As a fast-moving consumer goods company, Henkel is experienced in adapting to rapid changes in the global and digital world. Every few years, the company sets new strategic priorities. Colin Castle speaks to Carsten Knobel, CFO, about the extent to which the brand-owner fulfilled the goals it set in its ‘Strategy 2016’ from an efficiency, sustainability and growth perspective.
Standing in front of the company's shareholders in April, outgoing Henkel CEO Kasper Rorsted gave a mixed outlook for the company's mid-term financial targets: due to the state of emerging market economies and weakening currencies, the company would probably not meet its goal of €20 billion worth of sales - one of three financial targets set in 2012 for the 2013-2016 strategy cycle. At the same time, Rorsted reconfirmed the company's commitment to achieve the key target of 10% EPS growth for the same period. Rorsted has since handed over his responsibilities to Hans Van Bylen.
For Rorsted, who came into the company as a rare outsider in 2008 and has since left for Adidas, it was the end to an otherwise stellar run as the head of one of Europe's most prominent consumer goods multinationals.
This situation is hardly unique to Henkel. Big companies, from Procter & Gamble to Unilever, face significant challenges that make them seem simultaneously old fashioned and more essential than ever. It isn't easy to maintain relationships with core customers, build developing markets and safeguard developed ones, manage complex corporate dynamics and forge a successful sustainability policy all at the same time. Carsten Knobel, CFO at Henkel, says there's a firm framework for the future. While the 2012 plan focused on the EPS growth objective, it also laid out a strategy for long-term growth resting on four central pillars.
"The first of these pillars is to outperform," Knobel says. "We want to ensure that we are more successful than our competitors by leveraging our top brands, by the strength of our innovation, by our customer relations and by digitalisation."
Big brands are a top priority for companies like Henkel. Names such as Schwarzkopf, Dial, Loctite and Persil, among six others, made up 61% of total sales in 2015 - an increase of four percentage points in two years. With such a sizeable chunk of business resting on the success of these products, it is essential to keep things fresh and ahead of the curve. "Innovation and investment in brand equity is of the upmost importance to us," says Knobel.
This is where R&D becomes essential, particularly in emerging markets. Henkel has significantly expanded its operations in the past few years with new innovation centres in countries as diverse and geographically distant as South Africa, India, the UAE and South Korea.
"Proximity to consumers is really important. For example, we have a haircare research centre in Johannesburg, South Africa," Knobel says. "African hair, from a structural point of view, is completely different from Caucasian or Asian hair.
To get really relevant products to our customers, we think it's necessary to get that proximity and that awareness. It's about having global brands, but being able to adapt them to local needs."
This focus also means keeping the portfolio competitive. "Since 2008, we have significantly streamlined our portfolio," says Knobel. "We started with around 1,000 brands and, today, we're operating across the three divisions with fewer than 300 brands. This means stronger focus and support and higher efficiency."
The second pillar of the strategy is taking Henkel global through organic expansion into existing and new markets and through mergers and acquisitions. For any large-scale consumer-goods company, acquisitions are essential. An expanding portfolio of well-known brands keeps things fresh and opens new corridors for growth. While it is hard for Knobel to give specifics about where the company will go next, the past few years have been busy: Henkel acquired leading Australian and New Zealand laundry brands, a range of US professional haircare companies and US-based Berqquist Company, a leading provider of thermal management solutions.
"Firstly, we see M&A as an integral part of our strategy," says Knobel. "We have clearly defined the selection of criteria for acquisitions; they have to be a strategic fit into our laundry, homecare, beauty care or adhesive technologies. The second criterion is feasibility: we are not in favour of unfriendly takeovers, so we need to have a discussion with the current owner to get that deal executed. The third, which is more related to the CFO, is financial attractiveness."
A potential partner for the company needs to be worth the money. Henkel spent over €2 billion on takeovers in 2014 and 2015. Knobel calculates that these acquisitions will boost the company's turnover by about €800 million.
The third pillar of Henkel's strategy is simplification. The company wants to streamline its corporate structure by focusing on IT and digitalisation as well as more efficiency. Companies such as Henkel face challenges when trying to remain competitive and keep processes running smoothly. With significant acquisitions every year, as well as a portfolio of major brands that need to be better than the competition, it is easy for many companies to get caught up in rapid growth and forget to keep their houses in order.
"We see digitalisation as one of the key drivers for future successes, and that's why we've focused on making further progress in integrating that into all dimensions of our businesses," says Knobel. "We are improving our networking and collaboration platforms."
In the past, Henkel worked with more than 30 enterprise resource planning (ERP) systems. It plans to bring them under one roof in the coming years. Its work, which started almost three years ago, has been a task riddled with risks due to the potential disruptions to business. It is not something being tried for the first time, however. Henkel's Asian business, which ran 21 different systems, consolidated it into one system within two years without affecting the running of the company.
"For us, that's an excellent example that we can roll out to the rest of the world, to Europe, to the Americas, to the Middle East," Knobel says. "That's the way we see ourselves putting the IT focus into the set up. It's about creating a scalable business platform that means we can grow our company without growing costs."
With rapid expansion, it's easy to neglect the environmental impact of operations, especially when pushing into new markets. Sustainability has long been a foundational aspect of Henkel's development and, by 2030, the company hopes to have tripled efficiency in all of its processes and production compared with the 2010 figures. It is about balancing economic success, environmental protection and social responsibility.
"It's not about offering a 'green' product. We need to have a long-term strategy that contributes to the sustainable and successful development of the company, giving us a competitive advantage," says Knobel.
Henkel takes a holistic approach by implementing sustainability practices along the entire value chain. As CFO, much of Knobel's role has been to develop a fundamental realignment in purchasing and production logistics. This is linked to the simplification and automation aspect of the company's growth strategy as greater efficiency makes for more environmentally friendly processes.
As part of an initiative called 'Together for Sustainability', Henkel works with other companies to evaluate and assess suppliers, simplify complex global supplier management processes, and transfer knowledge and training. Henkel's sustainability ambassador programme trains employees to become spokespeople for the environment to educate younger generations. For example, employees visit schools to spread the message.
Knobel, who is one of the ambassadors, says: "I was out last year in two schools where we trained the students in water and waste management. We made that an important part of our strategy, not just looking at financials or KPIs, but also doing something for the company and making sustainability a core value."
A people-oriented approach is an integral part of Henkel's fourth pillar of growth. The company aims to build and develop a committed, hardworking team and highly inspired team. Henkel aims to continuously improve its leadership team and foster a unique performance culture. As part of the plan of action to ensure this, Henkel has emphasised diversity in the workplace. It now has women employed in more than 30% of the company's managerial roles.
Last year was exceptional for Henkel despite the tough economic environment. The company achieved €18 billion in turnover and has reached operating margins of 16.2%. The likelihood is that the company won't reach its 2016 sales target - a shortfall driven as much by troubled international markets as by weakening emerging market currencies - but Henkel looks set to continue its sustained growth.
Evidently, the company's bold approach of balancing international development with innovation and sustainability is effective.