 6.02 times fixed charges to
1.48 times fixed charges.
Level II Technology
The combined application of Levels I and II technology man-
dated by 1983 incrementally reduces net income by $38,571,
or 91%. The net profit margin declines 4.01 percentage points
to 0.41% (less than half a cent a dollar of sales), and the
return on tangible net worth declines 11.57 percentage points
to 1.17%. Therefore, on a cumulative basis, in order to meet
the 1983 standard for effluent control under the recommended
guidelines and standards, the total impact will be to require
a capital expenditure of $150,000 and an annual incremental
cost of $63,500 in 1973 dollars. The annual incremental cost
per pound of product is 1.590- Total cost per pound of pro-
duct will increase by 7.1 percent and reduce net income to
$3896, thus reducing the net profit margin to 0.41 percent
and the return on net worth to 1.17 percent. Long term debt
will increase by $150,000 the debt/equity ratio increases to
77
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Table 22
SMALL MODEL SOAP PLANT - MEDIAN DATA
IMPACT ANALYSIS FOR LEVELS I, II. AND III TECHNOLOGY
COLIN A. HOUSTON & ASSOCIATES, INC. - RECOMMENDED EFFLUENT CONTROL STANDARDS
Level i fius
Present Level I Level II Level III Technology
Technology Technology Technology Batch Kettle Continuous**
CX)
1. Annual incremental cost
2. Annual incremental cost
per pound of product
3. Per cent change in total
cost per pound of pro-
duct
4. Net profit margin
5. Return on tangible net
worth
6. Net profit before
federal income tax
7. Net profit after
federal income tax
8. Fixed charge coverage
on long term debt
9. Increase in funded
debt
10. Debt to tangible net
worth
11. Long term debt to
total capitalization
4.42%
12.74%
$68,495
$/!?,467
6 02x
W • W 4m A
62%
16%
$54,900
1.37C
6.1%
1.10%
3 . 18%
$13,595
$10,604
1 48x
^ • ^T W*V
$120,000
98%
22%
$63,500 $125,500
1.59C 3.14C
7.1% 14.1%
n Ai<7
1 1 T*l _____
$4,995 ($57,005)
$3,896 ($57,005)
1.16x '.
$150,0.00 $550,000
107% 227%
26% 57%
$105,800
2.65C
11 . 9%
($52,305)
($52,305)
$840,000
314%
67%
Cumulative - $120,000 to reach Level I and an additional fi.30.nnn to reach Level II.
-------
Table 23
SMALL MODEL SOAP PLANT - MEDIAN DATA
STATEMENT OF INCOME AND EXPENSE
Net Sales $960,000
Less Cost of Goods Sold 687.889
Gross Margin $272,111
Compensation of Officers $ 42,720
Rent Paid on Business Prop-
erty 5,952
Repairs 5,184
Bad Debts 1,824
Interest Paid 13,632
Taxes Paid 14,016
Depreciation and Depletion 13,536
Marketing 96,864
Pension and Other Employee
Benefits9,888
Total Other Expenses $203,616
Net Profit Before Federal Income Tax $ 68,495
Federal Income Tax 26,028
Net Profit After Tax $ 42.467
79
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Table 24
SMALL MODEL SOAP PLANT - MEDIAN DATA
BALANCE SHEET
ASSETS
Current Assets
Cash $ 55,998
Accounts Receivable 136,000
Inventories 126,316
Total $318,314
Fixed Assets 97,000
Intangible and Other Assets 125,686
Total $541.000
LIABILITIES AND CAPITAL
Current Debt $119,667
Long Term Debt 88,000
Net Worth 333.333
Total $541.000
80
-------
107.3% from 62% and long term debt to total capitalization
increases from 16% to 26.3%. Fixed charge coverage on long
term debt declines from 6.02 times fixed charges to 1.16
times fixed charges.
Level III Technology
LeVel III technology, involving a new source of manufacture
requires by far the largest capital outlay, as indicated in
the previous discussion of Level III requirements. The
large increase in operating costs for this net addition to
plant would yield a net loss of ($57,005) and ($52,305) for
the batch kettle and continuous processes respectively.
Assuming that such an undertaking were financed through
borrowing, the debt/equity ratio increases to 227% for
batch kettle and 314% for the continuous process. Long
term debt to total capitalization increases to 57% and
67% respectively, and the fixed charge coverage on long
term debt is negative.
SUMMARY
This model of a marginal soap manufacturer quite clearly
is very sensitive to any increase in cost that cannot be
offset by an increase in price. Even small increments in
net cost could cause him to close down. It is also clear
that based upon this marginal performance, the company
could not remain viable in the face of the costs associated
with meeting the recommended effluent control guidelines
and standards mandated for 1977 and 1983. The new plant
appears to be out of the question under these circumstances.
By placing this company on a better financial basis using
median data, the impact of the effluent control standards
is reduced, but not significantly, when one considers that
the viability of the firm is at stake. The impact of
Levels I and II are sufficient to drive this manufacturer out
of business, if all other things are held equal. Level III
expansion is out of the question.
81
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IX
MODEL OF A SMALL LIQUID DETERGENT PLANT
There ere a number of small?liquid detergent manufacturers
who are in the private label business. A plant capable of
producing about 25,000,000 pounds per year of a 50% solu-
tion of househpld detergent product in small packages is
postulated as a model. The product is sold to local mer-
chants where the private label material competes on the gro-
cer's shelf with liquid detergent promoted heavily by the
majors in the industry.
This relatively small operator faces the initial financial
handicap of having to price his product considerably under
that of the major brands, thereby reducing the margin with
which he can operate. For this reason, in particular, this
type of firm needs to be studied in some detail to determine
if the guideline recommendations could be a threat to the
continuation of his business.
For $80 - $100,000 a conveyorized automatic filling line
is postulated to be installed and an additional $60-$70,000
is needed to install the required mixing vats, plumbing and
cleanout units . The rest of the capital provides the lab,
plant, office buildings and other attendant physical
facilities required to carry out the business.
To meet the Level I guideline recommendations, this,small
manufacturer would have to install essentially the same
type and size of equipment to minimize loss of product in
cleanouts as the large manufacturer - about $50,000 in the
form of tankage and additional piping.
As a point source discharger, the small liquid determent
operator could theoretically purchase a packaged waste-
water treatment plant that would adequately handle his
5,000 gal/day average wastewater load.
The cost of such a unit.installed, would amount to $70,000
$100,000 with an annual operating cost in the neighborhood
of $10,000. As effective as these units are in handling
specific problem loads, they would not be the acceptable
solution for this sized operator. He would have two prob-
lems which the packaged unit is not prepared to cope with
without a great deal of attention - that of widely varying
loads over the period of a working day and concentrations
of equally varying intensity. Either one of these elements
would cause difficulty for a large size treating plant which
is operating ordinarily at equilibrium conditions; a small
unit of the size mentioned above probably 10,000 gallons
capacity would be totally incapable of handling such a mix-
ture of problems. Consequently, there is no alternative for
the small liquid detergent manufacturer other than the use
of a publicly owned facility, or sharing of some large pri-
vate unit.
