Reckitt chef opens new era with sale of infant formula unit in China

When Reckitt Benckiser acquired infant formula maker Mead Johnson for £ 13 billion four years ago, the chief executive of the consumer goods group called it a “rewarding solution for moms”.

But for Reckitt, the deal did not bring the enrichment envisaged by Rakesh Kapoor.

Sales of Mead Johnson’s vital Chinese branch continued to decline due to falling birth rates and growing local competition. By the time the company had sold most of its Chinese infant formula division last month it had written off £ 8 billion from its value.

Now, Laxman Narasimhan, Kapoor’s successor, is looking to take advantage of a pandemic surge in demand for Reckitt’s hygiene products to re-energize a business that some investors and analysts say has been undermined by the focus put on the integration of Mead Johnson.

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

With the sale of everything but 8% of China’s infant formula division, Narasimhan has drawn the line on what was a “galaxy-sized mistake,” Simpson said.

Adapt to market flows

Narasimhan’s challenge is now to restore Reckitt’s competitiveness in a changing consumer market due to Covid-19. Sales of products associated with socialization, such as Reckitt’s Durex condoms, rebound with the launch of immunization programs. Durex saw double-digit sales growth in the first quarter compared to a year ago.

But demand for cough and cold products such as Reckitt’s Lemsip, Mucinex, and Strepsils has plummeted. The company estimated that coughs, colds and flu were down 90% last winter due to anti-Covid measures such as social distancing.

Narasimhan ignores declining sales as a pandemic. “As things open up, as mask warrants disappear and people socialize, we are seeing a greater incidence of influenza,” he said. “Now part of that will play out over this year and into the next year. But the flu will come back.

Outside of China, sales of older Mead Johnson infant formula brands such as Enfapro, Lactum and Lactum have been relatively strong, including in the United States and the Philippines, although there is evidence of a declining birth rates due to the pandemic.

An even bigger issue for Reckitt is the sustainability of a sanitizing dam that has significantly boosted sales of its Dettol and Lysol products. Dettol sales remained stable in the first quarter compared to a year ago, although Lysol grew strongly, helping to increase sales of Reckitt’s Hygiene division by 28.5%.

This reflected the geographies in which the brands are sold, the company said, as Dettol is sold in countries that have been more successful in bringing the pandemic under control. But observers are divided over time disinfectant rush will last, especially since the Covid-19 is airborne and rarely transmitted on surfaces.

Dettol products on a shelf in a grocery store in London

The pandemic increased sales of Reckitt’s Dettol product, helping to boost the first quarter revenue of its hygiene division © Facundo Arrizabalaga / EPA / Shutterstock

Simpson said a legacy of the pandemic would be “increased awareness of the risk of infection in general. It will last a very, very long time. “

But Steve Clayton, manager of the UK Select fund line at Hargreaves Lansdown – which held stakes in Reckitt until two years ago through its Growth Shares and Income Shares funds – is more skeptical. “Surely the world will get bored of sticky, overly sanitized tabletops for too long?” ” he said.

“Reckitt will face the challenge of getting the right stocks in the right markets. If you get it wrong, the group could find themselves having to discount brands in order to erase overhangs, threatening hard-earned brand bonuses. “

The group’s share price had lost more than a fifth of its value in February, after hitting a pandemic high of £ 77.54 last July, with Terry Smith, a well-known UK fund manager and former investor loyal to Reckitt, selling his stake at the end of 2020.

But investors subsequently regained some optimism, pushing the share price up 11.3%.

Rebased stock price line chart showing that Reckitt has underperformed its peers

Past missteps

Bart Becht, Kapoor’s predecessor, is credited with establishing Reckitt’s consumer health division, which includes brands such as Nurofen and Gaviscon. But this division has made mistakes.

“We believe Reckitt’s history in the hygiene market has sometimes left him blind in trying to figure out how to best manage consumer health brands. A culture of rapid innovation and aggressive marketing. . . doesn’t always fit into the safety-focused health care culture, ”Clayton said.

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

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

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

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

One of the justifications for buying Mead Johnson was to strengthen Reckitt’s presence in China. This “has given them critical mass in China, which is one of the most dynamic and important consumer markets in the world. . . They were undersized there, ”Simpson said.

Still, sales in China’s infant formula sector have remained on a stubborn downward path as birth rates plummeted and the government pushed to encourage domestic infant formula manufacturers. The new owner of the unit, Primavera, is Chinese.

A woman carrying her baby in a shopping mall in Beijing, China

The Chinese government lobbied for new domestic manufacturers of infant formula © Andy Wong / AP

Yet Reckitt’s business in China, even without infant formula, is now very different. It generated around £ 700million in revenue last year, compared to £ 861million for infant nutrition.

Sales of vitamins, minerals and supplements such as the Move Free brand have increased significantly. “Prevention [of illnesses] is now anchored in our behavior ”, argued Narasimhan.

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

The challenge of the margin

Samuel Johar, who chairs London-based board advisory group Buchanan Harvey, said Narasimhan spent the early years of his leadership dealing with problems hailing from Kapoor, while Kapoor spent his own early years reaping the rewards of the changes Becht made.

“In a company of this size, what happens in the first three or four years of a CEO’s tenure is less their doing than the momentum they inherit – for good and for bad. “, did he declare.

Clayton said Narasimhan had made a “welcome start” but added he would face the “perennial margin challenge”. Reckitt is winning big margins and driving change while maintaining stable margins is always fraught with challenges.

But the higher margins of Reckitt’s sector – a more positive legacy of Kapoor – will also help insulate it against cost. inflation hitting the sector, Simpson said.

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

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