Reckitt CEO marks the arrival of a new era by selling the Chinese infant formula division

Four years ago, when Reckitt Benckiser acquired Mead Johnson, a manufacturer of infant formula milk powder, for 13 billion pounds, the then CEO of the consumer products group called it “a rich solution for mothers.”

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

Due to declining birth rates and increasing local competition, the sales of Mead Johnson’s important Chinese branch continued to decline.When the company has Sell ​​off Last month, the value of most of its Chinese infant formula division has been written off by 8 billion pounds.

Now, Kapoor’s successor, Laxman Narasimhan (Laxman Narasimhan), is seeking to reinvigorate the company on the basis of the surge in demand for Reckitt health products. Some investors and analysts say the company’s The focus on integrating Mead Johnson was compromised.

Narasimhan took over in 2019, “inherited a business that needed a lot of reversal, a business that had been underinvested for a long time [in]”, Barclays Bank analyst Ian Simpson said.

Simpson said that with the sale of an 8% stake in China’s infant formula division, Narasimhan has drawn a line under the “galaxy-sized mistake.”

Adapt to market changes

Narasimhan’s challenge now is to restore Reckitt’s competitiveness in the changing consumer market due to Covid-19. With the launch of the vaccination program, sales of social-related products (such as Reckitt’s Durex condoms) are recovering. Durex reported that sales in the first quarter achieved double-digit growth compared to the same period last year.

However, demand for cough and cold products such as Lemsip, Mucinex and Strepsils from Reckitt has dropped sharply. The company estimates that due to social distancing and other anti-coronavirus measures, the number of people with coughs, colds and flu dropped by 90% last winter.

Narasimhan dismissed the pandemic’s short-lived sales decline. He said: “As things develop, with the implementation of mask requirements and people’s social activities, we see an increasing incidence of influenza.” “Now, some of them will play a role this year and next year. But influenza Will make a comeback.”

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, although there is evidence that the birth rate has fallen due to the pandemic.

A bigger problem for Reckitt is the persistence of the disinfectant boom, which has greatly increased the sales of its Dettol and Lysol products and helped its health department’s first quarter revenue increase by 28.5% year-on-year.

The company said that this reflects the sales regions of these brands, as Dettol is selling in countries where it has performed better in controlling the epidemic.But observers are divided on how long it will last Disinfectant boom Will continue, especially considering that Covid-19 is airborne and rarely spreads on the surface.

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

But Steve Clayton, manager of Hargreaves Lansdown’s British select fund series, is skeptical. Hargreaves Lansdown also held shares in Reckitt through its growth stock and income stock fund two years ago. “Of course, the world will soon get tired of sticky, over-disinfected desktops?” he said.

“Reckitt will face the challenge of owning the right stock in the right market. If it gets it wrong, the group may find it has to discount the brand to remove excess, threatening the hard-won brand premium in the process.”

After the group’s share price hit a pandemic high of £77.54 in July last year, it had fallen by more than one-fifth in February. The famous British fund manager and former Reckitt loyal investor Terry Smith sold it at the end of 2020. His shares.

But investors subsequently regained some optimism, pushing the stock price back 11.3%.

Past mistakes

Kapoor’s predecessor, Bart Becht, established Reckitt’s consumer health department, which included brands such as Nurofen and Gaviscon. But this department made a mistake.

“We believe that Reckitt’s history in the hygiene market sometimes makes it unprepared when trying to understand how to best handle consumer health brands. A culture of rapid innovation and active marketing… Not always with safety first medical care The health care culture fits in,” Clayton said.

Under Kapoor’s leadership, his salary was among the best in the FTSE 100, and Reckitt was condemned by Australian regulators for marketing Nurofen as a targeted rather than general anti-inflammatory product. The company also suffered losses after failing to launch the Scholl electronic foot gear in 2016. The company also apologized that year for its humidifier disinfectant sold in South Korea that caused dozens of deaths.

This year, Scholl was sold to a US private equity group, and Reckitt invested more in research and development.

Narasimhan is doing “all the right things… This is a better investment business than before, and the market share performance looks much better. This is a business that communicates better with stakeholders,” Simpson said .

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

One of the reasons for the acquisition of Mead Johnson was to strengthen Reckitt’s influence in China. It “gave them critical mass in China, which is one of the fastest-growing and largest consumer markets in the world… where they are too small,” Simpson said.

However, as the birth rate drops and the government vigorously cultivates domestic infant formula manufacturers, the sales of China’s formula milk powder business is still on a stubborn declining track. Primavera, the new owner of the unit, is Chinese.

Nevertheless, even without infant formula, Reckitt’s China business now looks very different. Its revenue last year was approximately 700 million pounds, while its infant nutrition revenue was 861 million pounds.

Sales of vitamins, minerals and supplements (such as the Move Free brand) have increased dramatically. “prevention [of illnesses] Narasimhan believes that our behavior is now deeply ingrained.

According to the company, at the end of last year, Reckitt chose to launch a polyurethane version of Durex in China, which is harmless to allergies while providing greater softness and elasticity. “We expect China will continue to be an important market for innovation,” Narasimhan said.

Margin challenge

Samuel Johar, chairman of Buchanan Harvey, a London-based board advisory group, said that Narasimhan had handled the leadership in his early years. problem It originated in Kapoor, and Kapoor benefited from the changes made by Bercht in his early years.

“In a company of this size, what happened during the first three or four years of the CEO’s tenure is not so much what they did, but rather the momentum they inherited-whether right or wrong,” he said.

Clayton said that Narasimhan has already had a “popular start” but added that he will face “perennial profit margin challenges.” Reckitt makes huge profits and drives change, while maintaining stable profits is always full of pitfalls. “

But Reckitt’s profit margins beyond the industry—a more positive legacy from Kapoor—will also help protect it from costs inflation Simpson said to crack down on the industry.

He added: “Compared with many other home and personal care companies, their exposure in this area is lower because their gross margins are quite high.”