by Greg Thain
· Focus mainly on organic growth. Acquisitions, as had been the case soon after the merger, would only be considered if targets had a great strategic fit, either regionally or within the portfolio, if Reckitt Benckiser could clearly add value beyond the capabilities of existing owners and if there was a clear path to enhanced shareholder value
The implementation began in 2002 with the introduction of the concept of ‘powerbrands’, defined as leading global brands in high-growth categories with disproportionately high margins. Powerbrands would receive disproportionately high marketing spends – well above category averages – and would be the priorities for management and resources across all markets. They would be managed centrally in terms of brand image and strategic direction, but each market would be allowed to push for local tweaks in order to make the brand more relevant and successful at the local level: kitchen surface cleaning products would be formulated differently in India than in Italy to cope with the different kinds of food spills. The company also believed strongly in growing the categories in which they competed and so spent substantial sums promoting the ownership of dishwashers, which it did not sell, as that would drive sales of dishwasher tablets, which it did.
Behind the powerbrands would be a constant stream of incremental innovation, usually aimed at offering more convenience for consumers for which hefty brand premiums would be charged. An example was the launch of Finish Powerball 2-in-1 dishwasher tablets with an integrated rinse aid. The follow-up, Finish Powerball 3-in-1, also included the salt consumers were adding to their dishwashers. The research effort was primarily consumer research with a big emphasis on in-home studies, rather than technical R&D research. Reckitt Benckiser had a fairly low level of R&D investment, 1.8% of sales or less, believing that growth came from multiple small improvements based on studying products use rather than rare but big improvements based on the discovery of some wonder new ingredient. At the time of the merger, around 20% of sales were derived from products launched in the previous three years: this would quickly rise to 30% and then reach 40% by 2003.
The company also believed in operating with great speed. Innovations in a country would be evaluated within weeks and either quickly taken off the market or scaled up for launch in multiple countries before competitors even knew what was happening. Products would be rolled out even before product costs had been optimised - the Squeeze team could look after that later. To facilitate such speed, the company operated with an extremely flat organisation and had a culture of making decisions and moving to action in the first meeting in which any topic was discussed. This required a certain type of manager which the company took great pains to find, often freely admitting that it would rather leave a post vacant rather than fill it a candidate who was only half-right. Reckitt Benckiser was not a company for shrinking violets or office politics.
It would be this unique strategy and style that drove performance in the first few years of operation, when no major acquisitions were made or new brands launched. By 2003, net sales revenue stood 28% above the 1999 level, while operating profit had increased by 90%, pushing a 12% margin to above 18%, despite marketing spends as a percentage of sales that were increased every year.
Sales in 2003 were split between the five product categories as follows:
· Fabric care: 27%. Number one worldwide in fabric treatment and Wwater softener categories
· Surface care: 20%. Number one worldwide in disinfectant cleaning and lavatory cleaning.
· Home care: 15%. Number two worldwide in air care, shoe care and pest control.
· Health and personal care: 15%. Dettol was the world leader in antiseptics bought for use at home; Veet was the world leader in depilatories.
· Dishwashing: 14%. Number one worldwide in automatic dishwashing.
How Is It Structured?
Reckitt Benckiser began life in 1999 with a regional management structure in which country managers reported into regions or sub-regions. For example, the United Kingdom would report into Northern Europe, which reported into Western Europe. In 2003, as the company got a handle on the different issues in the different markets, it moved to a hybrid regional/market development structure. Thus, the Eastern Europe region was combined with Western Europe to create one European area. To combine all of the company’s lesser-developed markets into a single management entity, it created the developing markets area covering Asia, Africa, the Middle East and Latin America. The remaining regions of North America (household and food) and Australia/New Zealand were combined to form North America and Australia Area. Alongside the regional structure there was also a category development function, which managed the categories and powerbrands at a global level. There were subsidiary management roles within each region.
What Has It Been Doing Recently?
2004
Reckitt Benckiser celebrated five years of unbroken success since its formation with 10% growth in the year at constant exchange rates. The growth was fairly evenly spread around the world, with Europe growing by 8%, North America and Australia by 9% and developing markets by 16%. Operating margins expanded a full 1.3 percentage points up to 19.6%, the company having almost tripled its annual operating profit since 1999. Much of the increase in margins came from increases in gross margin, up from an industry-trailing 46.4% in 1999 to an industry-leading 54.8%.
This dramatic expansion had come from the combination of robust pricing of the many innovations together with the Squeeze team’s reduction of product costs, an annual £2 million alone coming from a redesign of the Harpic and Lysol bottles, with plastic and shipping costs going down as on-shelf visibility and squeezability went up. Wider margins had also enabled the doubling of media spend over the previous five years. But as usual, there were profitability challenges in developing markets: the company delivered only 7% compared to more than 20% elsewhere.
With no significant acquisitions or new brand launches in the year, growth had come from the business-as-usual application of the strategy: focus on the powerbrands, backed by huge numbers of incremental innovations, rolled out to as many markets as possible. Within fabric care, which grew by 9%, the highlight was the patented new formulation behind Vanish Oxi Action Max, which was more effective against greasy stains than chlorine bleach. The brand was also extended by the launches of Vanish Oxi Action gel and Vanish Carpet Cleaner, which gained leadership of the European market, tripling the size of the category in Germany. Vanish was now sold in more than 40 countries; it had been launched in the UK in 1999.
