Bang Goes the Pricing Power

Reckitt's Hidden Good News Gives it a Shot at Cleaning Up

Its fall from superstardom doesn't need to be permanent.
Chris Ratcliffe/Bloomberg
UNILEVER NV-CVA
-0.28
At Closing, May 24th
47.98 EUR
RECKITT BENCKISER GROUP PLC
-1.00
At Closing, May 24th
5981.00 GBp

Bang, and the pricing power is gone.

In common with Unilever NV and Nestle SA, Reckitt Benckiser Group Plc has become the latest consumer goods company to report that competition among retailers was taking its toll on prices for its products on supermarket shelves. The shares fell as much as 9 percent on Friday, the most for 15 years.

That wasn't the Cillit Bang-maker's only problem. Cheaper competition in some over-the-counter medicines produced disappointing sales in the health division excluding infant nutrition. The Scholl footcare and Dettol brands were also weak.

Bad Year

Reckitt Benckiser may have overcome its sales stumble in 2017

Source: Bloomberg Intelligence

That's a worry, because consumer health is the engine of expansion for Reckitt.

Chief Executive Officer Rakesh Kapoor has been grappling with the company's fall from superstardom. The acquisition of infant nutrition company Mead Johnson spread the group too thin, and a cyber-attack dented sales.

But Friday's report also included some pain relief for investors.

Firstly, the recovery in infant nutrition gained traction. Strong demand in China helped, something that also benefited Danone. Like-for-like sales rose 6 percent, the third consecutive quarter of growth after nine previous quarters of decline.

Yeah Baby

Reckitt Benckiser is seeing some early signs of improvement at its newly acquired infant Mead Johnson business

Source: Company reports

Secondly, volume growth was strong in hygiene and home -- like-for-like sales rose 4 percent.

That suggests Kapoor's new strategy is working. Reckitt recently rejigged its organisational structure, creating two businesses: health, which includes Mead Johnson, and hygiene and home. The latter includes brands such as Lysol, Finish dishwasher tablets and Vanish stain remover. Separating the slower-growing household products and giving them dedicated management was supposed to revive growth, and it looks like this is happening.

This has broader implications. 

Reckitt pulled out of the race to acquire part of Pfizer Inc.'s consumer health arm -- the whole of the division was valued at $15 billion to $20 billion, but Reckitt only really wanted the U.S. Advil business. The sale attempt ultimately fell apart, and it's possible that the asset will come onto the market once more.

As I have argued, even with Mead Johnson having stretched the company's balance sheet, doing a deal wouldn't have been that hard. That's partly because Reckitt could have offloaded some of its home brands division, which generate a healthy amount of cash. Friday's report of a better performance will only help the valuation if any part of it is put up for sale.

Fading Superstar

Reckitt Benckiser has lost its valuation premium to Nestle and Unilever

Source: Bloomberg

Shares in Reckitt have fallen by a quarter over the past year. They have lost their premium to Unilever and Nestle and now trade below their rivals on a price to forward earnings multiple.

To narrow the gap, Kapoor must build on the early improvements at Mead Johnson and kickstart growth in the rest of the health business. He must also maintain the better sales volume at the hygiene home business, and tackle the weak pricing. That all looks a tall order right now. But if the nascent turnaround becomes a sustained recovery, Kapoor has a shot at cleaning up again.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Andrea Felsted in London at afelsted@bloomberg.net

    To contact the editor responsible for this story:
    Jennifer Ryan at jryan13@bloomberg.net

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