Is Dial a Good Call for Henkel?

November 14, 2005

Henkel's acquisition of Dial is the biggest news in the laundry detergent segment.

Is Dial the right call for Henkel? After losing out to Procter & Gamble in its bid for Wella last year, the German consumer products giant made a bold move last month with its $2.9 billion all-cash deal for Dial, the Scottsdale, AZ-based maker of Purex laundry detergent, Dial soap and Armour canned meats. The acquisition, which is expected to be completed in April, was the most prominent event to shake up the U.S. laundry detergent market in 2003.

Otherwise, major trends within the U.S. laundry detergent market remained relatively unchanged from previous years. Consumers continue to forsake powders for the convenience of liquids. Procter & Gamble continues to dominate the U.S. laundry detergent scene and price pressures continue to put the squeeze on innovation. “Not too much is going on in terms of formulation trends,” noted Andrew Shore, an analyst with Deutsche Bank, New York, NY. “There haven’t been any major initiatives by the national brands because they have maintained their shares by cutting prices to beat out private label brands.”

Henkel-Dial: A Good Fit?
Some analysts were cautious about Henkel’s purchase of Dial, noting that at $28.75 per Dial share, it seemed expensive and offered little in the way of potential savings to the firm, which makes Persil washing powder in Europe.

“It’s not ideal,” Citigroup Smith Barney analyst Andy Smith told Reuters. “The price to us looks relatively high and there seem to be relatively few synergies both from an operating point of view and for cross-selling (each others products).”

Other observers took a different view. Industry consultant and Happi columnist Colin Hession said the move makes good sense for Henkel, especially in regard to personal care.

“They lead the European personal wash category, but have been struggling in the U.S. for lack of critical mass,” he said. “O.K., so bar soap has relatively low margins, but bodywashes are better, and Fa needs the sort of shelf presence that the Dial sales force can give. Similarly, for Henkel to really do a number in hair care and colorants especially, they’ll need all the sales clout Dial can bring them.”

Mr. Hession did issue one caveat: “Henkel should learn the lesson of Dep and pile in some of its most experienced German management from the start.”

But whether you love the deal or hate it, the sale of Dial shouldn’t surprise anyone. In fact, company leaders have been talking about a potential sale for years.

“The announcement is the culmination of a strategy put in place three years ago to serve the long-term interests of the company and its shareholders by making Dial part of a larger, global enterprise,” said Herb Baum, Dial’s chief executive officer. “Henkel will be an outstanding partner and will bring additional scale, resources and technology to continue to grow Dial’s presence in new and existing markets. “This is clearly a win/win transaction for both companies.”

It was agreed that Herb Baum will continue in his role as CEO of Dial for the next two years. Along with Mr. Baum, top-level management is expected to stay on board. Dial’s headquarters will remain in the current Scottsdale location. The transaction is subject to the approval of the shareholders of Dial and the receipt of customary regulatory approvals. Once all that goes through, the deal is expected to be completed by April.

If approved by regulators, Purex, as well as all the other Dial brands, will be part of the Henkel family of products by April.

Dial’s Purex is well-positioned in the $3.6 billion U.S. laundry detergent segment. Purex liquid is the No. 2 brand, behind Tide, in the $2.6 billion liquid laundry detergent category and the No. 7 brand, following Tide and Gain, in the $980 million powder category, according to Information Resources, Inc. The Chicago-based research firm estimates sales of powders, liquids and tablets fell 2.8% for the year ended Nov. 2, 2003. But those totals don’t include Wal-Mart, which can account for a large portion of a marketer’s sales. In fact, Dial freely admits that Wal-Mart represents nearly 30% of its sales.

“Dial is clearly a Wal-Mart growth story,” observed Mr. Shore. “It’s got a great price point and has stolen a lot of share at the value end of the detergent category from Colgate and Unilever.”

The Changing Retail Landscape
With price pressures mounting, marketers are more than willing to cut prices to keep private label shares down. According to Mr. Shore, Unilever has boosted its operating margin in the U.S. from 6% to 12%, but those margin gains have come despite smaller volumes.

