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Snapshots of GlaxoSmithKline’s Consumer Healthcare Division and Horlicks’ Sales

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By: Hope Lee

The bribery case in China and disappointing second-quarter results have put GlaxoSmithKline (GSK) in the headlines again. The pharmaceutical giant was initially reported to be looking to spin off its Consumer Healthcare division and make it a stand-alone company – but GSK quickly denied any such plans. Simon Steel, GSK’s spokesman, later stated that GSK would not rule out the possibility of one day divesting the unit, but that it is not currently being considered, at least in the short term. The quick denial raised interest in the media and among analysts as to what exactly GSK plans to do with the consumer unit and a decision about the future of Horlicks in the long term.

 

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Overview of Consumer Healthcare

Normally, when issues or discussions like this arise, the company in question is conducting a strategic review of the division and weighing up the pros and cons and perhaps the best possible strategic direction for certain businesses. In fact, GSK is in the middle of forming a joint venture with Novartis AG to create a Consumer Healthcare company with around US$11 billion in annual revenues, with GSK having majority control of the new company (including the brands Aquafresh and Panadol). The transaction is not expected to be closed until next year.

According to GSK’s 2013 annual report, its Consumer Healthcare division expanded its turnover by 2% to £5.2 billion globally, accounting for 20% of the Group’s revenue. Excluding the non-core OTC brands that were divested in the first half of 2012, turnover grew 4%. Operating profit for the division grew 3%. On a side note, Lucozade and Ribena used to belong to this division and were both sold to Suntory. That said, GSK might have started to shrink its brand portfolio for the division several years ago. Consumer Healthcare has four segments: Total Wellness, Oral Care, Nutrition and Skin Health. Horlicks is included in Nutrition and the brand does look a bit lonely following the sale of Lucozade. Sensodyne and Horlicks seem to be the key growth drivers for the division, according to the annual report. Euromonitor International’s data confirmed that Sensodyne recorded net growth of £450 million in retail value sales in 2008-2013, making it the fastest-growing global toothpaste brand. By contrast, Horlicks grew by £160 million in 2008-2013 and it appears a minor brand in the division.

Operationally, the Consumer Healthcare and pharmaceutical businesses are operating in very different environments, despite some synergies and interfaces in research and development between the two. GSK’s Consumer Healthcare brands compete against those of Colgate-Palmolive, Unilever, Nestlé and the like, with these brands predominantly sold through grocery retailers. Meanwhile, its core pharmaceutical products target hospitals and GPs and face a whole host of different competitors. Interestingly, in India, GSK’s Consumer Healthcare business is a publicly listed company and GSK lifted its holding in it to 72.5% in 2013. This means the Indian division is already a stand-alone entity in its own right and is showing some individual strength. Thus, it would not be a huge surprise if GSK were to eventually spin off the global division as a whole or even sell Horlicks independently. While this discussion is ongoing and there is no clear-cut evidence for any decision just yet, it is worth taking a look at Horlicks’ sales.

Horlicks in Emerging Markets and a Versatile Brand in India

From the beverage perspective, Horlicks is the key brand for the Consumer Healthcare division. Globally, Horlicks ranked fourth in flavoured powder drinks with retail value sales reaching US$600 million and a 6.4% share in 2013, compared to leading brand Milo (Nestlé) with 12.7%. However, Horlicks outpaced Milo by a large margin in 2008-2013, with respective CAGRs of 11% and 7%. The strong performance by Horlicks was underpinned by its category dominance in India and further expansion in Bangladesh and Pakistan. In terms of global geographic presence, Horlicks registered shares in malt-based drinks in around 13 countries, with its growth mainly coming from emerging markets.

Malt-based drinks are considered nutritious drinks in many emerging markets and there is still growth potential as new middle-class consumers enter the marketplace. According to Euromonitor International’s field researcher in Kenya, Horlicks disappeared from the market for a while and was relaunched in December 2013 with a refreshed appearance and smaller packaging at lower prices. The relaunch was supported by TV advertising and in-store promotion. In Nigeria, ABF’s Ovaltine is competing keenly with Horlicks, with both brands achieving CAGRs of around 20% in 2008-2013. Flavoured powder drinks benefit from easy storage and long shelf life, which makes them convenient to distribute and sell in an underdeveloped retail environment. However, the potential of Horlicks in developed markets will be limited by the many nutritious beverages already available.

India accounts for over 80% of Horlicks’ global sales and the situation has been like this for years. India’s malt drinks market is expected to see net growth of around US$130 million in 2013-2018. Unlike its rival companies, Horlicks is also present in a wide range of foods, including noodles and snack bars, in addition to malt-based drinks in India. This could be a vehicle for GSK to expand into the food and beverages market in India. GSK could introduce similar products to Horlicks in other South Asian countries. Nevertheless, malt-based drinks is the key revenue generator due to its category dominance. In recent years, GSK introduced Women’s Horlicks, which was formulated with iron, calcium, folate and other vital nutrients, and which has seen its popularity continue to grow. That said, Horlicks is a very viable and robust brand in India and its strength and promising potential would carry much weight if GSK decides to negotiate its sell-off at some point. It makes logical sense for the company to sell Horlicks to raise good money to fund the development of its other Consumer Healthcare brands. There will be no shortage of potential suitors, which could include Tata Global Beverages and Mondelez as such companies would want to gain a presence in malt-based drinks in India and would aspire to leverage Horlicks’ potential.

In brief, Horlicks is undoubtedly the key beverage brand in GSK’s Consumer Healthcare division, and, to maintain Horlicks’ global value, as of today, India is the key.

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