Pandemic provided big boost to Dettol producer but may be masking lingering problems

Shortly after Laxman Narasimhan took over as chief executive of Reckitt Benckiser, he called for urgent improvement at the consumer goods company he said had delivered too many “disappointing” results.
A year on, the maker of Nurofen painkillers, Durex condoms and Harpic toilet cleaner is racking up the strongest growth in its history.
“We are now an organisation galvanised by a common purpose,” Mr Narasimhan declared last month as the group upgraded its full-year forecasts.
But the biggest driver behind the growth is one Mr Narasimhan could not have foreseen: a pandemic that has sent sales skyrocketing for previously unglamorous hygiene products such as Reckitt’s Lysol and Dettol. 
The cleaning boom has made Reckitt’s hygiene business — once tipped for a spin-off under former chief executive Rakesh Kapoor — into the group’s star division, aided by a rapid internal response to record demand.
It has also become an unexpected social media sensation: a TikTok campaign, the #handwashchallenge, begun by Dettol’s Indian arm, has racked up 125bn views, the second most viewed campaign in TikTok’s history.
The hygiene mania has prompted sceptics to question whether the windfall may be camouflaging lingering issues that had prompted Mr Narasimhan to make his initial unforgiving assessment.
Masked challenges
Martin Deboo, analyst at Jefferies, highlighted the over-the-counter medicines business, which was long the engine of growth at Reckitt, following its acquisition of Boots’ non-prescription drug business in 2005. Reckitt made Gaviscon and Mucinex, among others, into global brands.
Mr Deboo said the business was now the company’s “exposed flank, with sales down 10 per cent at the third quarter”.
“With the rising tide of hygiene lifting all boats, no one is really taking any notice,” he warned.
Iain Simpson, analyst at Barclays, said sales had been affected by the limited spread of colds and flu during the pandemic.
But he added that “innovation in RB’s [over-the-counter] business has also lagged in recent years” and improving it was “a key area of focus” for management.
Reckitt said it was already ramping up new product launches in over-the-counter medicines, including new lines in the Gaviscon, Mucinex and Nurofen ranges.
Chinese baby formula is another problem for the company. In February, Reckitt took a £5bn writedown on its 2017 acquisition of formula maker Mead Johnson.
While brands, such as Enfamil, are faring well in some markets, the group has faced challenges in China.
“This needs either an operational or strategic solution,” such as a sale or joint venture,” said Mr Simpson.
Fresh start
The arrival of Mr Narasimhan, a former PepsiCo executive, marked a new chapter for a company that had been grappling with manufacturing problems that had — in extreme cases — led to failures to fulfil client orders.
Reckitt’s financial figures had not met expectations for much of the preceding three years, while it had battled a scandal over deadly humidifier disinfectant in South Korea, a failed product launch, a cyber attack and a $1.4bn settlement with US regulators over a former subsidiary’s marketing of an addiction drug.
It was a troubled end to the reign of Mr Kapoor, who was among the best-paid chief executives in the FTSE 100 and whose hard-driving culture had helped make Reckitt’s margins the sector’s highest.
Calling the company “a good house in a great neighbourhood”, Mr Narasimhan scrapped plans to divide the health and hygiene divisions, and pledged to spend £2bn to boost growth.
According to one person close to the company, he has won over executives by placing less emphasis on short-term targets and more on long-term aims.
They have also welcomed changes to the executive pay structure — basing bonuses on net revenue and return on capital employed as well as earnings per share — although these date from shareholder protests over pay before Mr Narasimhan’s arrival.
In the context of the earlier problems, the agility of Reckitt’s response to dramatic shifts in demand resulting from Covid-19 surprised the market.
Marcus Morris-Eyton, a portfolio manager at Allianz Global Investors, which holds a stake in Reckitt Benckiser, said: “The growth profile has undoubtedly been impressive, albeit with a supportive backdrop.”
Mr Morris-Eyton said he would be keeping an eye on the relationship between rising sales and operating profit.
Customers have also acknowledged a change under Mr Narasimhan. “Customer service and execution has been much improved under Laxman,” said Stefano Pessina, chief executive of Walgreens Boots Alliance.
The chief executive uses a language of “purpose” previously more associated with rival Unilever, and emphasises the company’s role in public health. Reckitt has given away £40m in response to Covid-19.
Mr Narasimhan has pushed up research and development spending by 20 per cent this year and plans another 15 per cent increase in 2021.
He has also sought to simplify a complex network of products — although has halted an attempt to sell brands including Scholl footcare, Veet hair removal products and Clearasil acne cream. 
Crowded market
Much now depends on how Mr Narasimhan deploys the windfall from this year’s hygiene boom, and on the success of new strategies, such as partnerships with businesses to offer services under the Dettol and Lysol brands.
In a sector where organic revenue growth is a key metric, Reckitt’s 13.3 per cent in the third quarter far exceeded Unilever’s 4.4 per cent and 9 per cent for Procter & Gamble.
The strong figures set a tough precedent for Reckitt to contend with next year.
After reaching three-year highs in July, the company’s share price has since shed more than 10 per cent of its value despite bumper third-quarter results released in October.
Mr Deboo warned that Reckitt’s position in the hygiene market may be vulnerable. “The laws of economics tell you that . . . high returns get competed away eventually. It hasn’t escaped anyone’s attention that antiseptics and hygiene solutions are a big growing area, which is going to get crowded.”
He pointed out that even assuming consumers worldwide buy as much Dettol next year, “that still means no sales growth after March 2021, in the context of the bulk of growth this year coming from hygiene”.
Mr Narasimhan maintained that the group took a longer-term view.
“There is demand in many places that we are not meeting, innovations we haven’t brought to market yet . . . we are investing for growth in the long term, and as we have seen, culture change is taking hold inside the company,” he said.