FMCG
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Reckitt Benckiser
Where Did It Come From?
The creation of Reckitt Benckiser in 1999 was more than just another merger: it was the deliberate creation of a completely new company with no nationality and a unique style of operating. But a better understanding of its subsequent impressive success can be gleaned from understanding the salient parts of the history of Reckitt & Colman Ltd and Benckiser NV.
First out of the gate was Jeremiah Colman, a miller by training, who managed a mill in Norfolk, England before buying his own mill in 1803. In an asset utilisation exercise to get the most out of his fixed investment in mill and millstones, in 1814 he bought a mustard business and added the crushing of mustard seeds to that of wheat kernels. By 1829, he had extended his reach to London and, by 1854, three years after Jeremiah’s death, Colman’s had constructed Britain’s first mill dedicated entirely to mustard. Jeremiah’s nephew James (Jeremiah being childless) had taken over the firm, having been co-opted as a partner in 1823 and, clearly sharing his uncle’s partiality for asset-driven expansion into new categories, he took the firm into the manufacture of starch, laundry blue and corn flour, all leveraging the company’s investment and expertise in milling.
Entry into the starch category brought Colman’s into competition with another trained miller, Isaac Reckitt, who, after twenty years of unsuccessfully running a series of flour milling businesses and losing all his capital, borrowed enough from his obviously loving relatives to rent a starch works in the north of England. There he yet again failed to make his mark, until his four sons, including a chemist and a salesman, took over the key roles. For the first seven years, the business lost money and it was only when the product range was extended beyond starch that the business became viable. Unlike Colman, the Reckitt expansion strategy was not asset-led but category-led, moving beyond starch products into other emerging household product categories such as black-lead for polishing fire grates and ovens, synthetic ultramarine and washing paste. It took the business a full eighteen years to pay back Isaac’s relatives, whom he only outlived by four years.
The third 19th-century industrialist involved in the genesis of Reckitt Benckiser was Johann Adam Benckiser, who founded an industrial chemicals manufacturing business in Pforzheim, Germany in 1823. Johann was a dyed-in-the-wool heavy industrialist, initially manufacturing ammonia, hydrochloric acid and ammonium chloride and subsequently acquiring a gold plating factory and setting up a pottery. In 1851, Johann co-founded a chemical plant with chemist Ludwig Reimann, seven years later relocating the business to Ludwigshafen, where it also began the production of phosphates, citric acid and other commodity chemicals.
This unlikely trio of mustard cook, household products manufacturer and chemical industrialist would bring something different to the Reckitt Benckiser party. The mustard maker’s great nephew would be one of 19th-century Britain’s most innovative advertisers, building leading-edge marketing skills in selling a product half of which was scraped off plates uneaten at the end of meals. The household products maker’s sons recognised that a huge business could be built on the insight of making the homemaker’s life easier, and embarked on a late-19th-century acquisition spree of all kinds of household goods brands while internationalising the business as early as 1864. The German industrialist’s descendants, who would spend well over a century in the commodity chemicals sector, were exceptionally astute business strategists who knew how to revolutionise a business.
How Did It Evolve?
By the turn of the 20th century, Reckitt & Sons and J & J Colman were both very well established British consumer goods companies that had done well out of the ready markets of Britain’s great industrial cities and from the far flung markets of the British Empire. Although J & J Colman was primarily a food company and Reckitt & Sons a household goods company, they were both still in the starch market and continually bumping up against each other in markets all over the world. In an era when trusts were seen as being eminently good business sense, the two firms finally buried the hatchet in 1913 when they formed a joint company, Atlantis Ltd, to distribute both companies’ product ranges in South America.
This arrangement worked so smoothly that in 1921, when rising tariff barriers in many of their main overseas markets were choking off demand, the two companies combined all their overseas businesses in order to generate the critical mass to run manufacturing operations in key markets such as Australia, Canada and South Africa. This was a common arrangement at the time by British firms, who competed with each other tooth and nail in the British market but co-operated to the point of partnership in overseas ventures. In this instance, the working arrangements became progressively closer, culminating in the setting up in 1938 of Reckitt & Colman Ltd to manage both businesses as one, while each kept a separate stock market listing. The full financial merger did not take place until 1953, at which point the newly merged firm was joined by a major boot polish company, Chiswick Products, in which Reckitt & Sons had held joint ownership.
By this time, Reckitt & Sons had either acquired or invented for itself a number of own-brands that would go on to form the backbone of the company, such as Harpic lavatory cleaner, a booming brand acquired in 1932 when indoor toilets were fast becoming the norm, and Dettol, launched a year later. Dettol had begun as a project in 1929 to develop an antiseptic disinfectant that could be safely applied to open cuts and wounds. It was successfully tested in a maternity hospital in 1932 and launched to the general public a year later, its trump card being an endorsement by the medical profession. Further acquisitions such as the denture cleaner Steradent in 1938 had taken Reckitt & Sons further out of the kitchen and into all household products.