Elsewhere in the portfolio, health and personal care led the way, growing by 15% in the year with multiple successes including the launch of Veet Rasera, a hair removal cream that acted in only three minutes and required no shaving. This doubled the brand share in North America, 60% of sales coming from consumers who had previously shaved, which grew the category. Also doing well was the antacid brand Gaviscon, which was being rolled out across Europe, and the patented opioid-dependency treatment Suboxone. Foods, the Cinderella of the company, with sales of less than £200 million, made up almost entirely by French’s mustard and Frank’s Red Hot Sauce, spiced up the year by growing by 9%.
This was a performance that showed the strength of the company’s basic consumer philosophy: ‘to understand everyday irritations that drive you nuts. We want to develop even better household cleaning, health and personal care products that solve those problems, make your life easier, and earn your trust and loyalty’. Why hadn’t Reckitt Benckiser’s competitors thought of this one?
2005
In what was a mildly disappointing year by Reckitt Benckiser’s standards, sales grew by 8%, but only by 6% at constant exchange rates. The usual round of innovations hit the market and powerbrands, now eighteen in number, accounted for 60% of total sales. New to the elite club was Bang, sold under the Cillit brand in Europe and Easy Off in the rest of the world. Bang, a multi-purpose cleaner, was launched in 68 countries during the year, giving the company global leadership in the category. Th
is new standard in brand rollouts meant that Bang was now sold in more countries than any other single Reckitt Benckiser brand: the venerable Vanish being had a mere 48.
By product category, the only real problem was in the largest category, fabric care, where revenues grew by a mere 2%, the continued success of Vanish Oxi negated by competitive pressures in the laundry detergent and fabric care markets. This is not that surprising as laundry was a segment where Reckitt Benckiser was toe-to-toe with the industry giants of P&G, Unilever and, in Europe, Henkel, whereas in most other categories the company’s powerbrands competed in what were secondary sectors for the laundry behemoths. On the cost side, the company SWAT teams had to work ever harder than to negate some substantial increases in raw material costs, particularly plastic, steel and tinplate, but negate them they did, growing gross margins by ten basis points to 54.9%, via innovations such as glossy labels, cheaper than printing directly onto packs.
However, the big news in the year was the largest acquisition in the company’s short history, that of Boots Healthcare International for £1.9 billion. Reckitt Benckiser had been looking for a major acquisition within OTC healthcare that met their fairly ruthless specifications: outstanding long-term growth prospects in aging populations in the context of European government trends to curb healthcare costs by encouraging more self-treatment for less problematic conditions. All angles covered beautifully there. Reckitt Benckiser also felt that its rapid, incremental innovation model worked well in the OTC arena, as it had shown in its stewardship of Lemsip and Gaviscon. The particular attraction of BHI was its roster of three powerful multi-national brands: Nurofen, Europe’s number-two analgesic, Clearasil, the world’s number-one anti-acne brand and Strepsils, outside North America the world’s leading over-the-counter sore throat medication. BHI brands and infrastructure would be absorbed into Reckitt Benckiser’s health and personal care category, bringing with it a strong route-to-market in medical detailing and pharmacy channels, complementing the company’s existing strengths in grocery and mass-market distribution.
2006
With eleven months of BHI sales in 2006, overall revenues grew by 18% to a shade under £5 billion, while like-for-like sales grew by a still impressive 7%. Performance highlights included the prescription drug Suboxone, which Reckitt Benckiser owned and had the US distribution rights for, and its related drug Subutex, which grew by 30% in to £165 million with the high profit margins of on-patent drug. However, the year was dominated by the BHI integration into Reckitt Benckiser, a process that took place remarkably quickly. By mid-year, overlapping functions had been downsized and BHI products were appearing on Reckitt Benckiser invoices. By the end of the third quarter, systems in all countries had been integrated and by the end of the year no visible trace of BHI organisation remained: it was all Reckitt Benckiser now. Remarkably, sales of BHI brands managed to grow by 3% during this process and cost synergies were 15% ahead of target.
But it was not just about integration; it was also about preparing the ground for the Reckitt Benckiser growth model. One difference in the OTC market is the regulatory factor in new products approval, especially their efficacy claim, a process which significantly increased the route-to-market times compared to rest of the company portfolio, where innovations could invented and launched within weeks. So while the innovation pipeline was being primed to start delivering in 2008, much of the 2006 preparation had been to improve in-market execution the following year, in particular on-shelf displays in pharmacies and the advertising campaigns behind which increased media spend tests could be run. The Reckitt Benckiser growth model would still be applied, but essentially with a one-year time lag for the incremental innovations to come to market. As consumer loyalty generally gave OTC brands higher profit margins, the three big brands acquired from BHI were going to get a lot of focus and investment. The European bias of BHI further increased the area percentage of Reckitt Benckiser sales, up to 53%, and, by doing so, presented the company with plenty of opportunity to do what it was good at: rolling out brands to new markets.
