Bayer Consumer Chief Identifies 'Root Causes' Of Slump, Initiates Growth 'Fix'
Executive Summary
Bayer's Consumer Health chief Heiko Schipper hopes a focus on innovation and a leaner portfolio will help return business to mid-single-digit growth by 2022. German firm has identified North American business as the "key area to fix."
“We know where the issues are and we have plans to fix them,” insists Bayer AG's Consumer Health head Heiko Schipper, who is responsible for implementing a wide-ranging turnaround program to return the troubled business to growth.
Speaking in London at the firm’s recent capital markets day, Schipper – who took the helm at Consumer Health in March – admitted that the performance of the business in recent years had been “disappointing.”
Consumer Health’s sales growth had “really slowed down” from a high of 6.1% in 2015, Schipper admitted, with turnover last year declining by 1.7%.
With sales falling, and costs increasing, margins had “eroded significantly” over the past two years, he pointed out, from a high 24% in 2015 to 21% in 2017.
“With my management team, we’ve spent a lot of time to understand what the root causes are behind this performance,” Schipper revealed, “and, more importantly, what we are going to do to fix them.”
Bayer is targeting annual sales growth of around 3%-4% by 2022 driven by portfolio changes, a new sales and marketing approach and a focus on innovation. At the same time, the German firm will look to lift the earnings before interest, tax, depreciation and amortization (EBITDA) margin to 24%, by creating a leaner organization and optimizing costs of goods sold. These changes, along with group-wide adjustments to the corporate platform, are expected to generate savings at Consumer Health of around €500m ($567m) by 2022.
Key Problems Identified
To effectively turnaround Consumer Health and enable it to reach its “full potential,” Schipper said he had to address four “key issues”:
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low level of innovation;
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outdated sales and marketing approach;
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regulatory difficulties in China;
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temporary supply interruptions.
“The level of innovation that came to market in the last couple of years has been disappointing,” Schipper admitted, pointing out that new product development was a “key driver of growth” in the consumer healthcare industry.
On Bayer’s sales and marketing approach, Schipper claimed that the firm had “missed opportunities” by not effectively utilising “new digital technologies” leading it to fall behind some of its peers.
Turning to the issues in China, Schipper said Bayer had suffered a “very significant” setback when the country’s medicines regulator unexpectedly reverse-switched to prescription-only status the firm's Kang Wang and Pi Kang Wang products. (Also see "Chinese switch hurts Bayer" - HBW Insight, 23 Mar, 2018.) More recently, a change to regulations related to manufacturing forced Bayer to temporarily stop supplying Claritin in China, he revealed.
Additionaly, recent supply interruptions, particularly at its plant in Leverkusen, Germany, had “significantly impacted” Bayer’s ability to meet demand, Schipper said. (Also see "Bayer’s “challenging year” persisting" - HBW Insight, 21 Sep, 2018.) “To give you a feeling of magnitude, some of the supply-related issues kind of took out about 150 to 200 basis points out of the top line in the past two years.”
Bayer Assembles Experienced Team
Schipper says he has put together a leadership team at Bayer Consumer Health that has a “proven track record” at a wide range of OTC and consumer-packed goods (CGP) companies.
Patrick Lockwood-Taylor recently joined Bayer from P&G to lead Consumer Health in North America. Stefan Meyer heads up the business in EMEA; Lance Yuen in APAC; and Arturo Sachez in LATAM.
Sharon James now leads Consumer Health’s global Innovation and Development organisation, after joining in October from Reckitt Benckiser, where she was head of global R&D.
John Koelink has come to Bayer from Organon to take charge of product supply, while Patricia Corsi will join the firm in January from Unilever to lead the firms strategic marketing and digital efforts.
To address these key issues and other problems facing the business, Bayer had put together a “very comprehensive turnaround plan,” Schipper said, comprising three key building blocks”:
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focusing on a winning portfolio;
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Accelerating growth-focused innovation;
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modernizing sales and marketing.
Firstly, Bayer had taken a step back to decide what categories and brands in the Consumer Health portfolio it wanted to focus on, Schipper explained. “We took time over the past month to reflect on what is the right portfolio for us to put our R&D, our marketing and our capex investments behind for the future. We looked at each category evaluating them for their growth potential and their margin potential, but of course also our ability to win in these categories.”
Through this process, Bayer had identified five “core OTC categories” to build its Consumer Health business around: Allergy, Cough & Cold; Nutritionals; Dermatology; Pain & Cardio; and Digestive Health.
“These are the five categories that we are going to accelerate,” Schipper said. “We have good positions here with many key brands,” he insisted, pointing to Claritin in Allergy; Elevit in Nutritonals; Bepanthen in Dermatology; Aleve in Pain; and MiraLAX in Digestive.
Consumer Divestments Planned
Consequently, Bayer had decided to divest those categories of brands it judged to be "non-core," he explained, namely Sun Care; Foot Care; and Rx Dermatology.
In July, Bayer entered into a deal to sell its Rx Dermatology operation – which generated sales of €280m in 2017 – to Leo Pharma AS. (Also see "Deal Watch: LEO Pharma Expands Market Reach Through Bayer Dermatology Deal" - Scrip, 31 Jul, 2018.)
The company also recently announced plans to explore options for its Coppertone sun-care line and Dr Scholl’s foot-care range. (Also see "Coppertone, Dr. Scholl’s On The Block As Bayer Narrows Consumer Health Focus" - HBW Insight, 29 Nov, 2018.)
“We feel that these businesses are in better hands with another owner,” Schipper said, “so that we can focus on some of the other categories where we are better placed; where we can bring science to the category and combine it with our marketing capabilities.”
With a “winning portfolio” identified, he said Bayer wanted to use innovation to “accelerate growth”.