While the newly merged Reckitt & Colman went from strength to strength in the 1950s thanks, amongst other thing, to the advent of commercial television in Britain, it wasn’t until 1956 that Benckiser, now run by the Reimann family, made the decision to diversify into consumer goods and industrial cleaning products, beginning with the launch of Calgon water softener the same year.
So, as both companies entered the 1960s, both were diversifying. For Benckiser, moves into chemically driven new consumer goods such as automatic washer and dishwasher detergent - Calgonit in 1964 and Quanto fabric softener in 1966 - made complete sense. For Reckitt & Colman, on the other hand, the trajectory was positively whimsical. It bought into the leisure industry, for example, particularly in North America. As the company mushroomed, it was constantly undergoing disruptive reorganisations with ‘sprawling’ being one of the kinder descriptions of the business. However, at its heart, it still had thriving businesses in food, household goods and pharmaceutical items, all sold around the world: 70% of the company’s revenues came from overseas.
By the end of the 1970s, both companies faced strategic choices. Within Reckitt & Colman the decision was finally made to concentrate on the core product ranges, so it set in place a divestment strategy to rid itself of its leisure interests and various commodity-type businesses, such as its American potato-processing factory. Simultaneously, the company looked for big brand name acquisitions in its chosen areas of operation, picking up Airwick Industries, Durkee Famous Foods, with its North American-leading French’s mustard, and Gold Seal, which made a range of laundry aids and bath additives. In 1989, it picked up Nenuco, a Spanish baby care company, as part of a European drive to better prepare the company for economic unification.
During the 1990s, it also made the big decision to prioritise household goods over food, beginning with the $1.3 billion transformative acquisition in 1990 of the US Boyle-Midway household goods arm of American Home Products Inc., bringing in such brands as Woolite fabric care, Wizard air fresheners, Easy-Off oven cleaner, Sani-flush toilet cleaner and Old English furniture cleaning products. This deal made Reckitt & Colman the seventh-largest household goods company in the world and fifth-largest in America, significantly shifting its business centre of gravity. This deal would be bettered in 1994 when Reckitt & Co
lman paid Eastman Kodak $1.55 billion to for L&F Products, half of whose turnover was accounted for by the Lysol brand. The deal catapulted Reckitt & Colman into the top four globally, but to fund it the company had to sell off the bulk of the food business, including the iconic Colman’s mustard brand, sold to Unilever in 1995 for £250 million, which left only the US French’s unit on the food side. But it continued to acquire strong brands such as Spray ‘n Wash, while selling off weaker products without strong market share positions. Despite these sound strategic moves, there was still much investor doubt about the quality of the company’s management, compounded by a disastrous 25% decline in 1998 profits owing to poor handling of the Latin American and Asian markets that generated 30% of company sales.
Meanwhile, over at Benckiser, the company was taking something of a hammering on the industrial chemicals side of the business, now a global industry dominated by huge multinationals: Benckiser had become a relative minnow, with annual sales of only $250 million. So in 1981 the still family-owned business recruited a Harvard MBA to lead the full transition out of chemicals and into a more commanding position in household goods. Over the next decade, following the chemicals divestment, the company would make 26 acquisitions, the first of which was the French firm of St. Marc in 1985. In 1987, a more transformative acquisition came with the purchase of the worldwide branded division of Ecolab Inc. for $240, which, although loss-making, Benckiser expertise would soon turn round.
Benckiser continued to acquire strong local brands, such as Italy’s Mira Lanza and Panigel together with Spain’s leading detergent company, S.A. Camp Group, with its memorably named leading brand, Colon. Benckiser competed with the multinational giants such as Unilever and P&G through a combination of aggressive cost cutting in the non-essentials combined with marketing strategies aimed at meeting local needs, heavily funded by big marketing budgets. In 1990, the company significantly increased its US presence with the acquisition of SmithKline Beecham’s North American household products division for $106 million, which it followed up with a somewhat radical departure from household goods, buying the Margaret Astor and Lancaster cosmetics businesses for $380 million, also from SmithKline.
Almost immediately, Benckiser set about expanding its new cosmetics arm, picking up the Jovan, Germaine Monteil, Bogner cosmetics and Joop! perfumes. In 1994, Benckiser became US market leader in mass-market cosmetics with the $440 million purchase from Pfizer of the Coty business, which included brands such as Emeraude, Exclamation, Lady Stetson, L’Effleur, Sand & Sable and Wild Musk. This pushed the company cosmetics and fragrances sales of $3.4 billion to 45% of turnover, with household products and detergents accounting for the remainder. The cosmetics play finally came to a halt in 1996 when Benckiser was outbid by L’Oréal after a short but intense bidding war for Maybelline Inc., the third-largest cosmetics business in the US.