2007
A 7% increase in reported revenues, with 10% on a like-for-like basis, yielded an eighth consecutive year of above-average industry growth: proof that the BHI acquisition firstly had not distracted Reckitt Benckiser management from its day job and secondly had demonstrated the growth prospects within BHI, whose product sales grew by 10% in the first full year of Reckitt Benckiser ownership. Most of the BHI growth came from the three powerbrands of Nurofen, Strepsils and Clearasil, helped along by substantial increases in media support and some early innovations such as Nurofen Express, which promised express relief from pain: its blood-stream absorption rate was twice as fast as the generic ibuprofen products.
This was an excellent start in a year when all but one of the eighteen Powerbrands gained market share, accounting for 61% of total sales. Growth came through the usual mix of new products - Air Wick Freshmatic Mini and Vanish Oxi Action Multi – and geographic rollouts that had now taken Veet into 73 countries, Air Wick into 70 and Vanish into 57. High media spending - 12.4% of total revenues and more like 15% on the powerbrands – also made its contribution.
With the BHI acquisition fully integrated, the new, improved Reckitt Benckiser now had 75% of its revenues from brands that were number one or two in their markets. Together with numerous leading local and regional brands and categories, the company was now worldwide number one or two in the following categories:
Number One
· Fabric Treatment
· Water Softeners
· Surface Care
· Disinfectant Cleaners
· Automatic Dishwashing
· Topical Antiseptics
· Depilatory Products
· Medicated Sore Throat Products
Number Two
· Garment Care
· Air Care
· Shoe Care
Across the regions, the North American pharmaceutical unit was having such an impact on the numbers for the total area that it was being treated almost as a discrete entity, the Buprenorphine Business Group. A loosening of the regulatory rules for the heroin addiction treatment meant that doctors could prescribe it to more patients, so Reckitt Benckiser had substantially increased its sales infrastructure and received an immediate payback: 42% sales rises delivered a staggering 56% margin, when the area average for all other products was just 21%. There was also some movement on the M&A front. The BHI Hermal prescription skincare business sold for £260 million. The company also announced its intention to acquire Adams Respiratory Therapeutic Inc. for £2.3 billion, which would bring Reckitt Benckiser into the US OTC market via Mucinex, the clear US market-leading cough relief brand, which was slated to become powerbrand number 19.
2008
The Adams acquisition not only added to the top line but grew by 12% in the eleven months it was owned by Reckitt Benckiser. Thus the company posted a 25% increase in sales to £6.5 billion, its core business having grown by 13% and its powerbrands by 17%. The powerbrand list had also been lightly culled: two brands were dropped while Mucinex was added. Seventeen powerbrands were now going forwards:
Of these seventeen, fifteen were number one or two globally. Similar regional brands were now being awarded powerbrand status, the US’s Electrasol and Jet Dry would be re-branded as Finish, starting with the launch of Finish Quantum.
The usual regional trends applied during the year with Europe and North America and Australia growing like-for-like by 7% and 6% respectively, while developing markets powered ahead by 16%, where the operating margin was now well into the double-digit territory at 13.7%. Overall, the company yet again increased its gross margin by a full percentage point to 59.3%. There were three factors driving this increase:
· Better-than-average performances by the higher-margin categories
· Continued ‘Squeeze’ cost savings such as the £1 million that came from a redesign of a French’s mustard dispensing cap that also elimin
ated drips
· The continued explosive growth of the now renamed pharmaceuticals unit, whose sales increased another 45% up to £341 million, delivering an eye-watering £193 million operating profit which added nearly two whole percentage points to the entire company’s operating profit margin
The pharmaceuticals unit was turning into a backyard oil well, although it might not gush forever. Subutex, for example, was marketed by Reckitt Benckiser in the US and Australia but principally by Schering Plough in Europe, where permission had just been granted to market the drug in 27 member states of the European Union. However, in America, the drug had Orphan Drug status (enhanced patent protection rights) until September 2009, beyond which point exclusivity would lapse and generics could decimate both sales and margins. It would be a big gap to plug.
2009
The big question in 2009 was how the Reckitt Benckiser growth strategy would cope with the deep recession into which many of its key markets had plunged. With over 80% of sales coming from developed markets, the company was more vulnerable than many to the slowdown. The answer is that the organic growth model coped well but the past acquisition and focus strategies worked better.
Overall, the company grew by an impressive 18%, 8% at constant exchange rates, to reach £7.8 billion – a top-class performance in the economic circumstances. If we dig a little deeper we see that, unsurprisingly, Europe struggled, growing only 1% with margins wilting slightly. Developing markets, largely untouched by the crisis, grew across all regions by a still impressive 16% to nearly £1.5 billion, with the margin creeping up once again. The star of the show, though, was the backyard gusher of pharmaceuticals, which put on another 50% of highly profitable revenue. Without this, total company performance would have shown a 6% top-line growth and a 4% increase in operating margin, good but not stellar. And the company was getting naturally very nervous about what would happen after the loss of Orphan Drug status in October 2009: US revenues of £502 million could decline by up to 80%.
