FMCG

by Greg Thain

  While treatment of heroin addiction was clearly recession-proof, perhaps even recession-fed, the company had deliberately added some areas of the portfolio in recent years specifically tp protect against economic downturn as well as to make money in healthier times. Thus, while not one of fabric care, surface care, dishwashing, home care and food could put on more than a 5% growth, health and personal care zoomed ahead by 14% driven by Nurofen, Strepsils, Gaviscon and Mucinex: headaches, sore throats, acid reflux or nasal congestion take scant notice of the economy. And more cost savings had pushed the gross margin over 60% for the first time in the company’s 10-year history, an increase of almost fifteen percentage points over the period. But the much vaunted media spend as a percentage of sales was more subdued, declining from 12.4 to 11.1%, partly because of the almost exponential sales increases of the unadvertised Suboxone but also because of the company, whose business model was not completely recession-proof.

  2010

  Another 9% on the top line took sales to nearly £8.5 billion, like-for-like growth of 6% and still a respectable 5%, excluding pharmaceuticals. Once again, health and personal care performed strongly, helped by a good piece of cross-category innovation with the surface care brands Dettol and Lysol each launching the No-Touch Hand Soap System. Coming a year after the H1N1 scare, this was the right product at the right time. Not to be outdone, home care increased by 8%, driven by a slew of innovations in the Air Wick brand, Air Wick Aqua Mist and Air Wick Ribbons, for example. Dishwashing, fabric care and surface care had uneventful years, while food, justifying French’s newfound status as a powerbrand, grew by 9% in the year, driven by the new variants its new status allowed.

  The once-again newly named RB Pharmaceuticals continued to perform. It was not really news that sales had increased again, but the rise to £737 million was impressive, while the 37% increase in operating profit to £531 million was even more so, both clear signs that oil from the company well was not being siphoned off by no-name competitors. A development that kept such creatures at bay was the regulatory approval and subsequent launch of a patented and user-preferred film version of the drug to supplant previous tablet versions. The film, developed via an exclusive agreement with Mono-Sol Rx using its proprietary technology, already accounted for 25% of sales and, by dissolving faster and tasting much better, was keeping patients in treatment longer. Although the film diluted margins slightly, the long-term beneficial effect of continued treatment patent protection in the US was of huge value. Reported sales in RB Pharmaceuticals had also been boosted by the company’s £100 million re-purchase of the European distribution rights. The new rights began to bite on July 1st. Reckitt Benckiser was now most definitely in pharmaceuticals; the unit contributed 9% of the year’s total sales..

  The other big news in the year was the July announcement of the acquisition of SSL International, maker of sexual wellbeing brand Durex and foot-care brand Scholl. The £2.5 billion deal was completed on 29th October. The addition of SSL would increase the size of the health and personal care category by 36% and add two new brands to the powerbrand list. The acquisition also transformed Reckitt Benckiser’s previously somewhat limited presence in the crucial Chinese and Japanese markets. And the company’s reputation for innovations in the field was beginning to intrigue, if not excite, the world’s lovers. Reckitt Benckiser also made another significant acquisition, the Indian company Paras Pharmaceuticals, which now gave the company a viable health care business in that other great emerging market. Partly helped by these acquisitions, total sales in developing markets had increased by 18% during the year and now accounted for 22% of company business.

  2011

  By far the biggest news in the company’s short history was the shock April announcement in of the retirement of Bart Becht, the only CEO the company had ever had. To say the news was unexpected was the understatement of the year. Becht was still in his fifties and had shown no signs whatsoever of reaching for his pipe and slippers. Rumours in the investment community, denied by both Reckitt Benckiser and Becht, suggested that he had stormed out following a major strategic bust up with the board.

