Reckitt Benckiser Cleans Up

Profits are high and the household cleaners giant is no longer content to rest in P&G's shadow. A move into health care products could boost sales even more

by Mark Scott

• View Slide Show

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.