83
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FINANCIAL ANALYSIS
This model represents a small successful liquid detergent
manufacturer. The company is analyzed with both the upper
quartile and median key financial ratio previously referred
to.
This model has sales of $2,950,000 with a unit output of
25,000,000 pounds. It is substantially larger than the
first model with an annual output of 4,000,000 pounds and
sales of $960,000 and substantially smaller than model three
with an annual output of 740,000,000 pounds and sales of
$214,140,000.
Upper Quartile Data Analysis
The upper quartile data analysis is based on the use of the
following key ratios to impart upper quartile industry fi-
nancial characteristics to the small liquid detergent plant.
Table 25
Upper Quartile Ratio Data
Sales to tangible net worth 3.87X
Current debt to net worth 24.4%
Total debt to tangible net worth 39.4%
Current ratio 3.93%
Net sales to inventories 9.OX
Average collection period 33 days
Fixed assets to net worth 20.0%
Net profit on tangible net worth 17.91%
Levels I and II Technology
The nature of this company's business is such that both
the 1977 and 1983 standards are met simultaneously. There-
fore, the only capital expenditure necessary to meet these
standards is an outlay of $65,000, involving annual in-
cremental operating costs of $18,500 for this prototype
company. At 25,000,000 Ibs/yr of product, this translates
into a cost per pound of 0.074$. (Tables 26, 27, and 28).
The effect of incurring this cost is to increase total
cost per pound of product by 0.68% and to reduce net
profit from $136,523 to $118,023, or 13.6%. The return on
net worth declines by 2.43 percentage points and the net
profit margin declines by 0.63 of 1%. Assuming that this
capital expenditure is to be financed by borrowing, debt
increases by $65,000, the debt/equity ratio increases by
8.5 percentage points from 39.47o to 47.970 and long term
debt to total capitalization increases 6.0 percentage
points from 13% to 19%. Assuming a before tax interest
84
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Table 26
SMALL MODEL LIQUID DETERGENT PLANT - UPPER QUARTILE DATA
IMPACT ANALYSIS FOR LEVELS I, II, AND III TECHNOLOGY
COLIN A. HOUSTON & ASSOCIATES, INC. - RECOMMENDED EFFLUENT CONTROL STANDARDS
Present Levels I and II Level III
Technology Technology Technology
1. Annual incremental cost $18,500 $158,500
2. Annual incremental cost
per pound of product 0.074$ 0.634$
3. Per cent change in total
cost per pound of pro-
duct 0.687. 5.97.
4. Net profit margin 4.637. 4.007, 1.677.
5. Return on tangible net
£ worth 17.917. 15.487. 6.477.
6. Net profit before
federal income tax $248,224 $229,724 $89,724
7. Net profit after
federal income tax $136,523 $118,023 $49,348
8. Fixed charge coverage
on long term debt 16.03x 10.98x 1.96x
9. Increase in funded
debt $65,000 $765,000
10. Debt to tangible net
worth 39.47. 47.97. 139.87.
11. Long term debt to
total capitalization 13.07. 19.07, 53.67.
-------
Table 27
SMALL MODEL LIQUID DETERGENT PLANT - UPPER QUARTILE DATA
STATEMENT OF INCOME AND EXPENSE
Net Sales $2,950,000
Less Cost of Goods Sold 2.085.226
Gross Margin $864,774
Compensation of Officers $ 147,500
Rent Paid on Business Prop-
: erty 18.290
Repairs 15,930
Bad Debts 5,605
Interest Paid 16,520
Taxes Paid 43,070
Depreciation and Depletion 41,595
Marketing 297,655
Pension and Other Employee
Benefits 30,385
Total Other Expenses $616.550
Net Profit Before Federal Income Tax $248,224
Federal Income Tax 111,701
Net Profit After tax $136.523
86
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Table 28
SMALL MODEL LIQUID DETERGENT PLANT - UPPER QUARTILE DATA
BALANCE SHEET
ASSETS
Current Assets
Cash $132,765
Accounts Receivable 270,417
Inventories 327.778
Total $730,960
Fixed Assets 152,455
Intangible and Other Assets 179.195
Total $1,062.610
LIABILITIES AND CAPITAL
Current Debt $185,995
Long Term Debt 114,341
Net Worth 762,274
Total $1.062.610
87
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cost of 10%, fixed charge coverage on long term debt de-
clines from 16.03 times to. 10.98 times fixed charges. (It
is assumed that the interest expense shown on the income
statement is interest on the long term debt portion of the
total debt.)
Level III Technology
The application of Level III technology involves a new
source of manufacture. It requires a capital outlay of
$765,000 and an annual incremental operating cost of
$158,500. With the above incremental operating costs,
all other things being equal, net income after federal
income tax would decline from $136,523 to $49,348 or
63.9%. The return on net worth falls to 6.47% from
17.91% and the net profit margin falls to 1.67% from
4.63%.
Assuming that such an undertaking were financed through
borrowing, the debt equity ratio increases to 139.8%
from 39.4%. Long term debt to total capitalization in-
creases from 13% to 53.6%, while fixed charge coverage on
long term debt declines from 16.03 to 1.96 times fixed
charges.
Median Quartile Data
This prototype company is now viewed from the point of
view of the median data profile in order to compare it to
the average or midpoint performance in the industry. Net
income after federal income tax is $130,497; the return
on tangible net worth is 12.74% and the net profit margin
is 4.42%.
Levels I and II Technology
As has already been observed, Levels I and II are treated
simultaneously. As a result of incurring the incremental
annual cost of $18,500,net profit after tax declines from
$130,497 to $111,997 or 14.2%. (Tables 29, 30, and 31).
The return on net worth declines by 1.81 percentage points
and the net profit margin declines from 4.42% to 3.8070 or
0.62%. Assuming that this capital expenditure is to be
financed by borrowing, debt increases by $65,000, the debt/
equity ratio increases to 68.6% from 62.3% and long term
debt to total capitalization increases from 20.9% to
24.770. Assuming a before tax interest cost of 107o, fixed
charge coverage on long term debt declines from 15.36 times
to 10.50 times fixed charges.
