Reckitt Benckiser Cleans Up
Laundry detergent and dishwasher tablets don't usually get investor heartbeats racing. But even the most jaded market watchers must concede that Britain's Reckitt Benckiser (RB.L), the world's largest maker of household cleaning products, has mastered the art of turning everyday items into gold.
That skill likely will be evident on Apr. 24 when the company posts its first-quarter 2008 results. Deutsche Bank (DB) figures Reckitt Benckiser's sales excluding acquisitions will hit $2.87 billion, up 15% from the same quarter last year, and net income will rise 16%, to $413 million. For the year as a whole, analysts expect the maker of such well-known products as Lysol, Clearasil, and Woolite to grow 6% to 7%, despite signs of weakening consumer spending.
What's Reckitt Benckiser's secret to success? In a competitive industry filled with heavy-hitters such as Procter & Gamble (PG), Unilever (UL), Clorox (CLX), and S.C. Johnson, the company—formed from the 1999 merger of Britain's Reckitt & Colman and German firm Benckiser—has focused on a small number of high-margin brands prized by devoted customers. It also manages innovation unusually well, churning out novel products often faster and more cheaply than rivals.
Revenues from New Products
As a result, some 40% of Reckitt Benckiser's $10.5 billion in 2007 revenues came from products launched within the previous three years. And its net profit margins, at 17.8% of revenues last year, are the highest in its sector, outflanking even P&G's 14%.
"Reckitt Benckiser is strong at marketing its brands to consumers," says Serena Jian, senior company analyst at research firm Euromonitor International in London. "Combined with good product innovation, that helps increase brand loyalty and drive up margins."
That formula is set to be tested as Reckitt Benckiser tries to break into the U.S. over-the-counter health-care business, which is now dominated by domestic players such as P&G. Chief Executive Officer Bart Becht aims to harness the same strategy that has propelled the company's success with cleaning products in North America and Western Europe. Dubbed "innovation marketing," it entails intensive market research and consumer-led product development, combined with heavy promotion of brands.
Exploiting Recognized Brands in U.S.
To elbow its way into over-the-counter health care, Reckitt Benckiser paid $3.4 billion in February, 2006, for London-based Boots Healthcare International, the maker of Nurofen-brand ibuprofen and Strepsils throat lozenges. Then, in December, 2007, it spent $2.3 billion for New Jersey's Adams Respiratory Therapeutic, best known for its Mucinex line of cold remedies.
Euromonitor's Jian figures Reckitt Benckiser will try to exploit these recognized brands while discarding lesser-known products with smaller profit margins. The company already spends more than 12% of its revenues on marketing—more than double the ratio of most of its rivals. If all goes according to plan, U.S. over-the-counter health-care revenues could more than double by 2012 from last year's $332 million in annual sales.
Key to the company's fortunes will be its innovative approach to research and development. Reckitt Benckiser has moved sharply away from lab-based development towards analyzing how consumers go about their daily lives.
The company conducts extensive one-on-one interviews with buyers and sends its employees to visit consumer homes to gauge what products could be a hit. The research is translated into hundreds of possible ideas, but only the most profitable prospects ever hit retail shelves.
Weak in Emerging Markets
Oddly enough, Reckitt Benckiser's overall R&D spending is slightly lower than industry standards. It spends less than 2% of revenues on R&D, vs. more than 3% at P&G. Analysts say customer-focused development helps ensure more efficient R&D — potentially a big boost in the cutthroat, over-the-counter health-care market, where giants like Unilever can easily outspend Reckitt Benckiser in product development.
One area where Reckitt Benckiser is weak is in emerging markets. The company got only 18% of its 2007 revenues from the developing world, far below the industry average and less than half the 40% of Unilever. "Reckitt Benckiser is underexposed," says Martin Deboo, an analyst with London stockbroker Investec Securities, "and the acquisition of Boots Healthcare and Adams haven't helped that much." Deboo says Reckitt Benckiser might need to dip into its extensive capital reserves to buy local players in emerging markets.
Share Price Quadrupled Since Merger
Another concern for the company is rising commodity prices. Deutsche Bank estimates oil and petrochemicals account for around 30% of Reckitt Benckiser's total input costs. This escalating charge primarily affects the company's household cleaning division, but could begin to hurt margins if oil remains above $100 a barrel.
Not that investors seem worried. The company's share price has quadrupled since the merger of Reckitt and Benckiser and is up 5.7% in the past year. That's comparable to P&G's 12-month stock performance and way ahead of a 16.5% decline for Clorox over the same period. "It shows just how much confidence investors have in the company's innovation marketing strategy," says Investec's Deboo.
CEO Becht isn't resting on his laurels, though. His stated goal is to double Reckitt Benckiser's revenues from its Adams acquisition by 2012 and to increase operating margins to 30%. Much depends on whether the company can transplant its innovation marketing strategy from its household cleaning products to over-the-counter medicines. With first-quarter results expected to be bullish, it appears for now that expanding into health care was just what the doctor ordered.
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