“In the absence of game-changing innovation, price and differentiating benefits, such as fragrance, have become the biggest drivers in the category,” agreed Helayna Minsk, marketing director, Unilever. “Value brands have seen the greatest growth in laundry, and even premium-priced brands have had to offer more frequent, and deeper, deals to stay competitive.”

Ms. Minsk insisted that consumers know the difference between a good price and a good value, and if consumers buy an inexpensive product and don’t get the performance they’re looking for when they get home, they’re unlikely to buy that product again.

What in the World? Global Laundry Detergent Sales, 2002-2007
Here are estimated global retail sales (in millions of U.S. dollars) within the various product categories that make up the laundry detergent segment.
  2002 2003 2004 2005 2006 2007
Laundry detergents 30,054.3 30,380.1 30,926.4 31,670.3 32,398.0 33,128.6
Automatic 24,472.0 24,706.3 25,145.1 25,774.5 26,386.5 26,996.7
   Powder 17,080.9 17,034.7 17,167.1 17,427.9 17,715.0 18,029.1
      Standard 12,207.7 12,375.8 12,630.3 12,942.8 13,251.4 13,580.6
      Concentrated 4,873.2 4,658.8 4,536.8 4,485.1 4,463.6 4,448.5
   Tablets 1,517.4 1,660.5 1,776.0 1,874.2 1,955.9 2,019.0
      Compact Powder 1,315.3 1,372.4 1,416.6 1,462.0 1,504.6 1,545.3
      Liquid 202.1 288.1 359.4 412.2 451.3 473.7
   Liquid 5,873.7 6,011.1 6,202.0 6,472.4 6,715.6 6,948.7
      Standard 1,638.6 1,733.8 1,830.0 1,920.1 2,007.5 2,086.6
      Concentrated 4,235.1 4,277.3 4,372.0 4,552.3 4,708.1 4,862.1
Others 5,582.3 5,673.8 5,781.3 5,895.8 6,011.5 6,131.9
   Bar 2,185.1 2,184.7 2,200.2 2,217.0 2,238.1 2,265.9
   Hand wash 2,073.8 2,113.7 2,162.6 2,217.1 2,273.3 2,331.2
   Fine fabric 1,323.4 1,375.4 1,418.4 1,461.7 1,500.1 1,534.8
Source: Euromonitor, 2003.

“The key to long-term brand health and loyalty is offering the consumer the right level of quality and performance at a price she thinks is fair or even better than she expected,” observed Ms. Minsk.

That’s the philosophy behind Unilever’s All brand, she maintained. “All offers excellent quality at a surprisingly good price, and we carry that philosophy through in the brand’s latest extensions: fragranced detergent variants, fabric conditioner and the new refresher sprays and refresher sheets. We’re seeing that positioning pay off in the strength of the brand’s share this year.”

For the year ended Nov. 2, sales of All rose 8.7%, compared to a 2.5% increase for the entire liquid laundry detergent category, according to IRI.

While its competitors try to solve the price-value equation, executives at OrangeGlo International, the maker of OxiClean detergent, say the focus there continues to be on innovation. The latest addition to the OxiClean franchise is OxiClean Active Stain Remover. Like other products in the OxiClean line, it contains hydrogen peroxide to get out tough stains and odors such as wine, blood, dirt, tomato, pet stains, grass stains and even set-in stains.

No Need to Spray and Pray
Following its debut four months ago, OxiClean Active Stain Remover has met every sales goal that Orange Glo set, explained brand manager Cathy Underwood, who noted that consumers like the convenient new spray form to pretreat their laundry and target stains.

“In consumer tests, we found a lot of people had a ‘spray-and-pray’ mentality when it came to treating stains. They would find a stain, spray it and hope it would come out,” she explained.

In contrast, OxiClean Active Stain Remover penetrates deeply into fibers to immediately deliver the cleaning power of oxygen to a stain.

“Consumers are looking for convenience and ease of use,” said Ms. Underwood. “Active Stain Remover was developed so they can use it quickly around the house. Convenience is the big trend as consumers’ lives get more hectic.

“We’re committed to innovation,” she added. “Consumers expect us to provide leadership in product improvement.”

That commitment to innovation is just one reason why Orange Glo and its OxiClean brand have become such a huge success story, observed Ken Wasik, director of the consumer group at Houlihan, Lokey, Howard & Zukin.

