EUR 850.00 For Business Accounts Only

Morningstar | RB Building a Business to Face the Conditions of the 21st Century, but Fat Tail Risk is Growing

We think RB's recent portfolio restructuring will position the company for above-industry growth in the long term. The acquisition of Mead Johnson may not be rich in cost synergies, but it gives RB exposure to another consumer health business with pricing power and wide margins. Price/mix has deteriorated in several food, household, and personal-care categories in recent years, amid greater competition from the hard discounters’ private-label lines and lower barriers to entry in the e-commerce channel. However, consumer health and near-food categories such as infant formula are among the product categories that we believe retain pricing power, and RB’s focus on consumer health and its entry into formula are likely to ensure price/mix remains a growth driver for several years to come.We regard the restructuring of the business under RB 2.0 as a likely precursor to further transformative portfolio changes. RB now operates under two business units: RB Health, which incorporates the former Mead Johnson business as well as the legacy health portfolio, and RB Hygiene Home, which will comprise everything else (RB's food assets were sold to McCormick for $4.32 billion last July). We think the restructuring is an indication that Kapoor's long-term vision for RB lies in the consumer health business.After a decade of fairly steady profitability gains, we think RB’s margin expansion may slow going forward. Project Supercharge, which was intended to deliver GBP 100 million-GBP 150 million in annual cost savings, expired in 2017. In addition, RB's overall margin premium seems to be derived from its lower spending on brand investments. In 2018, the firm spent 1.8% of its net sales on R&D and 2.7% of sales on capital expenditures, both at the low end of its peer group. After several operational mis-steps and the emergence of allegations of some unethical marketing practices in Australia and in Indivior, RB's former pharmaceutical unit, investors should be aware of the risk that RB has been underspending, and there will be limited upside to margins, particularly if RB is forced to increase its brand equity spending in the face of increasing competition.