Reckitt Benckiser Cleans Up

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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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Scott is a reporter in BusinessWeek's London bureau .