When Reckitt Benckiser acquired the baby formula maker Mead Johnson for £13bn four years ago, the consumer goods group’s then chief executive called it “an enriching solution for mums”.
But for Reckitt, the deal did not provide the enrichment Rakesh Kapoor had envisaged.
Sales at Mead Johnson’s vital Chinese arm continued on a downward slide because of declining birth rates and rising local competition. By the time the company had sold off most of its Chinese baby formula division last month, it had written off £8bn of its value.
Now Laxman Narasimhan, Kapoor’s successor, is seeking to build on a pandemic surge in demand for Reckitt’s hygiene products to reinvigorate a company that some investors and analysts say has been harmed by the focus on integrating Mead Johnson.
Narasimhan, who took over in 2019, “inherited a business that needed a lot of turning around, a business that had been chronically underinvested [in]”, said Iain Simpson, an analyst at Barclays.
With the sale of all but 8 per cent of the Chinese baby formula division, Narasimhan has drawn a line under what was a “galaxy-sized mistake”, Simpson said.
Adapting to market flux
Narasimhan’s challenge now is to restore Reckitt’s competitiveness in a consumer market that is in flux because of Covid-19. Sales of products associated with socialising, such as Reckitt’s Durex condoms, are recovering as vaccination programmes kick in. Durex reported double-digit sales growth in the first quarter compared with a year ago.
But demand for products for coughs and colds such as Reckitt’s Lemsip, Mucinex and Strepsils has plummeted. The company estimated that coughs, colds and flu were down 90 per cent last winter owing to anti-Covid measures such as social distancing.
Narasimhan shrugs off the sales drop as a pandemic blip. “As things open up, as mask mandates go and people socialise, we are seeing greater incidence of flu,” he said. “Now, some of this will play itself out over the course of this year and next year. But flu will come back.”
Outside China, sales of former Mead Johnson baby formula brands such as Enfamil, Enfapro and Lactum have been relatively strong, including in the US and Philippines, although there is evidence of a dip in birth rates because of the pandemic.
An even bigger question for Reckitt is the durability of a disinfectant boom that has vastly boosted sales of its Dettol and Lysol products. Dettol sales were flat in the first quarter, compared with a year ago, though Lysol grew strongly, helping to push up sales in Reckitt’s hygiene division 28.5 per cent.
This reflected the geographies in which the brands are sold, the company said, as Dettol is sold in countries that have fared better in bringing the pandemic under control. But observers are divided on how long the disinfectant rush will last, especially given that Covid-19 is airborne and rarely transmitted on surfaces.
Simpson said one legacy of the pandemic would be “heightened awareness of infection risk in general. That will endure for a long, long time.”
But Steve Clayton, manager of the UK Select funds range at Hargreaves Lansdown — which owned stakes in Reckitt until two years ago through its Growth Shares and Income Shares funds — is more sceptical. “Surely, the world is going to tire of sticky, over-sanitised tabletops before too long?” he said.
“Reckitt will face the challenge of having the right stocks in the right markets. Get that wrong and the group could find itself having to discount brands in order to clear overhangs, threatening hard-won brand premiums in the process.”
The group’s share price had shed more than a fifth of its value by February, after hitting a pandemic high of £77.54 last July, with Terry Smith, a well-known UK fund manager and formerly loyal Reckitt investor, selling his stake in late 2020.
But investors have subsequently regained some optimism, sending the share price back up 11.3 per cent.
Bart Becht, Kapoor’s predecessor, is credited with building Reckitt’s consumer health division, which includes brands such as Nurofen and Gaviscon. But this division has made missteps.
“We think that Reckitt’s history in the hygiene market has sometimes left it blindsided in trying to understand how to best handle consumer health brands. A culture of rapid innovation and aggressive marketing . . . does not always sit well with the safety-first culture of healthcare,” said Clayton.
Under Kapoor, whose salary was among the highest in the FTSE 100, Reckitt was censured by Australian regulators for marketing Nurofen as a targeted rather than a general anti-inflammatory product. The company also suffered after the failed launch of a Scholl electronic foot file in 2016. It also apologised that year over dozens of deaths caused by 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 . . . this is a much better invested business than it was, the market share performance looks much better, it’s a business communicating better with stakeholders”, said Simpson.
The Mead Johnson acquisition came after 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 the Mead Johnson purchase was to strengthen Reckitt’s presence in China. It “gave them critical mass in China, which is one of the fastest growing and biggest consumer markets globally . . . They were undersized there,” said Simpson.
Yet sales at the Chinese formula business remained on a stubborn downward trajectory as birth rates dropped and the government pushed to foster domestic infant formula makers. The new owner of the unit, Primavera, is Chinese.
Still, Reckitt’s China business, even without baby formula, now looks very different. It had about £700m of revenues last year, compared with £861m for infant nutrition.
Sales of vitamins, minerals and supplements such as the Move Free brand have increased sharply. “Prevention [of illnesses] is now ingrained in our behaviours,” argued Narasimhan.
Late last year, Reckitt chose China to launch a polyurethane version of Durex, which is allergy-friendly while offering 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-based board advisory group Buchanan Harvey, said Narasimhan was spending the early years of his leadership dealing with problems originating with Kapoor, while Kapoor spent his own early years reaping the benefits of changes made by Becht.
“In a company of that size, what happens in the first three or four years of a chief executive’s tenure is less their doing than the momentum they inherit — in the right and in the wrong,” he said.
Clayton said Narasimhan had made a “welcome start”, but added that he would face the “perennial margin challenge. Reckitt earns fat margins and driving change while keeping margins stable is always fraught with pitfalls.”
But Reckitt’s sector-beating margins — a more positive inheritance from Kapoor — will also help to insulate it against the cost inflation striking the sector, said Simpson.
“They have less exposure in this area than many other household and personal care companies because their gross margins are pretty high,” he added.