88
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00
VO
Table 29
SMALL MODEL LIQUID DETERGENT PLANT - MEDIAN DATA
IMPACT ANALYSIS FOR LEVELS I* II, AND III TECHNOLOGY
COLIN A. HOUSTON & ASSOCIATES, INC. - RECOMMENDED EFFLUENT CONTROL STANDARDS
1. Annual incremental cost
2. Annual incremental cost
per pound of product
3. Per cent change in total
cost per pound of pro-
duct
4. Net profit margin
5. Return on tangible net
worth
6. Net profit before
federal income tax
7. Net profit after
federal income tax
8. Fixed charge coverage
on long term debt
9. Increase in funded
debt
LO. Debt to tangible net
worth
LI. Long term debt to
total capitalization
Present
Technology
Levels I and II
Technology
Level III
Technology
4.42%
12 . 74%
$237,267
$130,497
15.36x
62 . 3%
20 . 9%
$11,500
0.074C
0 . 68%
3 . 80%
10.93%
$218,767
$111,997
10.50x
$65,000
68.6%
24 . 7%
$158,500
0.634C
5.8%
2 . 67%
7.69%
$78,767
$43,322
1.85x
$765,000
136 . 9%
50.3%
-------
Table 30
SMALL MODEL LIQUID DETERGENT PLANT - MEDIAN DATA
STATEMENT OF INCOME AND EXPENSE
Net Sales $2,950,000
Less Cost of Goods Sold 2,096,183
Gross Margin $853,817,
Compensation of Officers $ 147,500
Rent Paid on Business Prop-
erty 18,290
Repairs 15,930
Bad Debts 5,605
Interest Paid 16,520
Taxes Paid 43,070
Depreciation and Depletion 41,595
Marketing 297,655
Pension and Other Employee
Benefits30,385
Total Other Expenses $616.550
Net Profit Before Federal Income Tax $237,267
Federal Income Tax 106,770
Net Profit After Tax $130,497
90
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Table 31
SMALL MODEL LIQUID DETERGENT PLANT - MEDIAN DATA
BALANCE SHEET
ASSETS
Current Assets
Cash . $ 172,076
Accounts Receivable 417,917
Inventories 388.158
Total $ 978.151
Fixed Assets 298,073
Intangible and Other Assets 386.225
Total $1,662.449
LIABILITIES AND CAPITAL
Current Debt $ 367,726
Long Term Debt 270,417
Net Worth 1.024.306
Total $1.662.449
91
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Level III Technology1
The application of Level III technology is for a new source
manufacture. It requires a capitali6.ut.lay of $765,000 and
an annual incremental cost of $158,500. With the above in-
cremental operating costs, all other things.'jbeiiig. £qu_al:i
net income after federal income tax declines from $130,497
to $43,322 or 66.-8%. The return on net worth declines to
7.69% from 12.74% and the net profit margin declines to
2.67% from 4.42%. ' '
Assuming that such anl'undertaking were financed through
borrowing,, the debt equity ratio increases to 136.9% from
62.07o. Long term debt to total 'capitalization increases
from 20.9% to 50.370, while fixed charges coverage on long
term debt declines from 15.36 times to 1.85 times fixed
charges.
Summary
This liquid detergent manufacturer is substantially affected
by the effluent control costs in terms of significantly re-
duced profitability. By meeting the 1983 standard, the up-
per quartile data return on tangible net worth will decline
by 2.43 percentage points, and the net profit margin will
decline by 0.63 of one percent. There is also a rapid rise
in debt relative to the equity base with a decline in the
ability to service that debt. Of course the supposition
that the control equipment is financed by debt is only one
possibility in this case, but a reasonable one. The
Level III new plant technology would seem to be a burden-
some undertaking under the constraints of this analysis
where all other things are held constant.
92
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X
MODEL OF A LARGE INTEGRATED PLANT
An integrated manufacturing facility, such as the theoretical
one described below, is representative of a plant that would
be operated by one of the four largest companies in the soap
and detergent industry.
Table 32
Model of a Large Soap and Detergent Plant
Process Annual Production
Kettle Boil Soap Manufacture 30,000,000 Ibs/yr
Fatty Acids From Fat Splitting 50,000,000 Ibs/yr
Glycerine Recovery/Distillation 10,000,000 Ibs/yr
Bar Soap Manufacture 30,000,000 Ibs/yr
Oleum Sulfonation * 120,000,000 Ibs/yr
Air/S03 Sulfonation* 25,000,000 Ibs/yr
Spray Dried Detergent Manufacture 600,000,000 Ibs/yr
Liquid Detergent Manufacture 50,000,000 Ibs/yr
* These processes will not, in themselves, be impacted to
any significant degree by the guideline recommendations. How-
ever, to provide the basic raw materials for other processes,
they would be found as part of such a plant.
Kettle Boil Soap Manufacture
Neat soap (70% soap solution in water) is prepared from a mix-
ture of 80/20 tallow/coconut oil. The neat soap is composed
of the sodium salts of the fatty acids and is made by reacting
them with caustic soda. The fats are costed into the process
at 17c/lb for tallow and 23c/lb for the coconut oil. These
prices will not represent true costs in the near future because
of a rapidly escalating fats and oils market. They were but one
half the values shown only one year ago. Glycerine in a con-
centration of 8 - 10% is produced as a by-product in the manu-
facture of soap. The weak glycerine is customarily concentrated
to 80% by the soap manufacturer but may be sold to an outside
glycerine producer for 13%C/lb (on an 8070 basis). In any event,
a credit is made to the soap process. For this economic model,
an arbitrary value of 10c/lb has been assigned on the basis of
100% glycerine. This product will be charged into the glycerine
recovery unit at this same price.
In Level I technology, the barometric condenser used in the
vacuum bleaching of the oils is considered to have been replaced
by a surface condenser, thereby cutting down significantly on
the 6005. All of the neat soap is presumed to be consumed in
the production of toilet bars.
93
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In Level II technology, there is a requirement that the BOD5
readings must be below those of Level I. To achieve this, new
capital will be required for the purchase and installation of
equipment to modify present drying processes and thus minimize
wastewater loadings. . .
Level III is assumed to have incorporated all of the improve-
ments which were required in Levels I and II without a basic
alteration of the bar making process.
Fatty Acid Manufacture by Fat Splitting
Tallow, at a price of 17
-------
equivalent would be the process of choice because of its low
capital requirements and very low operating costs. Its efflu-
ent generation is also minimal. By no means is this regarded
as a requirement •- just a very high probability that either it
or its equivalent would be chosen in a new installation.
Air/SO^ Sulfonation
This operation is expected to furnish the appropriate sulfo-
nated products to the liquid detergent function. In most in-
stances, the process produces minimum effluent. In Level III
technology, the capital is indicated to be lower than the average
for now-in-place equipment. The expectancy that a new, more ef-
ficient installation would employ the equivalent of a new Chem-
ithon unit or equivalent for which a firm estimate of capital and
operating costs was received.
Spray Dried Detergents
Active ingredient made in the oleum sulfonation unit is blended
with the required soil dispersants, perfumes, brighteners, etc.,
in the crutcher, dissolved in water to about a 70% slurry con-
centration and then pumped to the top of the spray drying
tower. There the slurry is sprayed into a stream of very hot
air where the appropriate sized particles are formed.
In Level II technology, the multiple guidelines are reduced
to one. Some revamping of the exit hot air scrubbing system
is expected to be required to meet Level III. The equipment
train is a set of "vortex" dust collectors followed by two tan-
dem water scrubbers. The first scrubber would be operated near
the 707o slurry concentration and serve to knock out the largest
portion of particulate matter and chill the air stream (this
particular scrubber flow would be refrigerated to maintain its
chilling capacity).' Periodically it would be bled off into the
crutcher for recycle of the solids. Make-up and dilution water
would be obtained from a bleed off of the second stream. It
would be operated at considerably lower concentration levels
than the first scrubber system. It would pick up the residual,
chilled particulate matter to make a system of approximately
99.97o effectiveness of particulate removal of particle sizes of
one micron or larger.