First, the firm intended to strengthen its “core innovation," he said, by “constantly renewing” its brands to “keep them relevant."
Second, Bayer was looking to accelerate “adjacent innovation” – moving brands into adjacent spaces, Schipper said, giving the example of the recently launched Stillzeit line extension to its Elevit range in Germany, which had taken the brand into the breastfeeding space, as part of its goal to “own a mother’s journey.”
Driving new prescription-to-OTC switch opportunities is the final piece of Bayer’s innovation plan. “I still believe [switching] is very key in our category,” Schipper said, “and this is a space where Bayer must be strong. We’ve had tremendous success there in the past.”
Overall, Bayer wanted to double the contribution from innovation to Consumer Health’s total growth by 2022, he explained, up from 15% currently to around 30%.
Noting that the firm would keep its investments in R&D “pretty much stable” as a percentage of sales, Schipper said Bayer would trim investments in “structures and people” and look to “tap into more external innovation opportunities.”
Shake Up Brand Building
Supporting its innovation efforts, Bayer intends to modernize its brand building and sales capabilities.
“Building brands today looks very different from building brands 10 years ago,” Schipper noted. “The millennial consumer is much more interested to understand what is behind the brand, what is the purpose, what you are contributing to this planet.”
Brand building had become “a much wider exercise than just finding one point of difference and marketing this,” he claimed.
“So, we are going to refresh our brands and bring purpose much higher up the agenda,” Schipper said. “If you look at the efficacy of our brands and what we bring, this can be expressed in a much more comprehensive way than we do today.”
"Thanks to all the data that we have available on our target consumers, we can target much more precisely every individual we market to." - Heiko Schipper, Bayer Consumer chief
Further, Bayer needed to change its marketing approach to become much more focused on the individual, he insisted. “Thanks to all the data that we have available on our target consumers, we can target much more precisely every individual we market to. If we think of the target groups that are fairly narrow in our category – because not everyone has allergies for example – to fully make use of that is a tremendous upside for us.”
With a reinvigorated sales and marketing approach and a more focused portfolio selected, Bayer had put together a “clear roadmap for success” for each of its geographical regions, Schipper noted.
North America Is 'Key Area'
North America was “the key area to fix,” he admitted. It is Consumer Health’s biggest market – with sales of €2.5bn ($2.9bn) in 2017 – but its worst performer, recording a compound annual growth rate over the past two years of -2%. (Also see "Bayer ‘All Hands On Deck’ For US Consumer Business Turnaround" - Pink Sheet, 8 Aug, 2017.)
Offloading Coppertone and Dr Scholl’s – “primarily” North American brands – would allow Bayer to have a “much greater focus” on its key brands in the region, such as Claritin, One-A-Day and Aleve. “These are very, very strong brands, but maybe we’ve not given them the right attention in the past,” Schipper noted, “as too many resources were allocated to other brands.”
Bayer intended to “rebuild” its innovation pipeline in North America behind these core brands, as its track record in this regard had “not been where it should be in the last couple of years,” he admitted. The firm also hoped to expand its Consumer Health offering in the market with a “clear set of priorities” for pursuing prescription-to-OTC switches.
While the company had been “pretty good” at developing its e-commerce offering in North America, it still had a lot to do in terms of direct marketing and precision marketing, Schipper observed. Bayer wanted to “catch up” to those firms that were best-in-class in those areas.
Many changes were already underway in North America, Schipper revealed, with Bayer “right-sizing” the business by around 20% in the fourth quarter alone, resulting in a “leaner organization.”
Reverse-Switch Hit APAC
Away from North America, the other region which needed special attention, Schipper said, was Asia-Pacific, where sales fell by 2% to €738m ($847.1m) in 2017.
“We had very good momentum there but the unfortunate reverse-switch that we had last year in China significantly slowed us down. But we’re going to recover from that,” he insisted, “it’s a matter of time.”
Asia-Pacific was the market where Bayer had the “lowest share,” Schipper pointed out, “and this is the area where we have to build really the highest growth levels."
Bayer was “well-placed” to achieve this goal, Schipper said, with those brands not impacted by the reverse-switch growing at “double digits.”
“Nutritionals is a huge category in China and we have a very, very attractive position there in some of the parts of that market,” he noted. “More specifically, our nutritional brand Elevit is the leader in the pregnant and lactating women space.”
Consumer Health’s other regions – Europe/Middle East/Africa and Latin America – had been performing well in recent years, Schipper pointed out. “EMEA is a stronghold for us, we are in the top-three in every single market," he noted, while Latin America was a region where Bayer was “extremely well placed." Bayer was confident that it could maintain this strong momentum in both regions, he said.
Growth Foundations In Place
Summing up Bayer’s Consumer Health turnaround plan, Schipper explained that 2018 had been about “setting the foundation” for future growth, by putting in place a new leadership team, making “portfolio choices” and initiating “stricter” cost control.
In 2019 and 2020, Bayer would “execute” its portfolio choices, work to right-size the cost base and recover product supply, as well as regain momentum in its Asia-Pacific and EMEA regions.
With these changes in place, 2021-2022 would be Consumer Health’s “acceleration phase," Schipper said, with Bayer driving a “higher innovation level,” accelerating its US growth momentum and “capitalizing” on its portfolio choices.
Commenting on the Consumer Health turnaround plan, Werner Baumann, Bayer’s chief executive officer, said the firm was “very well positioned to deliver significant value creation over the next years to come.”
“The fundamentals and the quality of our business are really, really strong,” Baumann insisted. “We have a highly concentrated portfolio of big, mega-selling brands, we are in the right markets, and we are doing the right things in terms of bringing value to customers, consumers and patients.”
From the editors of HBW Insight.