Reckitt Struggles To Tame Enlarged Health Portfolio As Durex and Scholl Stumble In Q2
Executive Summary
Durex, Scholl and a number of regional OTC brands fell short of expectations in Q2 as RB reported like-for-like Health sales down by 1%. Analysts are now questioning whether the UK-based firm has expanded too fast and spread itself too thin in the global consumer health market as it struggles to get the most out of its diverse portfolio.
“It would be an understatement to say that I'm disappointed with our Q2 results,” admitted Reckitt Benckiser Group PLC’s CEO Rakesh Kapoor as the UK-based firm reported like-for-like sales at its Health business down by 1% to £1.90bn ($2.32bn).
With like-for-like sales – which exclude the impact of currency fluctuations, acquisitions and disposals – falling by 3% for its Other Health category, flat at Infant and Child Nutrition (IFCN) and up 1% at OTC, Kapoor said RB had “work to do to deliver consistent financial performance” if the company was to meet its goal of becoming a “world leader in consumer health.”
Other Health – which houses RB’s wellness and health/hygiene brands – had experienced “another poor quarter,” the firm pointed out, with sales of the Scholl foot-care brand continuing to decline. RB has been working for some time to refocus the brand after the launch of a rechargeable electric file to smooth dry heels in 2016 floundered.
While sales of its VMS brands had picked up after a sluggish start to 2019, the firm revealed its Durex sexual health range had struggled in Q2 in “key developing markets,” while its Dettol antibacterial product had experienced a “slow quarter.”
Durex Under Pressure In China
Aditya Sehgal, RB’s Health COO, explained that Durex had experienced an “unusually weak quarter” due to a step-up in competitive pressure, in particular in China. “What is happening in China is that we have a whole bunch of competition, most of which is local, which is launching interesting new products.” To counter this, RB was working on innovation of its own, which would enable Durex’ performance to improve “over the next 18 months.”
Turning to IFCN, RB said the flat performance reflected slowing category growth trends in China due to a reduction in birth rates and a high comparator with the prior-year period which had offset a strong US performance. The firm had experienced “some share decline” in China for its infant formula brands, while sales had also dipped in other markets across the Asia-Pacific region and Latin America.
On a more positive note, RB said its OTC brands had returned to growth in Q2 after a particularly tough start to the year when turnover had nosedived by 9% in Q1. (Also see "RB's OTC Sales Slump 9% In Q1 As Cold Season Fails To Materialize " - HBW Insight, 3 May, 2019.)
Nurofen, Strepsils and Gaviscon had delivered good share gains in the quarter, the firm said, while Mucinex share was stabilizing following the re-entry of private-label competition to the US market in 2018.
However, it wasn’t all good news for the OTC portfolio, with a number of RB’s smaller brands delivering a slower performance. “It was a weak quarter for some of our local brands particularly in LATAM, India and Europe,” said Sehgal, “impacted by heightened local competition, seasonality and stock movements.”
On a geographical basis, North America was Health’s best performing market, with like-for-like growth of 4%, reflecting the IFCN performance, and improvement by Mucinex.
Sales in Europe/ANZ declined by 2% like-for-like due to Scholl and weakness in “local” OTC brands, while turnover in Developing Markets fell by 3% as a result of Durex’ struggles and the IFCN performance.
While Q2 had proven to be “tougher than we thought,” Kapoor insisted that he was seeing “green shoots” for RB’s Health business with “signs of better momentum returning.” IFCN was growing strongly in the US, he pointed out, and the firms leading OTC “powerbrands” were performing well.
“We expect a second half in Health which is strong and are further increasing our investment in brands and capabilities to support this growth,” Kapoor noted.
Despite Kapoor’s optimism, RB has revised its group net revenue target down to 2-3% from 3-4% for the full year.
With the guidance lowered and continued struggles at Health, analysts are questioning RB’s strategy of rapid expansion in the market and wondering if the firm has bitten off more than it can chew.
Has RB Spread Itself Too Thin?
On the firm’s Q2 earnings call, Bank of America Merrill Lynch’s Guillaume Delmas asked CFO Adrian Hennah if RB was “spreading yourself a little bit too thin” in the consumer health category, particularly since the acquisition of Mead Johnson. “It seems that every quarter, the list of under performing sales keeps on expanding. It used to be just Scholl, now we've got Dettol, Durex, some small brands in OTC,” Delmas pointed out. “Do you think your portfolio of brands in Health is optimal or are they opportunities for some divestments in order to help unleash the full potential of the division?”
Hennah insisted that RB had been on a trajectory towards becoming a consumer health-focused business for “a very long time” and had assembled a “fantastic core set of brands.” This expansion had created a particularly diverse, complex portfolio, he noted, which required the business “to operate optimally” with the appropriate operating model. “There is no doubt that has taken somewhat longer than we expected when we put these businesses together,” Hennah admitted.
Finding the right formula to get the most out of the Health business will be the most pressing task of RB’s CEO designate Laxman Narasimhan, who will take over from Kapoor on 1 September. (Also see "Reckitt Names New CEO To Ignite Growth And Lead Digital Transformation" - HBW Insight, 13 Jun, 2019.)
Narasimhan – who arrives from PepsiCo – stated his “immediate priority” was to deliver “consistent operational performance” at the Health business. He has promised to provide a full overview of his plans for RB in February when the firm reports its annual results.