  While more plausible than the company’s party line, it would have been an ironic way for Becht to go. Becht, more than anyone, had been responsible for, and very proud of, the curious Reckitt Benckiser operating style: meetings were essentially shouting matches. But they were always resolved within the meeting itself, with a course of action agreed that everyone would thereafter religiously support. For someone to flounce off because he didn’t get his way would have been a sackable offence for anyone else in the company but Becht. Maybe it was for him too, judging from the annual report’s single sentence on the matter; one would have expected rather more for the man who had taken Benckiser from obscure European packaged goods bit-part player to one of the best-performing companies on the London Stock Exchange: the send-off was not a gushing epitaph marking the well-earned retirement of one of the world’s best-performing CEOs. But then Becht didn’t retire. He was immediately snapped up by Reimann – the previous owner of Benckiser – to co-run its multi-billion-dollar investment company Joh A Benckiser Sarl, which had a seat on the Reckitt Benckiser Board Becht had just left. Which it retained.

  What happened afterwards was another indication that Becht’s departure had not been entirely amicable. Although the company promoted 25-year veteran Rakesh Kapoor to the CEO position, the new man wasted no time in introducing a dramatically different strategic direction for the company. There would be no smooth continuation of the Becht ways. The first shift in direction came in a restructuring of the portfolio. There were to be three powerbrand groupings: health and the OTC brands, hygiene and the cleaning and pest control brands and finally home, with utilitarian brands such as Vanish, Woolite and Air Wick. There was to be an exaggerated focus on health and hygiene, food would be run as a stand-alone business (making it easy to dispose of at some stage), as would RB Pharmaceuticals, giventhat it was essentially a one-product division with a unique route to market and management agenda.

  The powerbrand concept was still central to the company’s way of operating, but with more focus, attention and resources given to the health and hygiene powerbrands. The company’s identity would shift from household cleaning-centred on to health, hygiene and home. The rationale was clear. First, Reckitt Benckiser’s M&A strategy had got the company into higher-margin categories such as OTC while, at the same time, the vaunted innovation/high media spend strategy had not been performing as it used to in servicing the more mundane product areas. The days of double-digit growth in dishwashing and surface cleaning were long gone - more recently, the company had been delivering decidedly average performances in those categories. Also deemed past its sell-by date was the company’s habit of measuring brand investment levels purely in media spend as a percentage of net income. Under the new regime, that would be expanded to cover digital and social media, education programmes and medical marketing.

  The second strategic shift was geographic. Under Becht, Reckitt Benckiser had been far more focused on taking more powerbrands into existing Reckitt Benckiser markets than in opening up new markets for all the company’s brands. Consequently, it had long lagged behind its major competitors in sales percentages from emerging markets. This was now going to change. Three new reporting regions were put in place to replace the old structure, each grouping together markets the company saw as having similar consumer and retail dynamics:

  · LAPAC – Latin America, North Asia (i.e. China), South East Asia (India down to Borneo), Australia and New Zealand

  · RUMEA – Russia & CIS, Middle East, North Africa, Turkey, Sub-Saharan Africa

  · ENA – Europe and North America

  While the company insisted that developed markets were ‘still important’, the focus would turn from ENA towards the other two regions, with particular emphasis on what Reckitt Benckiser had identified as sixteen powermarkets. This emphasis would involve a migration of management a
way from developed markets, which currently had 64% of staff looking at 900 million consumers, towards the powermarkets, where 36% of staff serviced six billion consumers. KPIs were set on both strategic shifts: 72% of ‘core company revenues’ (excluding food and pharmaceuticals) coming from health and hygiene by 2016 (currently 67%), and 50% of core revenues from LAPAC and RUMEA by the same year (currently 42%). The numbers involved in the targets were not revolutionary, but the shift in emphasis was. Reckitt Benckiser would now be a quite different company than it had been in the first thirteen years of its life. Would it be as successful?