With annual sales now over $3 billion, helped by Benckiser’s aggressive forays into the newly opened markets of Eastern Europe and China during the early to mid-1990s, the extended family owners began to plan for at least a partial transition to public ownership as part of a major estate and inheritance tax minimisation strategy. In 1996, Benckiser organised all its cosmetics businesses into one single holding company, Coty Inc., which it spun off with the family retaining outright ownership. In the following year, the remaining household goods and laundry division was firstly relocated to the more beneficial tax regime of the Netherlands, where it adopted the name Benckiser NV. The same year 40% of the firm went on public sale on the New York and Amsterdam stock exchanges, which brought in a handy $704 million, with Coty and other privately-held investments organised under a Benckiser holding company still owned 100% by the family.
By 1999, Reckitt & Colman and Benckiser NV were both very large companies – but each had a significant problem. Reckitt & Colman had, over a prolonged period, innovated or acquired a peerless collection of worldwide best-selling household goods brands but had questionable management, widely acknowledged not to be making the most of their portfolio. Benckiser’s management, on the other hand, had the mirror-image of the problem, a management widely admired for their strategic and operational capabilities but a company which, after the Coty spin-off, had no particularly inspiring collection of brands management to practise on, beyond the exceptions of Vanish, a miracle stain removal product, and Finish dishwashing powder.
Geographically, the same was true. Reckitt & Colman was very strong in the US, Britain, the old British Empire countries, Latin America and some of the Far East, precisely where Benckiser was weak. Benckiser was strong in Continental Europe and the emerging markets of Eastern Europe and China, precisely where Reckitt and Colman had little or no influence. A merger seemed quite a good idea from everyone’s point of view. It was a marriage made, if not in Heaven, then in the boardroom of some prescient and very-well informed coporate match-maker. Or a very happy accident.
How International Is It?
Reckitt Benckiser came into being as an international company thanks to the joint efforts of the pre-merged entities, so international expansion was low on the management agenda. Much more important was launching their powerbrands into as many markets as possible as quickly as possible. By 2003, Reckitt Benckiser was selling its products in some 180 countries and had operations in 60 countries. In 2003, sales were split by region as follows:
· Western Europe – 47%
· North America – 27%
· Asia-Pacific – 12%
· Latin America – 4%
· Rest of World – 10%.
Clearly, Latin America and Asia-Pacific were relatively under-developed, particularly in comparison with a competitor like Unilever. But Reckitt Benckiser, by avoiding the large but intensely competitive laundry products market, prioritised its international strategy more by regional and local levels of category development than by the number of pins in a map.
How Did It Build Its Modern Business?
On 27th July 1999, the merger of Reckitt & Colman and Benckiser created a business with sales of more than £3 billion, making it the world’s fourth-biggest manufacturer of household cleaning and personal care products behind only Procter & Gamble, Unilever and Colgate. The brand list included the likes of Harpic toilet cleaner, Mr Sheen furniture polish, Cherry Blossom shoe polish, Disprin, Dettol, Immac hair remover, Finish, Calgon and Vanish. Although 59% of the shares went to Reckitt investors - Reckitt & Colman was the substantially the bigger of the two - the new company was biased very much in Benckiser’s favour, even though the merged company was based in London and had Alan Dalby, chairman of Reckitt for the past four years, continuing in the role. But the key CEO role went to Benckiser’s Bart Becht. His entire executive team, apart from one outside hire, were also Benckiser managers.
Right from its first day, Reckitt Benckiser had three overriding priorities:
· To focus the brand portfolio into five categories: Surface Care, Fabric Care Dishwashing, Home Care, and Health & Personal Care
· To reduce costs
· To deploy the Benckiser strategy and operating style on everything in the Reckitt & Colman brand portfolio that survived the category cull
A disposal programme was immediately instigated, which by 2001 had got rid of virtually all the unwanted elements of the portfolio. An acquisition programme ran in parallel to fill in geographic or product gaps in the five categories, such as an Indonesian pest control business (pest control having become a Reckitt & Colman strength) and Oxy, the leading Korean household goods business.
Much more crucial to the future success of Reckitt Benckiser than portfolio tweaking would be the second and third priorities. Reckitt Benckiser was set up from the outset as a lean, no-frills organisation in a Spartan and anonymous office block on the outskirts of London. In the first two years, the company created two permanent hit teams, Squeeze and X-trim, dedicated full time to cutting costs across the business. The remit of Squeeze was to look at the detailed design of products
and find ways to squeeze out costs without adversely affecting the utility or efficacy. In the new Reckitt Benckiser, product costs were far too important to be left to the whims of individual brand management teams. By having one dedicated team working across the business, synergistic cost savings could be found and applied across a variety of brands and categories. The X-trim team focused on saving costs elsewhere in the business, from global materials sourcing to reducing the number of office photocopiers.
The Benckiser strategy applied to the new business had not changed since first formulated in the mid-1990s and it was deceptively simple:
· A disproportionate focus on brands that were either number one or two in categories with above-average growth prospects
· Grow categories and brand share via an unrelenting programme of incremental improvement innovations, executed with great speed, and above-average marketing spends