Dusseldorf Even when Carsten Knobel became the new CEO of Henkel at the beginning of 2020, there were doubters. Market observers said financiers in the consumer goods industry rarely managed to be successful as bosses. Before his promotion, Knobel had been CFO of the Düsseldorf-based consumer goods manufacturer for seven and a half years.
In fact, after the 53-year-old took office, many key figures continued to fall. The share price is 20 percent lower today, while the prices of competitors such as Procter & Gamble (Ariel) or L’Oréal have risen by 30 percent during this period. Even during the tenure of Knobel’s predecessor, Hans Van Bylen, who was CEO of Henkel from May 2016 to December 2019, the shares fell by ten percent.
Knobel had to admit problems before presenting the annual figures this Wednesday: In preliminary figures, Henkel assumes sales of a good 20 billion euros for 2021 and thus remains below the pre-crisis level. EBIT has been falling for years. Even the earnings forecast for 2022 is below market expectations.
Henkel did not need any state aid during the corona crisis, did not send any employees on short-time work and has well-stocked coffers. But the Düsseldorf-based company has structural problems, Henkel is “not where we want to be,” Knobel admits in a call. The manager had a difficult time to start shortly before the outbreak of the pandemic in Germany. But he has been controlling the fortunes of the group as a member of the board for a long time.
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The Handelsblatt analyzes the three major problems facing the consumer goods group, for which the CEO has not yet been able to come up with any clear solutions.
Problem 1: Troubled cosmetics division
For years, the problem child at Henkel has been the cosmetics division with brands such as Fa, Schauma and Schwarzkopf, which was unable to grow on its own between 2018 and 2020. Detergents and cleaning agents such as Persil and Pril as well as adhesives for industry and consumers (Pritt) have to compensate for the weaknesses in the cosmetics division.
Because the profitability of the division has fallen sharply. Henkel Cosmetics generated an EBIT margin of a good 17 percent in 2017, compared to just 9.1 percent in the first half of 2021. Competitors such as Beiersdorf or Unilever are still in the double digits here. An explanation: Unlike the competition, Henkel primarily offers mass-produced goods. However, significantly higher margins can be achieved with luxury products or high-quality skin creams.
Body care products in particular have little growth potential. Henkel increased its marketing expenses, but this was not reflected in rising revenues. “Competitors such as Beiersdorf or L’Oréal are better received by customers with their Nivea brands or in the luxury segment with La Prairie,” says Martina Becker, consumer goods and retail expert at the Atreus consultancy.
For one company observer, Henkel’s cosmetics business is “too big to die but too small to grow.” Means: Knobel should strengthen the division through acquisitions – or sell it completely. But the owner family, which owns more than 60 percent of the shares, “apparently finds it difficult for traditional reasons to completely exit the cosmetics business,” says Jella Benner-Heinacher, who monitors Henkel for the German Protection Association for Securities Ownership (DSW).
The Henkel boss is reorganizing the company.
(Photo: Henkel)
Knobel’s only option is to sell individual product groups in order to increase profitability. By 2021 he had sold or discontinued low-growth brands with a sales volume of around 500 million euros, and in the coming months he wants to part with other brands worth a good 180 million euros.
In order to expand and upgrade the area, a substantial acquisition would be necessary. But Knobel has not yet succeeded in doing so, despite good cash flows. In 2020, the Henkel boss withdrew from the bidding race for the well-known hair care brand Wella from the American group Coty.
Problem 2: Unclear corporate restructuring
Knobel wants to restructure the group. He merged the ailing cosmetics division with the more successful detergents and cleaning agents division. The consumer business will operate under the name “Consumer Brands” from 2023.
But some observers consider Knobel’s approach to be a rush job. The manager did not present his restructuring plans at a capital market day, but during a press conference scheduled at short notice, in which he initially warned of lower margins due to rising raw material costs. Even middle management is said to have been surprised by the approach.
>> Read also: Persil manufacturer Henkel restructures and lays off employees
So Knobel initially owed more details and wants to provide them in the coming weeks. Then it will also be clear how many employees Henkel will part with. Knobel sees synergies in the areas of administration, sales and marketing. He hopes to be able to make faster decisions in a joint unit.
Company observers are skeptical. The merger is a defensive measure with advantages on the cost side, says analyst David Varga. For the expert from Bankhaus Metzler, such a conversion does not lead directly to increased sales. “Henkel is not in attack mode, the plan does not look like the big liberation.”
After the conversion, Henkel would stand on two pillars of roughly the same size. The new, combined consumer business accounts for 55 percent of sales in the 2020 figures. The adhesives division, which will benefit from the upturn in the economy and the increasing demand for adhesives, especially from e-car manufacturers, brought in only 45 percent of sales in 2020. However, it has significantly higher margins and generated 57 percent of earnings before interest and taxes (EBIT).
Analysts see the new division as an opportunity for a split into an adhesives and a consumer goods company and expect prices to rise as a result. But Knobel has so far rejected these plans: “Clearly: no”.
Problem 3: Weak North American business
North America is one of the most important sales markets for consumer goods – and Henkel has still not been able to recover from its problems here. The 3.2 billion euro purchase of the US detergent manufacturer The Sun in 2016 did not bring the hoped-for growth. In 2017, there were months of delivery difficulties that cost market shares.
EBIT has been falling in North America for years, and in 2020 Henkel made a loss of 88 million euros there. And in the first nine months of last year, the organic sales decline in North America was 2.6 percent. Knobel admitted that the “targeted turnaround has not yet succeeded”, although he had installed a new management team in North America in autumn 2020.
DSW expert Benner-Heinacher says: “In the USA, there is strong competition from large and price-aggressive players such as Procter & Gamble.” In times of rising raw material prices, Henkel finds it difficult to grow there.
While Henkel revenues are shrinking in North America, they are stagnating in Europe because the market is saturated. The presence in the growth market of Asia can also be expanded despite recent acquisitions. Most recently, the group has strengthened itself with the Asia-Pacific hairdressing business of the cosmetics supplier Shiseido.
“Henkel’s business is doing better in markets such as the Middle East, North Africa and Latin America,” says analyst Varga. There, however, there are exchange rate problems that would reduce profits again.
Knobel cannot influence exchange rates. But in order not to steer the group into a deeper crisis, he must first solve his own problems.
More: Undervalued and low-risk: Why investing in Henkel shares could now be worthwhile