In the prototype plant having two-300 million pounds per year
spray drying towers the additional capital for these installa-
tions is estimated to be about $500,000. This same installation
would be expected to meet Level III.
Liquid Detergents
Active ingredients will mainly come from the Air/SO^ sulfonation
unit.They will be blended with appropriate hydrotropes, perfumes,
95
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etc., and run to a filling conveyor system where they will be
poured into various size bottles. In this operation either
pressure or vacuum filling equipment will be used, with heavy
emphasis expected upon the pressure equipment due to the pre-
ponderance of plastic bottle employed. They would partially
collapse under the vacuum system and inhibit appropriate level
control in the filling.
There is indeed some loss of product due to the operation of the
conveyor filling line, but ordinarily the largest loss (and high-
est BOD5 loadings)occur when the equipment is cleaned out between
runs, particularly of different products. This cleanout is
deemed necessary so that there will be no cross contamination of
products having different colors, perfumes, incompatible in-
gredients (which could cause clouding of solutions, etc.)
For Level I technology, there will probably be a requirement on
the part of several firms to install additional holding tanks
to allow greater amounts of recycle of the washout materials.
In addition, for Level II technology there will probably be a
need to modify the piping systems to allow air or steam to be
used for the cleanout of transfer lines.
Additional capital requirement to meet Level I technology is
estimated to be $100,000 for a 50 million pound per year plant -
and an equivalent amount is needed to meet Level II technology.
WASTEWATER VOLUME GENERATION
Use of the above changes should substantially reduce the waste-
water generated in the processes. To get some idea of the mag-
nitude of the possible reduction, noted below is the anticipated
new wastewater volumes versus the present industry use range.
Table 33
Wastewater Generation - Present vs Expected
Current Range* Model Use*
gal/1000 Ibs gal/1000 Ibs
Process Anhydrous Product Anhydrous Product
Soap Manufacture (neat) 25 - 2345 150
Bar Soap Manufacture 8 - 750 300
Fat Splitting 50 - 9300 100
Glycerine Recovery 120 - 185,000 50
Oleum Sulfonation 12 - 300 15
Air/S03 Sulfonation .3 - 240 15
Spray Drying 14-228 30
Liquid Detergent 70 - 750 80
*The designation of gal/1000 Ibs relates the water usage per
1000 Ibs of anhydrous product produced in the unit described.
96
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POLLUTANT CONCENTRATION
Further comment needs to be made on this subject to lend a
degree of cogency to the arguments offered above in the model
description for the improvements recommended in the capital
equipment. While reviewing the industry data, the wide variation
in water used per unit of product produced became glaringly
apparent. Of equal interest was the fact that two plants having
very widely divergent amounts of water used to manufacture a unit
of product, also had raw waste loadings almost identical per unit
of product coming out of the end of the pipe. This means that
the concomitant production of the particular contaminants are
fixed. The manufacturer having the more dilute stream appears to
be the "better citizen" when, in fact, it is not true. The
changes incorporated in the prototype are expected to reduce both
the hydraulic loadings and the contaminant concentrations.
TREATMENT PLANT
The hydraulic loading on the treatment plant is expected to
be considerably reduced over current industry practice due to
the installation of the surface condensers. A flow of about
160,000 gallons/day is anticipated with a BOD5 of the range of
1,000 - 1,500 mg/liter. With this flow and loading the capital
cost is estimated to be of the order of $600,000 having an
operating cost of approximately $90,000. If the concentration
is closer to the 2,000 - 3,000 tng/1 range, then the capital
indeed might double. The treatment is expected to yield an ef-
fluent with a BODs of less than 50 mg/liter.
FINANCIAL ANALYSIS
This company is a large integrated company producing sev-
eral different products within the soap and detergent in-
dustry. Such an establishment would conform to the plants
of the so-called "big three" companies in the industry.
This company, like the other two prototypes, is analyzed
from the point of view of two different financial profiles.
In this case, the two profiles will be constructed from the
upper quartile and median data.
Upper Quartile Data Analysis
The upper quartile data analysis is based on the use of the
key ratios to impart upper quartile industry financial
characteristics to the large integrated plant.
97
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This company has sales of $214,140,000 with a unit output
of 740,000,000 Ibs/yr of product. Net profit after tax
is $9,910,200. The net return on tangible net worth is
17.91% and the net profit margin is 4.63%. (The net profit
margin is understated here because it is a derived figure.
The Dun & Bradstreet survey figure is 7.10%.)
Level I Technology
The application of Level I technology mandated by July 1,
1977, involves a capital expenditure of $570,000 for in-
plant control plus $600,000 for end-of-pipe treatment, or
a total of $1,170,000, and an annual incremental cost of
$402,600 for this model. At $740,000,000 Ibs/yr of pro-
duct, this translates into a cost per pound of 0.0544$.
(Tables 34,35, and 36). The affect of incurring this cost
is to increase total cost per pound of product by 0.21%
and to reduce net profit from $9,910,200 to $9,700,848 or
2.1%. The return on net worth falls by 0.38 percentage
points, and the net profit margin falls by 0.10 percentage
points. Assuming that this capital expenditure is to be
financed by borrowing, debt increases by $570,000, the debt/
equity ratio increases one percentage point to 40.4% and
long term debt to total capitalization increases 0.8 of a
percentage point to 13.8%. Assuming a before tax interest
cost of 8%, fixed charge coverage on long term debt declines
to 27.9 times from 32.8 times. It is assumed that one-half
of the interest expense shown in the income statement is
interest on long term debt.
Level II Technology
The application of Level II technology mandated for 1983 re-
quires an incremental capital investment of $600,000 and
annual incremental costs of $212,000. Combining the fi-
nancial impact of Levels I and II technology, there is a
combined capital expenditure of $1,770,000 and an additional
annual incremental cost of $614,600. At 740,000,000 pounds
of product per year this translates into an annual incremental
cost per pound of 0.0831 cents. The affect of incurring this
cost is to increase total cost per pound of product by an in-
crement of 0.31 percent above the cost at time zero and to
reduce net income by 3.2 percent below the net income at time
zero. There will be an increase in long term debt of $1,770,000,
assuming that the equipment is financed through the use of debt.
Return on net worth falls 0.58 of one percent to 17.33 percent
and the net profit margin declines to 4.48 percent from 4.63
percent. Long term debt increases by $1,770,000 the debt/
equity ratio increases to 42.6 percent from 39.4 percent and
long term debt to total capitalization increases from 13 per-
cent to 15.4 percent. Fixed charge coverage on long term debt
declines from 32.8 times to 25.9 times fixed charges.