  2012

  In the first year of the new strategy, it seemed that the Reckitt Benckiser machine had adjusted well to its new settings. Although top-line sales were up by barely 1% to £9.6 billion – all coming from RB Pharmaceuticals – this masked a more robust like-for-like increase of 4% when exchange rates were factored out. The strategy, remember, was to grow the health and hygiene categories faster, along with the LAPAC and RUMEA regions, and here the company succeeded. Health grew by 6%, helped by the Durex brand increasing its reach in China, a growth rate matched by hygiene in which Dettol Daily Care, Lysol No-Touch Kitchen System and the Quantum brand all made significant gains. The de-prioritised home and food sectors all still managed like-for-like growth, but in the 1–2% range. RB Pharmaceuticals put on an additional 10% revenue with strong volume growth in the key US market, tempered by the switch from Suboxone tablets to lower-margin film. The film, patent protected until 2020, now accounted for 64% of sales and was progressing so well the company felt comfortable enough to announce the planned withdrawal of the tablets during 2013, not least because they were coming under pressure from generic manufacturers. Within the regions, LAPAC led the way with an 11% like-for-like growth as the powerbrands continued their market rollouts and distributions gains; RUMEA was up by 8%, primarily because of Russia and the rest of the CIS; while ENA still managed to inch ahead by 1%.

  Strategically, the company made two significant shifts during 2012. After a review early in the year, the company set about terminating its contracts to supply private label products, primarily laundry products, to European retailers. This was followed in the last quarter by an announcement of the $1.4 billion acquisition of Schiff Nutrition International Inc., the leading US vitamin, mineral and supplement brand, which opened up a new $30 billion category for Reckitt Benckiser. A second acquisition, this time of China’s Oriental Medicine Company Ltd, reinforced the sense that Reckitt Benckiser was moving rapidly away from its more prosaic, home cleaning brands heartland.

  What Is Its DNA?

  Until the day Bart Becht left the building, Reckitt Benckiser had been the most consistently managed of all the world’s major packaged goods companies, applying its own idiosyncratic style year in, year out. There were no secrets in how Reckitt Benckiser delivered its results, not least because Becht never tired of telling anyone who would listen what the strategy was: focus on the brands that were advantaged in both profitability and growth prospects, churn out exceptional numbers of innovations and advertise the hell out of them. Everyone knew what the company was doing but no one could stop or even match it. The key elements of the company’s DNA that facilitated this strategy are, we believe, as follows:

  Consumer Focus

  It may seem odd to include this; after all, doesn’t every company in this book have a consumer focus? They are all consumer packaged goods companies, after all. However, we believe it is a particular strength of Reckitt Benckiser’s. The company has had an obsessive focus on getting under the skin of how consumers use its products and how they feel about every fine detail of the consumption experience. The vast majority of the company’s countless innovations have been fine-tuned improvements to its own offerings; it launched very few new brands, even fewer me-toos and no completely novel products. While P&G predominantly relied on technical breakthroughs like Febreze and Swiffer, Reckitt Benckiser relied predominantly on a succession of incremental improvements to the consumer experience. To do this over such a prolonged period requires an obsession with getting into people’s homes in different markets, seeing how they use the products and asking plenty of questions about how they feel about it. There are no desk-bound marketers in Reckitt Benckiser.

  Speed

  Reckitt Benckiser doesn’t just do things quickly. Compared to its competitors, it does everything at warp speed. Cillit Bang was launched in Hungary. Its potential for scaling up was agreed within weeks, with a global launch following within a couple of months. Facilitated by a very flat organisation, a cultural style that prohibits procrastination beyond a single meeting for any issue, a ‘you snooze, you lose’ attitude to taking products to market and an evaluation process that takes weeks not months to pick the winners and losers, the company sets a pace of market activity its competitors are structurally and culturally unable to get anywhere close to. What some purists may consider a ‘throw stuff at the wall and see what sticks’ strategy, Reckitt Benckiser made into a highly successful reality. Most company meetings are less than productive. Office politics are destructive. The best market research is whether or not something sells after you launch it: Reckitt Benckiser actually did something about these business truths rather than just grumble about them.

