FMCG
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Overall company R&D investment had settled at a slightly lower level of 2.5% of sales, reflecting the shift in emphasis to open innovation, with developments underway reflecting the continued focus on not just the growth but also sustainability. Good examples here would be the optimisation of the enzyme/stain interaction in low-temperature liquid detergents and glass cleaners surfactants manufactured entirely from renewable raw materials. The company production footprint was also reduced by eight sites during; new, more-efficient factories replacing older sites. Over 50% of company sites reduced both energy and water consumption and waste levels.
Henkel, five times sector leader in the Dow Jones Sustainability Index, already had the clearest, longest-running and most transparent commitment to sustainability among its peers. Yet in 2011 the company launched a new sustainability strategy; it resolved to triple value created relative to ecological footprint by 2030. This was Factor Three. It would mean improving efficiency (through sales increase, footprint reduction or both) by 5–6% a year. Interim goals for the first five years were set: a 10% increase in sales per production unit and a 15% reduction per production unit in water use, energy use and waste production.
2012
The year continued in the vein of 2011. Sales increased by nearly 6%, a performance all the divisions contributed to fairly equally as all gained global market share. The organic sales growth of more than 3.8% was mostly driven by price increases: Henkel again was successful in passing along input cost increases, an ability fuelled by its consistently very high innovation rate. Henkel’s regional spread was also a factor in its continued ability to move forwards, declines in the weak southern European markets counterbalanced by growth in Henkel’s core northern European markets, leaving Europe at a net break-even position. Very strong emerging markets presence continued as the main engine of growth, double-digit figures in the Middle East, Eastern Europe, Africa, India and China. Overall, emerging markets accounted for 43% of Henkel’s global sales and increased by over 9%, 7.8% of which was organic growth.
The year’s big news was the unveiling of a new four-year strategy, 2008’s having run its course and the business environment having changed considerably in the interim. In looking to the future, the factors Henkel resolved that it must adjust to the increasing consolidation of suppliers and customers, the accelerating importance of the emerging markets, and an increasing dynamism in Henkel’s product categories. To achieve the 2016 sales targets of €20 billion, with 50% coming from emerging markets (twelve of its top-twenty countries are in that category), Henkel’s strategy contained four strategic imperatives:
· Out-perform
· Globalise
· Simplify
· Inspire
While no sensible company would disagree with any of these, underpinning them were some hard specifics. To out-perform, Henkel now realised the portfolio had to evolve: core categories would receive heavy incremental investment, particularly in R&D, and seven new sites inside the emerging markets themselves. Meanwhile, less-advantaged categories would be scaled back and/or sold. To simplify the business, the number of global suppliers was to be reduced by 40%, while more employees were slated to move out of the divisions into shared service centres, two more of which would be opened in North Africa/the Middle East and China/Japan/South Korea regions. A longer-term goal was to triple the efficiency of the company: in other words, a re-statement of Factor Three. Target year, 2030.
What Is Its DNA?
Henkel is without doubt a unique player in the packaged goods industry. First, German owned and run as it is, it is euro-centric at heart, dominant in the large German market and a key player in the rest of Europe. Second, it has substantial businesses in both branded consumer goods and industrial supplies. While many packaged goods companies have business divisions outside of normal packaged goods (e.g. Heinz’ food services business, Coca-Cola’s Quick Service Restaurant sales and Kimberley-Clark’s hospital supplies and equipment categories), none has them to the same extent as Henkel, 50% of whose sales coming from its mostly industrial Adhesives Technologies sector. But these are current centres of gravity that have shifted over time and will no doubt continue to do so. We believe what really makes the company unique is the following:
Green Innovator
There is barely a company on the planet that does not claim at least some green credentials somewhere within its product range, but Henkel stands alone as a global player who has been, is and will remain completely committed to an innovation programme that constantly seeks to reduce the ecological impact of its products. Strictly speaking, that’s the company’s only growth strategy. It is succeeding. The impressively high innovation rate and an insistence on launching only products that both improve the profit margin and reduce ecological footprint, more than 40% of the packaged goods ranges are greener every three years and grow profits and market share. By following this strategy Henkel preference shares have averaged a 10% average annual yield since 1985. So if you believe sustainability isn’t just a fad but a real sea change in consumer attitudes, Henkel’s inbuilt strategic advantage is huge: it has now been measuring all its core competences against this agenda for decades.