“Orange Glo is doing an amazing job with OxiClean,” noted Mr. Wasik. “When you go the direct marketing route there’s really no barrier to entry.”

When OxiClean debuted, it immediately attracted the attention of other players in the laundry category. Still, being first to market has its advantages.

“Orange Glo had first-mover advantage,” explained Mr. Wasik. “When other companies introduced me-too products, it just gave Orange Glo more credibility. Unless a competitor can out-invent Orange Glo, consumers will continue to buy products from the company.”

Quality Private Label Detergents
As true innovations from national brands slow to a trickle, private label manufacturers have closed the gap and now often meet the product performance of well-established brands at a lower price, according to industry experts. In fact, Ash Gandhi, vice president of research and development quality assurance, Manhattan Products, Inc., Carlstadt, NJ, insisted that private label brands often provide performance equal to or better than national brands. Many of the today’s private label products boast the same stain-fighting abilities as national brands.

Still, according to IRI, private labels held just 2.5% of liquid laundry detergent dollar sales for the year ended Nov. 2, 2003. For the same period, sales of private label powders held just 2.9% of dollar sales.

“In order to keep private label’s share of the market from growing, national brands will drop their prices,” observed Mr. Shore. “Lever, for example, has dropped the price of Wisk consistently.”

“National brands are under tremendous pressure, as they try to improve profitability,” agreed Mr. Gandhi. “It’s a mistake to think that store brands aren’t real brands. Big retailers such as Wal-Mart and Costco have developed their own brands that have become major brands in their own right.”

And more house brands may be on the way. Wal-Mart is expected to gain even more clout in the laundry detergent segment if it goes ahead with plans to launch another house detergent under the White Cloud banner. P&G discontinued the White Cloud brand more than a decade ago, but the name was snapped up by Paper Partners, Boca Raton, FL. After five years of litigation against P&G, Paper Partners retained the rights to White Cloud and agreed to make the brand a Wal-Mart private label brand.

“Wal-Mart has more than 4000 stores,” observed Mr. Gandhi. “When the company decides to promote its own brands at the expense of national brands, it has a profound impact on the market.”

If private label manages to make inroads into the laundry detergent segment, that would be good news for privately-held Huish Detergent, which dominates the private label laundry segment with a 90% share of the market. “Huish is doing a good job,” observed Mr. Shore. “They outbid Dial for Wal-Mart’s private label business.”

According to Mr. Shore, the Salt Lake City, UT-based detergent maker benefits from being one of the lowest-cost producers in the U.S. The company even has its own methyl ether sulfate plant to produce surfactants.

The View Outside the U.S.
P&G is the dominant player in the global laundry care market as well. In laundry care, Procter & Gamble and its leading brand Tide, along with its sister brand Ariel, face little competition on a global level, other than from Unilever’s Omo and Surf, noted Irina Barbalova, an analyst with Euromonitor, London.

“Cost rationalization initiatives, such as Unilever’s Path to Growth, Procter & Gamble’s Organization 2005 and Squeeze 2-50 and X-trim strategies by Reckitt Benckiser allowed the companies to rationalize their brand portfolio and streamline their respective businesses,” she observed. “As a result, core brands were afforded specifically tailored global marketing campaigns to maximize economies of scale and foster brand equity.”

Although P&G is the overall detergent leader, other marketers hold significant share in certain categories and geographic regions, according to Euromonitor. Unilever, for example, still remains the largest manufacturer of tablet detergents, holding 38% of world share in 2002. Its overall share in tablets increased over the previous year, underpinned by a particular strength of its Persil Capsules liquid tablets and Persil Aloe Vera solid tablets in Western Europe.

With 11% of the Western European laundry care segment, P&G’s Ariel retained its leadership position in 2002. The brand’s strong positioning was driven by the popularity of its color and non-bio compact powder tablets version, according to Euromonitor. However, Ariel’s share in liquid tablet detergents suffered due to increased competition from Unilever’s Persil brand. Moreover, P&G faces increased competition from Henkel, the third largest player in laundry care in Western Europe.