98
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Table 34
LARGE MODEL INTEGRATED PLANT - UPPER QUARTILE DATA
IMPACT ANALYSIS FOR LEVELS I, II, AND III TECHNOLOGY
COLIN A. HOUSTON & ASSOCIATES, INC. - RECOMMENDED EFFLUENT CONTROL STANDARDS
vO
VO
1. Annual incremental cost
2. Annual incremental cost
per pound of product
3. Per cent change in total
cost per pound of pro-
duct
4. Net profit margin
5. Return on tangible net
worth
6. Net profit before
federal income tax
7. Net profit after
federal income tax
8. Fixed charge coverage
on long term debt
9. Increase in funded
debt
10. Debt to tangible net
worth
11. Long term debt to
total capitalization
Level I &
Present Level I Level II Level III Technology
Technology Technology Technology Continuous
$402,600 $614,600 $3,107,000
0.0544C 0.0835C 0.4199C
0.21%
0.31%
1.41%
4.63% 4.53% 4.48% 3.87%
17.91% 17.53% 17.33% 14.99%
$19,058,076 $18,655,476 $18.443,476 $15,951,076
$9,910,200 $9,700,848 $9,590,608 $8,294,560
32.8x
39.4%
13.0%
27.9x 25.9x 8.4x
$1,770,000 $1,770,000 $19,000,000
41.5% 42.6% 73.7%
14.6% 15.4% 33.0%
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Level III Technology
Level III technology involves a new source of manufacture.
It requires a capital outlay of $19,000,000 for a continuous
process plant and annual incremental operating costs of
$3,107,000.
With the above incremental operating costs, all other things
being equal, net income would decline from the time •>zero
model of $9,910,200 to $8,294,560, or 16.3%. The return on
tangible net worth declines from 17.91% to 14.99% or 2.92
percentage points. The net profit margin declines 0.76
percentage points from 4.63 to 3.8770.
Assuming that such an undertaking were financed through
borrowing, the debt equity ratio increases to 73.77., from
39.4%. Long term debt to total capitalization increases to
33% from 13%. Fixed charge coverage declines from 32.8
times fixed charges to 8.4 times.
Median Data Analysis
The median data analysis is based on the same key ratios used
in the median data analysis of the small model soap plant. The
purpose of giving this integrated company a median financial
profile is to determine the impact of the effluent control stan-
dards on a somewhat less successful large integrated company,
thus obtaining a more rigorous test of the impact of the costs
of effluent control.
The company's sales remain at $214,140,000. Net profit after tax
is now $9,472,720, return on net worth is 12.74%, and the net
profit margin is 4.42% (Tables 35, 36 and 37).
Level I Technology
The application of Level I technology mandated by July 1, 1977
involves the same capital expenditure and annual incremental
cost required in the upper quartile data. In this instance,
however, net profit after federal income tax declines by 2.2%
and the return on net worth declines by 0.28 percentage points
from 12.74% to 12.46%. The net profit margin declines by 0.09
percentage points, from 4.42% to 4.33%. Assuming that this-cap-
ital expenditure is to be financed by borrowing, debt increases
by $570,000 for in-plant control plus $600,000 for end-ofwpipe-
treatment, for a total of $1,170,000. The debt equity ratib in-
creases ).08 percentage points to 63.1% and long term debt to
total capitalization increases 0.5% to 63.1%. Assuming a before'
tax interest cost of 8%, fixed charge coverage on long term
debt declines from 31.8 times to 27.70 times fixed charges.
(It is assumed that one-half of the interest expense shown'.in
the income statement is interest on long term debt.)
100
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Level II Technology
Th® application of Level II technology mandated for 1983 requires
an incremental capital investment of $600,000 and an additional
annual incremental cost equal to $212,000.
Combining the effects of Levels I and II, the attainment of the
1983 recommended standards requires a total capital expenditure
of $1,770,000 and an annual incremental cost of $614,600 in
1973 dollars. The incremental cost per pound of product is 0.0831
cents. This will increase total cost per pound of product by 0-. 31%
and reduce net income by 3.4%. The return on net worth falls to
12.31%, a decline of 0.43%. The net profit margin declines by 0.15%
to 4.27%. Long term debt increases by $1,770,000, the debt/equity
ratio increases to 64.7% and long term debt to total capitaliza-
tion increases from 20.9% to 22.3%. Fixed charge coverage on long
term debt declines from 31.38 times fixed charges to 24.75.
Level III Technology
Level III technology involves a new source of manufacture.
It requires a capital outlay of $19,000,000 for a contin-
uous process plant and annual incremental operating costs
of $3,107,000. With these operating costs, all other
things being equal, net income would decline from the time
zero model of $9,472,720 to $7,857,080 or 17.1%. The
return on tangible net worth declines from 12.74% to 10.57%
or 2.17 percentage points; the net profit margin declines
0.75 of a percentage point from 4.42% to 3.67%.
Assuming that such an undertaking were financed through
borrowing, the debt/equity ratio increases to 87.9% from
62.3%. Long term debt to total capitalization increases
to 34.2% from 20.9%. Fixed charge coverage declines from
31.38 times fixed charges to 7.97 times.
Summary
This static analysis of the large integrated plant indicates
that meeting the 1983 standards will entail an appreciable cost
regardless of the financial profile used. In the case of the uppe--
quartile data, the return on tangible net worth will decline by
0.58%, from 17.91% to 17.33%. This reflects the annual incremental
cost of $614,600. Using the median data there is 0.43% decline in
thefrreturn on a larger net worth. Put another way, each percentage
point decline in the return on tangible net worth represents a
cost of $10,000 per million dollars of net worth.
This represents a substantial potential cost in meeting the
1983 standards. The cost, however, only becomes burdensome if the
company cannot increase its prices by an amount sufficient to
offset the cost increase.