Careful Competitor
While the sustainability agenda has proved competitively successful for Henkel, it is not all-powerful. Greener, more-efficient products are useless if the company isn’t able to distribute them efficiently and cost-effectively, or if there are entrenched competitors willing to spend anything to protect strong market positions. Perhaps as a consequence, one thing that stands out in Henkel’s history is that it has no desire to be absolutely everywhere just for the sake of it. And it very rarely gets into prolonged battles it cannot win:
· Its geographical expansion is weighted towards markets its global competitors tend to underplay: Africa and the Middle East are areas of relative strength for Henkel while Latin America, a Unilever heartland for over 50 years, accounts for only 6% of Henkel’s sales
· Rather than get into value-destroying battles of ego and pride, it is not afraid to leave a market if conditions are structurally adverse. Laundry brands, China and the Philippines are key examples here
· Its careful approach to acquisitions has been almost flawless: it takes its time to choose targets and is very flexible in its market entry strategies
· Perhaps the only question that remains to be answered in this regard is its acquisition of Dial in North America. The US Detergents and Home Care categories have been graveyards for the likes of Unilever and Colgate. Whether Henkel can do any better is still an open question
Summary
Henkel now has a $20 billion turnover, split almost equally between its industrially biased Adhesive Technologies and the highly branded home and personal care businesses. Perhaps unsurprisingly, the company mission statement hails it as ‘A global leader in brands and technologies’. It defines its values as follows:
· We put our customers at the centre of what we do
· We value, challenge and reward our people
· We drive excellent sustainable financial performance
· We are committed to leadership in sustainability
· We build our future on our family business foundation
One sign of a good strategy is the impossibility of adopting its opposite as an equally viable approach. Against this yardstick, the first two values are generic – no sane company would say otherwise. On sustainable financial performance, all companies would say that. But many chase short-term numbers, something Henkel has never contemplated. But where its values are certainly unique is in the last two: the company is not just committed to sustainability but to leadership in sustainability and in its chosen fields. And it is, at least in stock voting terms, still a family company and hence free to pursue its strategy unhindered by fears of any hostile takeover.
We believe this leadership in sustainability value will indeed sustain both continued growth and continued success for Henkel. It is bi
g enough to benefit from the consolidation of suppliers, manufacturers and customers happening in the world today. It has enough of a platform, particularly in Adhesive Technologies and cosmetics/toiletries, to benefit from the continued rise of emerging markets. It is efficient and well run enough at least to match the ever-growing need for greater operational excellence; the Persil reformulation disasters of the past happened to Unilever, not Henkel. Its least advantageous position, compared to its other two sectors, is laundry and home care. We look forward to its return to the acquisition trail to remedy that defect. And, of course, to making its US business work.
Kellogg’s
Where Did It Come From?
In 1855, a pioneer of what would become the Seventh-day Adventist Church accepted an invitation from a group of fervent early believers to move with her family to their hometown of Battle Creek, Michigan. A year later, the Kellogg family also moved to this epicentre of the new church. John and Ann Kellogg eventually had a very large family: eleven children to add to John’s six from a previous marriage. They included John Harvey Kellogg, born 1852, and Willie Keith, born 1860. John Senior imposed the strict Adventist diet on his family, forbidding meat, sugar and caffeine. He became a successful Battle Creek businessman, running, amongst other concerns, a broom factory in which both John Harvey and Willie Keith worked after school. Of the two boys, John Harvey eventually graduated from New York’s Bellevue hospital in 1975 as a doctor. Willie Keith, or WK as he preferred to be called, worked as a salesman for the family broom company.
In 1876, John Harvey returned home to become medical superintendent at the Western Health Reform Institute hospital run by the church in Battle Creek. As the word ‘Reform’ implies, it was the belief of the church, and John Harvey in particular, that many patients were in hospital through reasons of their own making. Their reform would result in better health. Something of a man ahead of his time, John Harvey believed that poor diet was at the root of many health problems. He had a particular fixation with constipation, and so imposed a strict diet on patients. They were served only whole grains, fruits, vegetables and other natural foods, and of course meat, sugar and caffeine were verboten.
While John Harvey was cleansing the bowels and souls of the sickly inhabitants of Battle Creek, WK had gone off to Texas to run a broom factory. He returned home when his elder brother offered him a job as business manager at the hospital, by now renamed the Battle Creek sanatorium. Now they were reunited, it would be the less than harmonious relationship between the brothers that would create the Kellogg cereal empire.
John Harvey, who was hard on his patients’ diets, was even harder on his staff, in particular WK. He treated WK as his gofer, making him work fifteen-hour days without a single day’s holiday. He assigned him a range of tasks, from doing the accounts to cleaning John Harvey’s shoes. Meanwhile, John Harvey, fascinated by the ideal of healthy diets, experimented endlessly. He sought to create new foods, which tempted the palettes of his jaded patients, without using the normal taste enhancers of sugar, salt or spices. John Harvey’s wife and WK were also enrolled in this difficult task.
The Kellogg brothers were aware that the first breakfast cereal, Granula, was invented in 1863 by James Caleb Jackson. He was also author of The Sexual Organization and Its Healthy Management. Jackson believed the twin evils of constipation and masturbation were intimately linked (a view with which John Harvey had sympathy), and Granula was part of the cure. So the brothers experimented with wheat batter, aiming to develop their own improved version.
As has been the case with the genesis of more than one business empire, the solution would come, not from an inspired flash of genius but through carelessness. A batch of batter was forgotten and went stale. Rather than throw it away, the brothers rolled the dried-out batter into sheets according to their usual process. They were surprised to see that it did not form sheets but broke into small flakes. They decided to bake the flakes to see what they tasted like and, hey presto! Here was a light, healthy and somewhat tasty perfect way for patients to start the day. They named the product Granose Flakes and started feeding the patients.