  Creative Tension

  Working at Reckitt Benckiser isn’t for everyone. The company’s leaders would be first to admit that new employees either love or hate the place, and the business does little to work with the ones who hate it: the sooner they leave, the happier everyone will be. Core to the day-to-day operating style is a culture that not only encourages but also actively demands conflict. Opinions must be aired at all times and need to be done so forcibly to have any chance of making them heard, let alone acted upon. Managers from small markets must shout up for what their market needs for the powerbrands to succeed there. The company believes the coming together of strongly held views, passionately argued, results in better outcomes. Rank and seniority count for nothing in the discussion phase; those closest to the consumer are expected to fight tooth and nail to get what their consumers want. Right from the beginning, the company moved managers around different countries and had a nationally neutral culture; English was made the operating language of the company in every meeting in every country. Outright anarchy is avoided by an equally strong belief in backing absolutely whatever decision a meeting arrives at; you may get outvoted or shouted down, but you are required to support the outcome as though it were your own idea. It is a powerful approach that does indeed get everything out on the table.

  Summary

  Reckitt Benckiser has been one of the biggest consumer goods success stories of the early 21st century. During its first twelve years, its share price increased five times more than Unilever’s. The combination of a set of somewhat tired-looking Reckitt & Colman brands with the Benckiser approach to strategy and management has been little short of spectacular. The company has been the subject of countless case studies in its approach to innovation; not surprising, as it has set new benchmarks for the level of innovation sustainable by a large packaged goods company. But the company has recently undergone its first transitions of both CEO and strategy, which raises several questions.

  Just how much was the success of the company driven by Bart Becht himself? We are instinctively not believers in the concept of the heroic CEO but there can be no doubt that Reckitt Benckiser was created and moulded in his style. And while there can be no arguing with the direction of the new strategy – most future growth is coming from emerging markets and OTC brands are generally more profitable than cleaning or household brands – here is the question: is Reckitt Benckiser as advantaged in those two areas as it has been in doing what it has been doing?

  Unilever, P&G and Henkel have been more active in emerging markets for decades than has Reckitt Benckiser and they no longer regard Reckitt Benckiser as a cheeky upstart on the fringes of their businesses. Also, while Reckitt Benckiser has largely operated o
ff the giants’ radar, it is coming up against indigenous firms in emerging markets who are even more agile and quick than they are.

  A key factor in the growth of Reckitt Benckiser has been its unique culture, one that developed fast and then embedded itself strongly. And, as the company was so focused on organic growth for so long and made so few acquisitions, it stayed that way. But nothing dilutes a management culture quicker than big acquisitions and the purchase of SSL conceivably falls into that category. SSL was a long-established company with its own culture operating in a multitude of different countries, some of which were to be spearheads for the Reckitt Benckiser brands. It is difficult in those circumstances to turf out the incumbent management who operate very differently, as happened with the Reckitt & Colman merger.

  In short, this is a crucial phase in the brief history of Reckitt Benckiser. Will history show it to have been an enduring business phenomenon that can out-perform its competitors ad infinitum? Or a passing phase where the stars aligned to create a set of ideal conditions for above-average growth: under-exploited brands, easy geographic expansion opportunities, and complacent competitors? As we all know from the stock market, past performance is no guarantee of future returns, especially in periods of great change. The new regime has the toughest of acts to follow.

  The Estée Lauder Company

  Where Did They Come From?

  In 1920s New York City, John Schotz, a Hungarian chemist, was working tirelessly in the kitchen of his brother’s house to develop the perfect face cream. His hairdresser niece, Josephine Esther Mentzer, bombarded him with suggestions. She thought one of his face creams was amazing, as did all of her friends. She devised a name for the cream, the somewhat catch-all Super-Rich All Purpose Crème, and gave samples to her customers at the Florence Morris Beauty Salon.