Reckitt’s head signals a new era with the sale of China’s creature formula unit

When Reckitt Benckiser acquired baby formula maker Mead Johnson for £ 13 billion four years ago, the executive director of the consumer goods group called it “an enriching solution for mothers.”

But for Reckitt, the deal did not provide the enrichment that Rakesh Kapoor had envisioned.

Sales in Mead Johnson’s vital Chinese arm have continued on a downward slide due to declining birth rates and growing local competition. At the time the company had it sold most of its formula division for Chinese children last month, had written £ 8 billion in value.

Now Laxman Narasimhan, Kapoor’s successor, is looking to build on a pandemic of demand for Reckitt hygiene products to reinvigorate a company that some investors and analysts say has been damaged by the focus on Mead integration Johnson.

Narasimhan, who took over in 2019, “inherited a company that needed a lot of turns, a company that had been chronically underinvested. [in]”Said Iain Simpson, Barclays analyst.

With sales of everything except 8% of China’s children’s formula division, Narasimhan drew a line below what was a “galaxy-sized mistake,” Simpson said.

Adapting to market flow

Narasimhan’s challenge now is to restore Reckitt’s competitiveness in a consumer market that is in flux because of Covid-19. Sales of socially-associated products, such as Reckitt’s Durex condoms, are picking up as vaccination programs launch. Durex reported double-digit sales growth in the first quarter compared to a year ago.

But demand for cough and cold products like Reckitt’s Lemsip, Mucinex and Strepsils has fallen. The company has estimated that coughs, colds and flu will drop by 90% over the past winter due to anti-Covid measures such as social disruption.

Narasimhan raises the drop in sales like a pandemic. “When things open up, as masked mandates go and people socialize, we see a greater incidence of influence,” he said. “Now, part of that will be played over the course of this year and next year. But the flu will come back.”

Outside of China, sales of the former Mead Johnson children’s formula brands such as Enfamil, Enfapro and Lactum have been relatively strong, even in the United States and the Philippines, although there is evidence of a decline in birth rates due to the pandemic.

An even bigger issue for Reckitt is the durability of a disinfectant boom that has greatly increased the sales of its Dettol and Lysol products. Dettol’s sales were flat in the first quarter, compared to a year ago, although Lysol grew significantly, helping to boost sales in Reckitt’s hygiene division 28.5 percent.

This reflected the geography where brands are sold, the company said Dettol is sold in countries that have done better to bring the pandemic under control. But observers are divided on how long u disinfectant run will last, especially since Covid-19 is in air and rarely transmitted on surfaces.

Dettol products on a shelf in a supermarket in London

The pandemic has boosted sales of Reckitt’s Dettol product, helping increase first-quarter revenue in its hygiene division © Facundo Arrizabalaga / EPA / Shutterstock

Simpson said a pandemic legacy would be “an increased awareness of the risk of infection in general. That will last for quite some time.”

But Steve Clayton, manager of UK Select funds at Hargreaves Lansdown – which was able to participate in Reckitt until two years ago through its Growth and Network Funds – is more skeptical. “Surely the world will get tired of sticky tables, too disinfected before it’s too long?” he said.

“Reckitt will face the challenge of having the rights in the right markets. You get it wrong and the group could find itself having to discount brands to get rid of surpluses, threatening hard-earned brand awards in the process.”

The group’s stock price had plummeted more than a fifth of its value since February, after hitting a pandemic high of £ 77.54 last July, with Terry Smith, a well-known fund manager at the UK and former loyal investor Reckitt, which sells its stake in late 2020.

But investors later picked up some optimism, sending a copy of the stock price up 11.3 percent.

Graphic line of lower stock prices showing that Reckitt has underperformed against its peers

Wrong steps

Bart Becht, Kapoor’s predecessor, is credited with creating Reckitt’s consumer health division, which includes brands such as Nurofen and Gaviscon. But this division took wrong steps.

“We think Reckitt’s history in the hygiene market has sometimes left him blind to try to understand how to better manage consumer health brands. A culture of rapid innovation and aggressive marketing… Doesn’t always go well. with the culture of health security, ”Clayton said.

Under Kapoor, whose salary was among the highest in the FTSE 100, Reckitt has been censored by Australian regulators for marketing Nurofen as a targeted product rather than a general anti-inflammatory product. The company also suffered after the failed launch of a Scholl electronic file in 2016. It also apologized that year for dozens of deaths caused by a faulty humidifier disinfectant it sold in South Korea.

Scholl has been sold this year to a US private equity group, while Reckitt is investing more in research and development.

Narasimhan does “all the right things…. It’s a much better invested company than it was, market share performance looks much better, it’s a company that communicates better with stakeholders,” Simpson said.

Mead Johnson’s acquisition went after a failed approach by Kapoor to acquire Pfizer’s consumer health division, which is now part of a joint venture with GlaxoSmithKline.

One justification for Mead Johnson’s acquisition was to strengthen Reckitt’s presence in China. “It has given them a critical mass in China, which is one of the fastest growing and largest consumer markets in the world… They have been undersized here,” Simpson said.

However, sales in the Chinese formula business have remained on a stubborn downward trajectory while birth rates have fallen and the government has pushed to favor domestic infant formula producers. The new owner of the unit, Primavera, is Chinese.

A woman carrying her child to a mall in Beijing, China

Chinese government pushes for new home formulas for children © Andy Wong / AP

However, Reckitt’s activity in China, even without a breeding formula, now seems very different. It had about £ 700 million in revenue last year, compared to £ 861 million for baby food.

Sales of vitamins, minerals and supplements such as the Move Free brand have risen sharply. “Prevention [of illnesses] it is now rooted in our behaviors, ”Narasimhan argued.

At the end of last year, Reckitt chose China to launch a polyurethane version of Durex, which is allergic and offers greater softness and elasticity, according to the company. “We expect China to continue to serve as an important market for innovation,” Narasimhan said.

The margin challenge

Samuel Johar, who chairs the London council’s advisory group, Buchanan Harvey, said Narasimhan was spending the early years of his leadership dealing with problems originally from Kapoor, while Kapoor spent his early years reaping the benefits of the changes made by Becht.

“In a society of this size, what happens in the first three or four years of an executive’s tenure is less their fact than the impetus they inherit – right and wrong,” he said.

Clayton said Narasimhan had made a “welcome start”, but added that he would face the “perennial margin challenge”. Reckitt gains fat margins and driving change while keeping margins stable is always fraught with pitfalls. ”

But Reckitt’s industry battle margins – a more positive legacy from Kapoor – will also help insulate him against the cost. inflation hitting the sector, Simpson said.

“They have less exposure in this area than many other family and personal care companies because their gross margins are quite high,” he added.

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