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Chief Reckitt has ushered in a new era with the sale of the Chinese infant formula unit

When Reckitt Benckiser acquired Mead Johnson’s creative formula for children 13 billion euros ago, four years ago the chief executive of the consumer goods group said it was an “enriching solution for mothers”.

As for Reckitt, the deal did not provide the wealth planned by Rakesh Kapoor.

Mead Johnson’s key Chinese arm sales continued to decline as birth rates fell and local competition was on the rise. When the company had it sell Most of China’s infant formula division last month wrote £ 8 billion.

Now Laxman Narasimhan, Kapoor’s successor, wants to exacerbate Reckitt’s demand for hygiene products due to the focus on integrating Mead Johnson, which some investors and analysts say is to revitalize a company.

In 2019, Narasimhan took over “he inherited a business that had to turn around a lot, a business that was chronically under-invested. [in]”Said Iain Simpson, an analyst at Barclays.

With the exception of 8% of China’s children’s formula division, Narasimhan has drawn a line under what was a “galaxy-sized flaw,” Simpson said.

Adapting to market flow

Narasimhan’s challenge is to regain Reckitt’s competitiveness because of Covk-19. Sales of socialization-related products, such as Reckitt’s Durex condoms, are recovering as vaccine programs are launched. Durex reported double-digit sales in the first quarter compared to a year ago.

Demand for cough and cough products such as Reckitt’s Lemsip, Mucinex and Strepsils has fallen. The company estimates that coughs, colds and flu have dropped by 90 percent last year due to measures against Covida, such as social exclusion.

Narasimhan ignores the drop in sales as a pandemic. “As things open up, as mask orders go by people become more socialized, we’re seeing a higher incidence of the flu,” he said. “Now, all of this will be played out this year and next. But the flu will come again.”

Outside of China, sales of formula brands for babies like Enfamil, Enfapro and Lactum have been relatively strong, including in the US and Philippines, although there has been a drop in birth rates due to the pandemic.

Reckitt’s question is even greater about the sustainability of a disinfection boom that has boosted sales of his Dettol and Lysol products a lot. Dettol sales were flat in the first quarter compared to a year ago, although Lysol grew sharply, helping Reckitt’s hygiene department sales boost 28.5%.

This reflected the geographies in which the brands were sold, the company said, as the Dettol pandemic is best sold in countries that have come out of control. But how long the observers are divided rush of disinfectant it will last, especially when Covid-19 is in the air and is rarely transmitted to surfaces.

Dettol products on the shelf of a grocery store in London

The pandemic has increased sales of Reckitt’s Dettol product, helping to increase revenue in the hygiene department in the first quarter © Facundo Arrizabalaga / EPA / Shutterstock

Simpson said a legacy of the pandemic “will be to raise awareness of the risk of infection in general. That will last a long, long time.”

But Steve Clayton, UK Select fund manager at Hargreaves Lansdown – which through its growth shares and revenue share funds held until two years ago by Reckitt – is more skeptical. “Surely the world will get tired of sticky tables and excessive sanitation for too long?” he said.

“Reckitt will face the challenge of having the right stocks in the right markets. You get it wrong and the team could find it instead of discounting brands, clearing surpluses, threatening brand premiums earned in the process. ”

The group’s share price plunged more than one-fifth of its value by February, after a pandemic of £ 77.54 last July, when Terry Smith, a well-known UK fund manager and former Reckitt investor, sold his stake in late 2020.

But then investors have regained some optimism, with the stock price recovering 11.3 percent.

Reckitt line chart of stock prices showing poor results against peers

Wrong steps in the past

Bart Becht, Kapoor’s predecessor, is credited with building Reckitt’s consumer health division, which includes brands such as Nurofen and Gaviscon. But that distribution has taken the wrong steps.

“We believe that Reckitt’s history in the hygiene market has sometimes left him blindly trying to understand how to properly manage consumer health brands. A culture of rapid innovation and aggressive marketing… Does not always fit well with the primary health of safety,” Clayton said.

According to Kapoor, when pay was one of the highest in the FTSE 100, Australian regulators censored Reckitt rather than a general anti-inflammatory product for Nurof’s marketing. The company also suffered in 2016 after the failure of the Scholl footer electronic file. He also apologized for the dozens of deaths caused by faulty disinfectant humidifiers he sold in South Korea that year.

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

Narasimhan “is doing all things well… It’s a much better invested business than this, the market share performance looks much better, it’s a business that communicates better with stakeholders,” Simpson said.

Mead Johnson’s acquisition came after a failed approach by Kapoor to take over Pfizer’s consumer health division is now part of a joint venture with GlaxoSmithKline.

One of the reasons for buying Mead Johnson was to strengthen Reckitt’s presence in China. “It gave them a critical mass in China, which is one of the largest markets to grow and consume the fastest in the world… They were small there,” Simpson said.

However, sales of Chinese formula businesses maintained a strong downward trajectory when birth rates fell and the government gave a boost to domestic formula makers. The new owner of the unit, Primavera, is Chinese.

The woman was carrying her baby to a mall in Beijing, China

The Chinese government is working to create new formulas for domestic children © Andy Wong / AP

Still, Reckitt’s Chinese business, even without a baby formula, looks very different now. Last year it had a revenue of £ 700 million, £ 861 million for childcare.

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

Late last year, Reckitt chose China to launch the polyurethane version of Durex, which is allergy-free while offering greater softness and elasticity, according to the company. “We hope that China will continue to be an important market for innovation,” Narasimhan said.

Margin challenge

Samuel Johar, head of Buchanan Harvey’s London management advisory team, said Narasimhan was giving his first years of leadership problems Kapoor’s origins, while Kapoor spent his early years reaping the benefits of the changes Becht made.

“In a company of this size, what they do in the first three or four years of the CEO’s tenure is less than the impetus they receive for succession, right and wrong,” he said.

Clayton said Narasimhan had been “welcomed” but added that he would face a “challenge of a lasting margin”. Reckitt gains fat margins and drives change while maintaining a stable margin, always with flaws. ”

But the margins that Reckitt’s sector exceeds – Kapoor’s more positive legacy – will also help isolate it against cost. inflation the sector is striking, Simpson said.

“They have less exposure in this area than many other home and personal care companies because the gross margin is relatively high,” he added.


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