101
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Table 35
LARGE MODEL INTEGRATED PLANT - UPPER QUARTILE DATA
STATEMENT OF INCOME AND EXPENSE
Net Sales $214,140,000
Less Cost of Goods Sold 116.171.334
Gross Margin $97,968,666
Compensation of Officers $ 2,227,056
Rent Paid on Business Prop-
erty 1,327,668
Repairs 1,156,356
Bad Debts 406,866
Interest Paid 1,199,184
Taxes Paid 3,126,444
Depreciation and Depletion 3,019,374
Marketing 64,242,000
Pension and Other Employee
Benefits2.205.642
Total Other Expenses $78.910.590
Net Profit Before Federal Income Tax $19,058,076
Federal Income Tax 9.147.876
Net Profit After Tax $ 9.910.200
102
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Table 36
LARGE MODEL INTEGRATED PLANT - UPPER QUARTILE DATA
BALANCE SHEET
ASSETS
Current Assets
Cash $ 9,637,406
Accounts Receivable 19,629,499
Inventories 23.793,333
Total $53,060,238
Fixed Assets 11,066,666
Intangible and Other Assets 13,007,762
Total $77.134,666
LIABILITIES AND CAPITAL
Current Debt $13,501,333
Long Term Debt 8,300,000
Net Worth 55,333.333
Total $77.134.666
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Table 37
LARGE MODEL INTEGRATED PLANT - MEDIAN DATA
IMPACT ANALYSIS FOR LEVELS I, II, AND III TECHNOLOGY
COLIN A. HOUSTON & ASSOCIATES, INC. - RECOMMENDED EFFLUENT CONTROL STANDARDS
Level I +
Present Level I Level II Level III Technology
Technology Technology Technology Continuous
1. Annual incremental cost
2. Annual incremental cost
per pound of product
3. Per cent change in total
cost per pound of pro-
duct
$402,600
0.0544C
0.217,
$614,600
0.08035
0.31%
$3,107,000
0.4199C
1.597o
4. Net profit margin
5. Return on tangible net
worth
6. Net profit before
federal income tax
7. Net profit after
federal income tax
4.427o 4. 337, 4.2770 3.677o
12.747o 12.467» 12.317o 10.5778
$18,216,770 $17,814,170 $17,602,170 $15,109,770
$9,472,720 $9,263,368 $9,153,128 $7,857,080
8. Fixed charge coverage
on long term debt 31.38x
9. Increase in funded
debt
10. Debt to tangible net
worth 62.37o
11. Long term debt to
total capitalization 20.97»
26.70x 24.75x 7.97x
$1,170,000 $1,770,000 $19,000,000
63.97o 64.77o 87.970
21.97o 22.37» 34.27,,
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Table 38
LARGE MODEL INTEGRATED PLANT - MEDIAN DATA
STATEMENT OF INCOME AND EXPENSE
Net Sales $214,140,000
Less Cost of Goods Sold 117.012.640
Gross Margin $97,127,360
Compensation of Officers $ 2,227,056
Rent Paid on Business Prop-
erty 1,327,668
Repairs 1,156,356
Bad Debts 406,866
Interest Paid 1,199,184
Taxes Paid 3,126,444
Depreciation and Depletion 3,019,374
Marketing 64,242,000
Pension and Other Employee
Benefits2,205.642
Total Other Expenses $78,910,590
Net Profit Before Federal Income Tax $18,216,770
Federal Income Tax 8,744,050
Net Profit After Tax $ 9.472.721
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Table 39
LARGE MODEL INTEGRATED PLANT - MEDIAN DATA
BALANCE SHEET
ASSETS
Current Assets
Cash $12,490.967
Accounts Receivable 30,336,483
Inventories 28.176.315
Total $71,003,765
Fixed Assets 21,637,062
Intangible and Other Assets 28.035.984.
Total $120.676.811
LIABILITIES AND CAPITAL
Current Debt $26,693,145
Long Term Debt 19,629,500
Net Worth 74.354.166
Total $120.676.811
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XI
SUMMARY OF FINANCIAL MODELS
The above analysis was mad® under fairly rigid constraints
.in order to determine the impact of the cost of effluent
control under"the recommended standards. Because of these
constraints, and the us® of a static analysis, factors
that would tend to lessen the financial impact of control
were not considered.
The assumption of a constant annual output permits no
offset to the control costs from increased sales. Of
course sales can also decrease, but the expectation is
that future industry growth will continue through the
decade at approximately three percent per year.
JT 6 «/
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It should be noted, with reference to the use of upper
quartile, median and lower quartile data, that the up-
per quartile key ratios represent data for a point midway
between the median and the top of the series. Therefore,
of the companies above the median, there are an equal num-
ber above and below the upper quartile ratios. By the
same token, by definition, median is average and, there-
fore, the three •_model., companies given the median fin-
ancial characteristics of the industry provide a good
indication of the average impact of the proposed effluent
control guidelines and standards. Since there are an
equal number of companies above and below the median, one
cannot conclude that the impact observed here is the ex-
pected impact for every company. Rather, one can observe
that half of the establishments in the industry will do
better than the median results while half will do less
well. It may further be observed that of the establish-
ments below the median, half will do better than the lower
quartile performance, while half will do less well.
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XII
PRICE EFFECTS
Based on the foregoing financial impact analysis, it is
clear that (1) there is an incremental cost associated
with point source members of the soap and detergent in-
dustry meeting the recommended effluent control standards
and guidelines and (2) that this cost is substantial. In
addition, it is noted that point source treatment is one of
two alternatives often open to a large member of the indus-
try in meeting the control standard within the framework
of an ongoing business; the other alternative is inter-
connection with a public waste treatment facility. In
either case, there is either an actual or potential in-
cremental cost.
In a market characterized by vigorous price competition,
limited market power among the participants, and a rela-
tively homogeneous product, the expectation would be that
the incremental cost of control would induce prices of
product to rise to cover the above cost increments, or
alternatively, for the producers of product to increase
productivity in order to offset the effect of the additional
cost on profit margins.
This market has previously been characterized as oligopo-
listic in recognition of the high degree of concentration
of production facilities and sales among few producers.
It was indicated that the market is further characterized
by a high degree of product differentiation and considerable
market power among the "big three". Since this is an
oligopolistic market, one cannot specify with certainty
the price effects of meeting the proposed effluent control
standards because they are to a great extent, discretionary.
THE "BIG THREE"
The big three producers, Procter & Gamble, Lever Brothers,
and Colgate-Palmolive may either (1) absorb the incremental
cost, (2) increase their price by an amount equal to the
incremental cost, or (3) increase their price by an amount
greater than the incremental cost of effluent control.
Since the price making process of necessity involves time
lags; for example, between rising costs and an upward price
adjustment, the oligopolist can build into any particular
price increase, an increment for future expected near-term
cost increases. This would permit the absorbing of some
cost increases without adversely affecting the target
profit margin or rate of return. If this is the case with
the "big three" at this point in time, they might well absorb
the incremental cost associated with effluent control, but
109
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it is not a likely alternative if such a course of action
would squeeze the profit margin of competitors since fur-
ther gains in market share by the big three, at the
expense of other competitors, might invite a governmental
antitrust action.
If the effluent control cost were to cut into the target
profit margin or rate of return significantly, a price in-
crease equal to the incremental cost would be expected.
If this incremental cost increase coincides with other
cost increases, there could be a price increase greater than
the incremental cost of effluent control.
PRIVATE BRAND HOUSEHOLD SOAP AND DETERGENT
The private brand producers of soaps and detergents must be
cognizant of the price differential between the private brands
and the nationally advertised brands. Therefore, their ability
to institute price increases are, to a great extent, a function
of the price differential between private brands and nationally
advertised brands, and therefore, a function of the price of
the nationally advertised brands. Substantial shrinkage of the
differential would cause a loss of market share from the pri-
vate brands to the nationally advertised brands. Bearing in
mind these considerations, there results a price leadership
situation, so common a characteristic of the oligopolistic mar-
ket. The price leadership is exerted by a member of the "big
three", possibly Procter & Gamble; the other two of the largest
three producers would follow, in line with the previously out-
lined characteristics of mutual interdependence in the oligopo-
listic market. The private brand makers would also follow suit
The private brand makers may be able to fully offset or par-
tially offset increased costs, depending on the magnitude of
the price increase of the price leader and the resulting net
effect on the price differential between national and private
brands.