One patient was a certain Charles W. Post. He toured the brothers’ kitchens, and left the sanatorium with a recipe, production process and business idea that would make him a millionaire soon after he founded Post Cereals in 1895. Meanwhile, despite WK’s pleas to follow Post’s example and commercialise their invention, Granose Flakes was fed only to sanatorium patients. John Harvey relaxed his iron rule to allow the setting up of a mail-order business. Called the Sanitas Food Company, this enabled patients to keep buying Granose Flakes after they had recovered and left the hospital. WK’s broom-selling experience came to the fore and in the first year he managed to shift 100,000 lbs of the cereal.
In 1898, aiming to add to the one-product price list, WK developed a similar process, this time making flakes out of corn. WK realised that he needed to use only the inner corn grit to get the texture he wanted and that the flavour would be much improved by adding a little sugar to the corn meal paste. Of course, to John Harvey, adding sugar was a complete non-starter. This added to the tension within their working relations, and especially John Harvey’s continued refusal to expand sales beyond the sanatorium alumni. By 1906, WK’s seemingly endless supply of filial loyalty finally ran out. He left Sanitas and the sanatorium, taking his recipe for flaked corn with him and, in February 1906, set up the Battle Creek Toasted Corn Flakes Company.
WK piled a third of his working capital into advertising and within a year was selling 2,900 cases a day at a dollar a box profit. Soon after dropping the ‘Battle Creek’ component of the company name, his fledgling business suffered a near-fatal blow in July 1907 when a stray firework ignited and burnt down his factory. Even as the embers were still glowing, the orders generated by his extravagant advertising campaigns continued to roll in, so WK planned a much larger (and fireproof) factory. WK had struck out on his own, and just in time. By now, another 41 past patients of the sanatorium, and various businessmen with an eye for a quick buck, had followed Charles Post and set up breakfast cereal companies in Battle Creek. All these wannabe cereal millionaires faced several major problems in growing their business.
First-mover Advantage
The market for breakfast cereal barely existed outside of the digestively compliant members of the Battle Creek Seventh-day Adventist Church congregation. The rest of the nation was quite happy starting the day with either stale bread brought back to life by soaking in hot milk and salt, or some kind of oatmeal gruel or porridge. For the fledgling breakfast cereal industry to succeed, it had to change the behaviour of a nation, and someone had to take the lead to do so.
Product Quality
Selling far and wide in the nation’s grocery stores meant the product would have to sit in the box for up to several months before being consumed. This was a far cry from cooking in the kitchen one day and feeding to patients the next morning. The shelf-life problem had to be solved if national distribution was the goal.
Winning Shelf Space
Compared to other packaged goods at the time, such as baking soda or soap, breakfast cereals were very bulky and grocery stores were extremely small. They were more like today’s convenience stores, carrying only 300 lines or so. They would need a lot of persuading to make room for large boxes of cereal, especially from multiple suppliers. Winning shelf space was critical: this factor alone would ring the death knell for the vast majority of the new cereal companies.
Barriers to Entry
As is self-evident from the fact that 42 cereal companies were operating in Battle Creek alone, it was an industry with next-to-no technical barriers to entry. The cereal category was always going to be one that would demand advertising and lots of it – consumer mind-space would become the only realistic competitive advantage.
The eventual winners in the category would be the ones who best addressed these challenges.
How Did It Evolve?
Kellogg became the world’s largest cereal manufacturer because WK realised from the outset that solving the above challenges was critical to success. Anyone, it seemed, could make a reasonable breakfast cereal but only one could build the most successful cereal business, and he made it his mission to do so.
First-mover Advantage
WK realised immediately he had to take the lead in converting people to the idea of eating cereal for breakfast. His timing was to some extent fortuitous. Pasteurised milk was becoming widely available in the major cities, so half his job was being done for him. He gave away product samples as though there was no tomorrow, employing samplers to go door-to-door to demonstrate the ease and convenience of switching o a cereal breakfast. He also spared nothing in advertising the same message. Determined to be the biggest and most impactful advertiser in the cereal business, he had constructed a colossal 106-foot-wide by 80-foot-tall billboard in Times Square requiring 80 tons of steelwork. This he boasted was the world’s largest single advertising sign. It was also one of the most effective, increasing his sales in the city fifteen-fold. By 1911, WK was spending a staggering $1 million a year on advertising, dwarfing the investment of his now rapidly dwindling competitors.
Product Quality
Here WK’s big breakthrough did not come until 1914. His son, John Leonard Kellogg, came up with the idea, trademarked as Waxtite, of encasing the cereal boxes within an envelope of waxed paper. This sealed the contents from the outside air, thus adding many months to the freshness. This would be one of over 200 patents and trademarks John Leonard would develop in his career in the company. A few years later he solved the more difficult manufacturing challenge of depositing the cereal in a sealed bag inside the box. He also developed a malting process that added more flavour to the Cornflakes.