Henkel managed to increase its global share of laundry care thanks to strong sales of its Persil brand in both Western and Eastern Europe, and Dixan laundry detergent in Western Europe. Henkel’s leveraging into tablet detergents through Persil, Dixan and Le Chat brand extensions also had a positive impact on its sales of laundry care in 2002.

In 2002 Henkel benefited from Middle Eastern and African boycotts of products manufactured by U.S. companies, including Procter & Gamble, Henkel’s major rival in the region. While Procter & Gamble’s Ariel detergent share declined by three percentage points, Henkel’s Persil recorded an increase of two percentage points in 2002, according to Euromonitor. Still, Ms. Barbalova expects P&G’s acquisition of the heavy-duty detergents from Colgate-Palmolive in 2003 will increase P&G’s regional share of laundry detergents by approximately two percentage points to nearly 36% in value, with gains being even more prominent in France, Italy, Sweden and Denmark.

Looking for Growth? Your Search Should Start Here
With established markets in the U.S. and Western Europe reaching the saturation points, multinational laundry detergent manufacturers have established strong networks in emerging countries. According Irina Barbalova, an analyst with Euromonitor, the underlying trends in emerging markets are positive, with increased urbanization, improved purchasing power, more effective distribution and high investment of multinationals—all contributing to greater demand.

However, Ms. Barbalova conceded that developing economies provide a wide range of challenges. In large, under-developed countries such as India, Indonesia or some parts of rural China, manufacturers have the challenge of tempting consumers away from the unorganized market structure, where generic, cheap domestic products and ‘branded’ counterfeits provide cheap cleaning alternatives. Here’s a snapshot of what’s happening in some of the fastest growing regions, according to Euromonitor.

Eastern Europe has been one of the most dynamic regions in recent years, and is expected to provide the fastest expansion over the coming years. Poland, Slovakia, Hungary and the Czech Republic are among those countries due to join the EU in 2004. This will increase per capita expenditure and further develop the supply side of the economy. These countries are also likely to become closer to the countries of Western Europe in terms of lifestyle. Meanwhile, further east there are a number of fast-developing economies, including the Ukraine. Russia is now emerging from a period of economic collapse, and looks much better placed to develop successfully. With increased investment by multinationals and a large population it represents an important development market, although the weak distribution structure (with open-air markets playing a significant role) might prove a limiting factor.

Mexico, another substantial and fast developing market, represents an increasingly sophisticated market place, with supermarkets gaining share and the economy growing steadily. While price still remains an important factor, younger consumers are increasingly demanding a combination of efficacy and convenience, the same properties that are important to the Western consumer. With the Hispanic population of the U.S. also likely to increase as a market over the coming years, the potential for developing cross-border brands is also high.

China, already the second largest laundry detergent market, offers a massive and still largely untapped rural population and an increasingly sophisticated urban community who are starting to demand added-value products. Washing machine penetration is 94% in urban areas, but only around 25% in rural districts, which still limits opportunities for growth. The market has become increasingly competitive, with new products, such as liquid detergents and fine fabric detergents being introduced, and a great potential of developing branded handwashing detergents.

India remains the laundry care sector’s sleeping giant. The country is less far down its development cycle than China with increasingly sophisticated urban markets spurring growth as much as rural penetration growth. The lower income groups have been shifting towards branded goods, while the middle- and upper-income groups have been tempted by premium products.

In Eastern Europe, the acquisition of Russia’s largest detergent manufacturer, Pemos AO in 2000, left P&G with a 24% leading share of Russia’s $1.2 billion worth of laundry care sales in 2002. According to Euromonitor, P&G has also experienced solid growth with its core Persil laundry detergent in the region, as the gradual increase of purchasing power of Eastern Europeans underpinned greater demand for premium laundry products.

With P&G’s position as the overall laundry leader secure, other companies are finding room for growth in other segments and regions. Ms. Barbalova noted that Reckitt Benckiser’s high share of global laundry care stems from its niche positioning in the laundry aids segment rather than in laundry detergents. Nonetheless, the company is present in laundry detergents with its mid-economy range of brand Dosia in Eastern Europe and Asia Pacific, especially China. Although Dosia’s share suffered in 2002 in Eastern Europe, it achieved a solid share of sales in Asia Pacific in 2002, and is the company’s best-selling laundry detergent brand in the region.

