Reckitt chief signals a new era with the sale of infant formula unit in China

When Reckitt Benckiser acquired infant formula maker Mead Johnson for £13 billion four years ago, the then-CEO of consumer goods group described it as a “rich solution for moms”.

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

Sales in the vital Chinese arm of Med Johnson continued to decline due to low birth rates and rising domestic competition. By the time the company sell it Most of the Chinese infant formula division last month, wrote off £8 billion from its value.

Now Laxman Narasimhan, Kapoor’s successor, is seeking to build on the pandemic’s surge in demand for Reckitt’s hygiene products to revitalize a company that some investors and analysts say has been hurt by the focus on the Mead Johnson merger.

Narasimhan, who took over in 2019, “inherited a company that needed a lot of change, one whose investment was chronically underinvested.” [in]said Ian Simpson, an analyst at Barclays.

With all but 8 percent of infant formula sold in China, Simpson said, Narasimhan drew a line under what was a “galactic size error.”

Adapting to market fluctuations

The challenge Narasimhan now faces is to restore Reckitt’s competitive edge in a consumer market in flux due to Covid-19. Sales of socialization-related products, such as Reckitt’s Durex condoms, are recovering as vaccination programs begin. Durex reported double-digit sales growth in the first quarter compared to last year.

But the demand for cough and cold products like Reckitt’s Lemsip, Mucinex and Strepsils has fallen sharply. The company estimated that coughs, colds and flu fell by 90 percent in the past winter due to anti-Covid measures such as social distancing.

Narasimhan dismisses the drop in sales as an epidemic indicator. “As things open up, as mask and social distancing mandates move in, we’re seeing an increase in flu cases,” he said. “Now, some of that is going to come into play over the course of this year and next. But the flu will come back.”

Outside of China, sales of former Mead Johnson infant formula brands such as Enfamil, Enfapro and Lactum have been relatively strong, including in the United States and the Philippines, despite evidence of low birth rates due to the pandemic.

Reckitt’s biggest question is the durability of the cleansing boom that has greatly boosted sales of Dettol and Lysol products. Dettol’s sales were flat in the first quarter, compared to a year ago, although Lysol grew strongly, helping increase sales in Reckitt’s hygiene division by 28.5 percent.

This reflects the geographies in which the brands are sold, the company said, as Dettol is sold in countries that have done better in controlling the pandemic. But observers are divided over how long the file will take Impulse disinfectant It will continue, especially given that Covid-19 is airborne and rarely on surfaces.

Dettol products on a shelf in a London grocery store

The pandemic drove sales of Reckitt’s Dettol product, which helped boost first-quarter revenue in the hygiene division. © Facundo Arrizabalaga / EPA / Shutterstock

Simpson said that one of the legacy of the pandemic would be “a greater awareness of the risks of infection in general. That will go on for a very long time.”

But Steve Clayton, director of the UK Select fund group at Hargreaves Lansdown – which owned stakes in Reckitt until two years ago through growth funds and income stocks – is more skeptical. “Sure, the world will tire of sticky, overly sterilized tablet PCs before too long?” He said.

Rickett will face the challenge of owning the right stocks in the right markets. Get it wrong, the group may find itself having to discount brands in order to clear the backlog, threatening hard-earned brand premiums in the process.

The group’s share price had shed more than a fifth of its value by February, having reached an epidemic level of £77.54 last July, with Terry Smith, a well-known British fund manager and former loyal investor in Reckitt, selling his stake in late 2020.

But investors then regained some optimism, sending the stock price back up by 11.3 percent.

Line graph of re-established stock prices showing that Reckitt has underperformed against its peers

slips of the past

Kapoor’s predecessor, Bart Becht, is credited with building Reckitt’s consumer health division, which includes brands such as Nuroven and Gaviscon. But this split was wrong.

“We believe Reckitt’s history in the hygiene market has at times left him at a loss trying to understand how best to approach consumer health brands. A culture of rapid innovation and active marketing . . . does not always align well with a healthcare culture of safety first,” Clayton said.

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

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

Narasimhan is doing “all the right things… This is a much better invested business than it used to be, and market share performance looks so much better, it’s a business that communicates better with stakeholders,” Simpson said.

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

One rationale for buying Mead Johnson was to strengthen Reckitt’s presence in China. It “gave them critical mass in China, which is one of the fastest growing and largest consumer markets globally… and it was quite small there,” Simpson said.

However, sales in the Chinese formula trade remained on a stubborn downward trajectory as birth rates declined and the government pushed to boost domestic infant formula makers. The new owner of the unit, Primavera, is Chinese.

A woman holds her baby in a mall in Beijing, China

The Chinese government has been pushing for new domestic infant formula makers © Andy Wong / AP

However, Rickett’s business in China, even without infant formula, now looks very different. It had about £700m in revenue last year, compared to £861m for infant feeding.

Sales of vitamins, minerals, and nutritional supplements have increased sharply, such as the Move Free brand. “protection [of illnesses] It is now ingrained in our behaviors,” Narasimhan said.

Late last year, Reckitt chose China to release a polyurethane version of Durex, which is allergy-friendly while providing greater softness and flexibility, according to the company. “We expect China to continue to serve as an important market for innovation,” Narasemhan said.

Margin Challenge

Samuel Johar, who chairs the London-based Buchanan Harvey Board Advisory Group, said Narasimhan was spending the early years of his leadership dealing with Problems He grew up with Kapoor, while Kapoor spent his early years reaping the benefits of the changes made by Becht.

“In a company of this size, what happens in the first three or four years of the CEO’s tenure is less work than the momentum they inherited – in right and wrong,” he said.

Clayton said Narasimhan had a “welcome start”, but added that he would face the “perpetual margin challenge”. Reckitt earns large profit margins and leads to change while keeping margins stable is always fraught with pitfalls.”

But Reckitt’s cross-sectional margins – Kapoor’s more positive inheritance – will also help insulate it from the cost. economic inflation Simpson said, hitting the sector.

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

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