INDUSTRIAL AND INSTITUTIONAL CLEANERS
These producers of specialty products will be able to increase
price depending on how successful they have been in differen-
tiating their product. Generally, specialty products, by def-
inition, are highly differentiated, and therefore prices can be
increased with relative ease. This product line is character-
ized by a few relatively large producers; e.g., the Chemed
Division of W. R. Grace & Co., and Economics Laboratory and a
large number of small companies. Since product differentiation
is rarely if ever complete, some cross elasticity of demand;
i.e., substitutability, must exist.
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GLYCERINE PRODUCERS
The natural glycerine supply is a by-product of soap manufac-
ture and/or fat splitting. Natural glycerine, therefore, is
marketed on a continuous basis regardless of immediate market
conditions. The price determined in the market for natural
glycerine determines the price for synthetic glycerine. Since
the recommended effluent control standards will increase the
cost of recovering natural glycerine, there may follow a price
increase to cover that incremental cost increase. As the 'big
three" are the dominant natural glycerine producers, any price
increase would probably originate with them and filter down
through the industry.
SUMMARY
Taking into consideration the structure of the industry, the
inelastic situation with respect to price elasticity of demand
and the ever-present threat of governmental action in the face
of further concentration within the soap and detergent industry
at the expense of the smaller producers, it is reasonable to
expect that the cost of meeting the recommended standards and
guidelines for effluent control will result in a price increase
of a magnitude equal to the cost increment.
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XIII
PRODUCTION EFFECTS
The recommended guidelines will affect production in many
ways. The most important are discussed below.
Equipment Installation
The capital equipment which may be required for in-process
modification to meet guideline recommendations will interrupt
the normal processing activities. Not every plant within a
particularly impacted category will be affected since many
are already at the equivalent of the Level I or Level II
guideline recommendations.
Replacement of barometric condensers by surface condensers is
by far the most controversial issue within the industry. There
is relatively little disagreement over the utility and opera-
bility of such equipment in glycerine recovery and distillation.
This is not the case regarding its use in soap drying and fatty
acid distillation.
Several of the manufacturers have advised the guidelines con-
tractor that the employment of the surface condenser in soap
drying would lead to rapid fouling of the condenser surface,
thereby requiring frequent shutdowns to clean out the conden-
sers. The contractor in turn insists that the parallel use of
surface condensers to handle such tacky material as coal tar
distillate make it more than suitable for such use. The pro-
cess change may require piloting before scale-up and instal-
lation. Once this controversy is resolved affirmatively there
is no work stoppage foreseen.
The fatty acid producers are also challenging the surface con-
denser replacement for barometrics. They claim the low melt-
ing point of some of the acids would offer a fouling problem
similar to that of the soap drying process. There are several
approaches which could accomplish the same water and effluent
reductions as barometric condensers such as extraction of light
ends from the vapor effluent from the still or the recycle of
barometric condenser cooling water through a biological cool-
ing tower. Nothing in the guideline recommendations mandated
the incorporation of particular hardware.
In terms of installation interference, an expected several days'
interruption can be expected to make the plumbing tie-ins of the
installed units. As much as two weeks shutdown is an outside
limit.
Similarly, the installation of the suggested water scrubbers
would require several days' down time of the spray towers in
order for the plumbing tie-ins to be made. Here again, the
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knowledge of similar types of equipment used elsewhere in the
chemical industry as a very common practice lessens the threat
of unanticipated difficult installation practices.
In the case of the liquid detergent plants making the appro-
priate changes to minimize their loss of product due to clean-
outs, most of this equipment could be installed without inter-
rupting the general performance of the filling lines. There
would come a time when the plant would have to shut down for
the necessary piping tie-ins which would amount to a few days
at most. There would be no yield losses, production losses,
or other noticeable change in operation after the changes are
made.
Operation Costs
There will be an increase in the cost of operation caused by
the installation of these new units of process equipment.
There will also be an attendant recovery of product or by-
product which will provide a payout - even though of long
duration in some cases.
Production Curtailment
Whatever interference there is with the manufacturing process,
it will only be temporary during installation and startup.
Plant Closings
No plant closings are foreseen due to equipment incompatability
or difficulty of installation. This is above the consideration
of economics. From a strictly engineering vantage point, there
is no reason to predict any insuperable problem.
Industry Growth
Growth will be unimpeded at the expected annual rate of 5% (in
pounds). Whatever increase in operation costs that would be in-
curred can be expected to be passed on to the consumer.
The soap business is expected to just keep pace with population
growth. In the event a new plant is built from "grassroots"1,
there is strong probability a new soap manufacturing unit would
utilize the continuous saponification unit rather than the older
batch kettle equipment. The new continuous unit offers lower
unit costs but does not offer the flexibility of product type
enjoyed by the older plant.
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XIV
EMPLOYMENT AND COMMUNITY EFFECTS
The employment effects of the recommended standards and
guidelines for effluent control will be slight if there
are any effects at all. Since it is the expectation that
price increases will offset the cost of effluent control,
there is little reason to expect production curtailment
to be a resultant effect of the institution of the recom-
mended standards. In addition, given the nature of the in-
dustry with respect to its size distribution there is
little expectation of an unfavorable employment effect
since the large plants are owned by those industry members
that can best cope with a rising cost situation.
The geographical distribution of the industry also minim-
izes the possibility of unfavorable employment and com-
munity effects. It is not likely that a soap detergent plant
will be the economic mainstay of a community. These plants are
generally located in well populated, highly industrialized areas
It is, therefore, concluded that the employment and community
effects of the recommended effluent control standards and
guidelines will be neutral.
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XV
INDUSTRY GROWTH AND
BALANCE OF PAYMENTS EFFECTS
DEMAND CHARACTERISTICS
The growth of the industry is primarily dependent upon the
key demand variables which are demographic in nature.
Since the product is highly differentiated with no close
substitutes, and since it is relatively income inelastic
as well as price inelastic, the added cost associated with
the recommended control standards should be neutral in ef-
fect with respect to growth.
SUPPLY CHARACTERISTICS
There is no doubt that the cost of doing business will
rise as a result of the control standards and guidelines.
However, as has already been pointed out, these operating
costs will be offset by price increases. There will be no
raising of the barriers to entry into the industry since
there will be no increase in capital requirements in an
overwhelming majority of cases. Although the cost estimat-
ing process employed in this study utilized point source
estimates with incremental additions to real capital, it
is the industry practice to hook up to public water treat-
ment facilities in all but a very few cases. Therefore, no
incremental capital costs are involved in all but a very
few cases.