The Detergent Industry Gathers in Boca
Want to hear what the movers and shakers in the detergent business have to say about the state of the industry? Then be sure to attend the Soap and Detergent Association’s annual meeting at the Boca Hotel Resort and Club, Jan. 27-30.

Fran Keeth, president and chief executive officer, Shell Chemical LP will be the keynote breakfast speaker on Jan. 29. Karen Hughes, former counselor to President George W. Bush, will be the keynote breakfast speaker on Friday morning, Jan. 30.

Prior to the general sessions, on Wednesday, Jan. 28, SDA senior staff will provide a thorough review of the top regulatory, scientific, legislative, communication and consumer issues facing the cleaning products industry at the annual issues briefing on Jan. 28.

In addition, the annual meeting will include golf and tennis tournaments and other social events. The meeting concludes with a dinner featuring a performance by rock legend Pat Benatar.

To register, visit SDA’s website at www.cleaning101.com or call (202) 202-662-2515.

“This is due to its presence in China, where Dosia was the seventh ranked laundry detergent product in 2002, having overtaken arch-rival Procter & Gamble’s Ariel brand,” observed Ms. Barbalova. “While Procter & Gamble’s Ariel and Tide brands target middle-income consumers living in urban areas in China, where consumers have higher disposable income, Reckitt targets middle to low-income urban households and the North and Northeast less developed regions, where the price is a decisive factor of purchase.”

Unilever’s the Leader in Latin America
In Latin America, Unilever is the leader in laundry care, although its share is under heavy pressure from P&G’s aggressive marketing of Ariel. Henkel and Colgate-Palmolive are two other major competitors in the region. Henkel’s acquisition of one of the major laundry detergent brands in Mexico, Viva, in 2001, consolidated the company’s 2% share in household care in Latin America. Henkel relaunched its Viva brand in mid-2002, expanding its product portfolio to include new smells and a powder detergent. The brand was heavily advertised on TV, with a cartoon fox mascot and is well-known in bar detergents and standard powders. Colgate dominates in fine fabric detergents with its traditional brand of Vel Rosita. The disposal of its Viva laundry business in Mexico in 2001 and its heavy laundry business in key markets of Western Europe in 2003 was the clear signal of the company de-emphasizing its heavy-duty laundry detergents business.

In Asia-Pacific, P&G faces strong competition from Unilever across all markets and from Kao and Lion in the Japanese market.

Taking a Global View of Regulations
Just as marketers are taking a global view of their business, they need to keep tabs of regulatory issues around the world too. The Soap and Detergent Association, Washington, D.C., does just that. According to SDA President Ernie Rosenberg, the biggest regulatory issue impacting the soap and detergent market for the next 5-10 years is the increasing scrutiny of chemicals by regulators and environmental groups.

High production volume (HPV) chemicals have garnered the attention of the U.S. Environmental Protection Agency (EPA) as well as regulators in the EU. Among the thousands of HPV chemicals on regulators’ lists, only about 400 are used by the soap and detergent industry. Luckily, the industry has a huge amount of data verifying the safety of these materials.

“We’re happy with the way things have gone so far,” insisted Mr. Rosenberg. “The (safety) of our products is well documented.”

Still, because the soap and detergent industry represents a large volume of products released into the environment, it will continue to be scrutinized by regulators around the world.

“The biodegradation of linear alkylbenzene sulfonate will always be under scrutiny because of the volume,” observed Mr. Rosenberg. “But when you look at the actual field data, you won’t find any problems.”

Yet there’s a persistent buzz regarding LAS as well as other ingredients such as triclosan. Why won’t these and other issues go away? Mr. Rosenberg noted that lab data that don’t show a problem often don’t get published.

“When there’s a buzz about chemicals, it may hinder innovation,” said Mr. Rosenberg. “Buzz can scare people from using a chemical in a new application or changing a formula.”

Never mind that innovative ideas, such as the use of enzymes, enabled the industry to create cleaning products that worked just as effectively as detergent products that contained phosphates. Although the laundry detergent industry is under pressure from regulators and low-cost private label brands, nearly everyone agrees that innovative ideas that enable consumers to get cleaner clothes easier than ever, will ultimately drive growth in the future.