P&L Check

US supply failure overshadows Henkel's strong year

Resurgent detergent. Source: Henkel

Many a soccer mom and self-conscious teenager were left cursing the German consumer product group Henkel earlier this year. A logistics meltdown brought its North American supply chain to a grinding halt: Supplies of washing detergents Purex and Persil, as well as beauty products such as the Schwarzkopf hair care range, dried up in US and Canadian stores. Groveling apologies and promises of a turnaround quickly followed, but the incident has left its mark nonetheless.

The delivery hiccup matters for a simple reason: North America has become an increasingly important part of the multi-billion dollar, family-run global concern. Seven years ago, the region generated 17 percent of Henkel’s worldwide revenue; last year that figure hit 26 percent, or more than €5 billion. That’s close to the share in its traditional core market, Western Europe.

There’s another reason it matters: The US logistics challenges have once again shined a spotlight on the wrong part of the company. Although Henkel is best known for consumer brands and beauty products, its major strength lies in the unglamorous world of industrial adhesives. You could say they hold the group together.

The supply snafu has led to a broader question: Should Henkel really put all its money in the United States?

Beauty care may be glamorous, but it’s actually the smallest of the company’s three divisions, with global sales of just €3.9 billion last year. It’s also Henkel’s worst performer: At 13.8 percent, profit margins are well below the group’s Adhesives and Laundry & Home Care divisions. Nor does it help that beauty care is extremely competitive with Procter&Gamble, Unilever and L’Oréal offering Head&Shoulders, Dove, Lancôme and other products.

By contrast Henkel is a leading supplier of adhesives, which includes products like Loctite, Pritt and Technomelt. It’s sold to consumers and industrial customers in areas like packaging, automotive manufacture, construction, power generation and electronics. Being a dominant player in the sector had helped it generate sales of more than €9 billion and a profit margin of 18.5 percent in 2017 – both the best marks in the group.

The adhesives division has made CEO Hans van Bylen look good. Overall, his first two years in office have been marked by record results and successful acquisitions. Sales passed the €20 billion mark for the first time in 2017. That helped him deliver a 10.5-percent dividend boost, maintaining the company’s consistent track record of increasing payouts to shareholders.

Investors haven’t taken the bait – the company’s stock price has fallen more than 10 percent since reaching a record high in mid-2017. Henkel’s lack of focus may be a reason for that, but don’t expect Mr. van Bylen to sell off the beauty care division. The Henkel family, which owns 61 percent of voting shares, strongly supports the group’s current composition.

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Like the attention to beauty care, there are grumblings about Henkel’s regional strategy. In recent years, Henkel has fought hard to expand its North American market share. Last year it became the number 2 in the world’s largest detergent market, helped by the acquisition of US detergent maker Sun Products back in 2016. It also launched Persil, its signature brand, in the American market, rapidly achieving an impressive 3 percent market share.

Supply chain crises come and go – Mr. van Bylen has promised things will return to normal within the second quarter – but the snafu has led to a broader question: Should Henkel really put all its money in the United States?

If Henkel really wants to keep growing long-term, a better target might be emerging markets. The region – ranging from Eastern Europe, Africa, the Middle East, Latin America to Asia (excluding Japan) – provides about 40 percent of the company’s revenue but has struggled to expand. A one-time goal of generating €10 billion in revenue from emerging markets by 2016 has been consistently missed, with sales of just over €8 billion last year.

As with beauty care, the United States generates the headlines. But the moral of the story is Henkel should focus less on glitz and glamor. Its strengths lie in the boring stuff.

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Georg Weishaupt covers the luxury and fashion industry for Handelsblatt. Christoph Schlautmann covers the logistics and waste management sectors for Handelsblatt. To contact the authors: weishaupt@handelsblatt.com, schlautmann@handelsblatt.com


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