Reckitt Tries a New Formula Amid Industry Malaise -- 2nd Update

Reckitt Benckiser Group PLC is splitting its business into two separate divisions, the latest move by a consumer-goods giant to address an industry-wide downturn.

Chief Executive Rakesh Kapoor will continue to preside over the entire company, but he will also run a new consumer-health division, which will include brands like Durex condoms and the recently acquired Mead Johnson baby-food division. After the restructuring, which will take effect by Jan. 1, the unit will make up about 60% of group sales, which last year totaled GBP9.89 billion ($13.04 billion).

A separate division--to be run by one of Mr. Kapoor's current deputies--will include Reckitt's home-and-hygiene products, like Lysol, Finish dishwasher tablets and Woolite.

The U.K.'s Reckitt and its rivals, including Procter & Gamble Co. and Unilever PLC, are struggling with stalling sales as consumer tastes in many key markets change fast. Shoppers are gravitating toward smaller, local products and away from the mega-brands these companies have relied on for sales growth for decades.

Sales growth at the world's packaged-foods companies slowed to 1.1% last year from 2.4% in 2013, according to Morgan Stanley. Home-care growth fell to 1.3% from 1.5%, while beauty and personal care dropped to 1.7% from 2.2%.

Until recently, benign inflation in many parts of the world made it difficult to increase prices to make up for lower volumes. Volatility in emerging markets like India and Brazil has further pressured sales.

"We have many more competitors to deal with now. Channels have changed," said Mr. Kapoor in an interview. "Therefore, this one-size-fits-all does not work. We need to create more focus and expertise."

To arrest the decline, many industry leaders are taking action.

Earlier this week, P&G narrowly won a proxy fight with activist investor Nelson Peltz, who has called on it to restructure to address these headwinds. Nestlé SA recently bowed to pressure from activist investor Dan Loeb and set a formal profit margin target. The packaged foods giant is also selling its U.S. confectionery arm. Unilever split off its spreads business into a separate unit, with its own management team, before earlier this year saying it would consider selling the unit. That decision came after Unilever rejected a $143 billion bid by Kraft Heinz Co., which triggered a number of moves by Unilever to appease investors.

Reckitt--one of the world's largest consumer-goods companies--spun off its pharmaceutical division in 2014. Earlier this year, it sold French's mustard and the rest of its food unit to McCormick & Co.

Mr. Kapoor said Reckitt has no plans to sell or spin off the health-and-hygiene unit, or any of its current businesses. He said his primary aim is to focus management attention on all the brands, to jump start growth in both divisions.

Still, analysts saw the move as a possible first step toward more drastic measures.

"This new structure could be the prelude to a split of the business or a sale" of the home-and-hygiene businesses, said Liberum analyst Robert Waldschmidt.

Reckitt has a market capitalization of GBP49.5 billion. It is unclear what valuations the two divisions would command as stand-alone companies, but both would rank as sizable players.

Amid the broader upheaval in the sector, Reckitt seemed to be navigating the headwinds relatively well. Until last year, it was a stock-market darling that enjoyed strong growth and chunky profit margins. Mr. Kapoor, one of the best paid CEOs among London-listed blue chips, won a reputation for keeping costs under control.

On Wednesday, though, Reckitt reported the latest in a string of disappointing results.

Third-quarter comparable sales fell 1% from a year earlier, missing analysts' forecasts. Reckitt also reduced its annual sales guidance for the second time this year, saying it now forecasts flat sales, compared with a previous estimate of 2% growth.

Reckitt is battling through the same headwinds as its rivals but has also suffered a series of company-specific setbacks. A Scholl-branded foot file, made for the shower, flopped. A humidifier disinfectant that Reckitt bought in South Korea has been blamed for dozens of deaths, triggering a consumer backlash there. And it was hit harder than most in a far-reaching cyberattack, called Petya, earlier this year.

The restructuring, announced Wednesday, is geared toward addressing the slowdown. Mr. Kapoor said designated management teams would be able to better focus resources and help both divisions grow, even as they share functions such as procurement and financial services. Mr. Kapoor said the home-and-hygiene brands have previously been neglected, compared with the higher-growth consumer-health arm, a trend that would have worsened with the acquisition of Mead Johnson.

Mr. Kapoor said consumer-health brands' route to market is very different to those of Reckitt's other brands. Acquiring Mead Johnson makes now "the perfect moment" to split out the operations.

Mr. Kapoor has long said he wants to build Reckitt into a consumer-health-focused giant. The restructuring comes at a time when several attractive consumer-health assets have come on the block. Pfizer Inc. and Germany's Merck KGaA have both said they are conducting strategic reviews that could lead to a sale or spinoff of their consumer-health businesses. On Wednesday, Mr. Kapoor said it is too early to say whether Reckitt will bid for these, but that he is watching the process carefully. In 2015, he said if Pfizer's consumer health arm became available he would be very interested.

Write to Saabira Chaudhuri at

(END) Dow Jones Newswires

October 18, 2017 10:28 ET (14:28 GMT)