Another supply side phenomenon that must be considered is
the possibility that demand will be partially satisfied
from abroad due to the cost increases associated with ef-
fluent control. This would lead to a negative effect with
respect to the growth of the domestic soap and detergent
industry. Such an eventuality is unlikely under present
circumstances, for a variety of reasons. First, any ex-
porter of product to this country must contend with a 57,
ad valorem import tax as well as high freight rates.
Second,given the nature of the industry, in order to gain
a market share any potential foreign competitor would have
to almost certainly take on the "big three" either with
respect to direct price competition or in terms of out ad-
vertising them - a formidable task. Third, devaluation of
the dollar with respect to other hard currency/exchange
tends to place potential foreign producers in an unfavor-
able relative price position vis-a-vis the dollar. Any
potential foreign competitor would be more likely to build
a plant in the United States. This would yield a favorable
employment and community effect and have a favorable
117
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balance of payments effect initially. (The secondary bal-
ance of payments effects are dependent upon many other
variables relating to the policy of this potential foreign
competitor with respect to reinvesting in the United States
as opposed to repatriating earnings to the foreign com-
petitor's country of origin. Fourth, it is noted that the
major industrial nations, apart from the United States, are
experiencing significant inflation, further reducing any
potential advantage that might develop from the costs as-
sociated with the recommended effluent control standards.
Fifth, and last, foreign industrial nations are recognizing
and have already recognized and reacted to, the threats to
the environment represented by water pollution. Many
countries have already enacted control requirements.
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XVI
LIMITS OF THE ANALYSIS
The limitations of this analysis have been stated in the
body of the text both in the statements of methodology and
in the analysis itself. Perhaps the single greatest limi-
tation has been the limitation created by the availability
of data on a plant and company basis. However, these
limitations are always present in a study such as this and
it requires the analyst to find proxies that are reasonable
approximations of the desired data -- this we have done.
The second major limitation has been the impossibility of
directly measuring future public sewer treatment costs
and their impact on effluent control. Here again, however,
we feel that we have established a reasonable alternative
route in arriving at the economic impact of the guidelines
and standards.
119
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XVII
BIBLIOGRAPHY
1. Bock, Betty and Farkas, Jack. Concentration and
Productivity, Some Preliminary Problems and Findings.
Studies in Business Economics No. 103, Appendix A.
National Industrial Conference Board, Inc., New
York, N. Y. 1969.
2. Caves, Richard. American Industry: Structure,
Conduct, Performance. Third Edition. Prentice-
Hall, Inc., Englewood Cliffs, N. J. 1972.
3. Chemical Week Magazine. Staff. Phosphate Bans Spur
Sales of Laundry Liquids. McGraw Hill, New York.
April 11, 1973.
4. Chemical Week. 1973 Buyers Guide Issue. Chemical
Week, III (17) Part 2. October 25, 1972.
5. CJA Co-ops and Voluntaries, Quarterly. Lebhar-
Friedman, Inc. New York, N.Y.
6. Dun and Bradstreet Middle Market Directory. Dun and
Bradstreet, New York, N.Y. 1973.
7. Dun and Bradstreet Million Dollar Directory. Dun and
Bradstreet, New York, N.Y. 1973.
8. Fellner, William. Competition Among the Few. Alfred
A. Knopf, New York, N. Y. 1949.
9. Houston, Colin A. & Associates, Inc. Development
Document for Effluent Limitations Guidelines and
Standards of Performance, Soap and Detergent Industry
(Draft). U. S. Environmental Protection Agency.
Washington, D.C. June 1973.
10. Kaysen, Carl and Turner, Donald F. Antitrust Policy.
Harvard University Press, Cambridge, Mass. 1959.
11. Securities and Exchange Commission. Colgate-Palmolive
Company. Form 10K. Washington, D.C. December 31, 1972
12. Securities and Exchange Commission. Proctor & Gamble.
Form 10K. Washington, D.C. June 30, 1972.
13. Soap and Detergent Association. New York.
14. Standard & Poors Corporation Records. Standard & Poors
Company, New York, N.Y. 1973.
121
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15. Standard & Poors Register of Directors and Executives
Standard & Poors Company, New York, N.Y. 1973.
16. U. S. Bureau of the Census, Department of Commerce.
Concentration Ratios in Manufacturing Industry: 1963
Report prepared for Subcommittee on Antitrust &
Monopoly of the Committee on the Judiciary, United
States Senate. Washington, D. C. Part I (1966)
Part II (1967).
17. U. S. Department, of Commerce. 1963 Census of Manu-
factures. U.S.G.P.O., Washington, D.C.
18. U.S. Department of Commerce. Soap, Cleaners and
Toilet Goods. 1967 Census of Manufacturer, p. 28 D2.
U.S.G.P.O., Washington, D.C. October 1970.
19. U.S. Government, Office of Management and Budget.
Standard Industrial Classification Manual. U.S.
Government Printing Office. 1972.
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: i.. ...r EPA - 230/1-73-026
i liiC ullu SuiHIUC
! ECONOMIC ANALYSIS OF PROPOSED EFFLUENT GUIDELINES
SOAP AND DETERGENT INDUSTRY
;/. Auvi.or^1/ Colin A. Houston, Frederick C. Herot, •
I Norman S. Douglas, Alfred W. Fleer
'9. i)c..o(,,>.i.a G.-fciui.isac.ori .Name and Audrei»
'U.S. Environmental Protection Agency
Office of Planning and Evaluation .
Washington, D.C. 20460
' ,'±. i^ofisofir.^ urbanization Name and Address
.U.S. Environmental Protection Agency
• wasmngton, IJ.L. /UH-DU
-
5. Ucpoic Date
August 1973
6.
8* Periorming Or^.iniiuuoii itcpt.
Not EPA - 230/1-73-Q
10. Project/TaskA'otk Unit No.
i 1. Contract/Grant No. '
68-01-1566
13. Type 01 Report & Period
Covered
Final
14.
i
an{j detergent industry is characterized by a highly con-
centrated oligopolistic market in which, according to 1970 census data,
the first four companies accounted for 70% of the value of shipments and
the first eight companies accounted for 79%.
Price competition is limited except in the liquid detergent field.
In the marketing of household products advertising plays an important
role in product differentiation.
On the basis of size, the industry was segmented' into the first
four, the first eight, "rest of the industry" basis. Segment I company
sales ranged from $400,000,000 to over one billion dollars. Aggregate
plant data indicates that the efficiency of the three groups corresponds
generally to their ordering. (8ee next
Simulation models of representative single plant producers page)
./.
Votuh uciii document Aft«iy*i«. 'i7o. Descriptor*
• 7i>. iucmif'i
erm*
'.'/c. >' OSA
123
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in the industry indicate that on a point source basis the cost to
the industry of the recommended control guidelines and standards
is appreciable, impacting smaller producers relatively more heavily
than larger producers. This point source approach is an indirect
approach in -assessing control costs.
Since most of the industry interconnects with public waste
treatment facilities, the greatest potential cost impact of effluent
control will come from rising public waste treatment charges.
No adverse community, employment, or balance of payment effects
are anticipated.
Bibliography.
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