Henkel Pricing Spineometer: 4 of 5 Vertebrae

Henkel, a global adhesive and consumer products company, had a relatively positive Half 1 2024. Revenue fell 1% to €10.8 billion while earnings before interest and taxes rose 70% to €1.4 billion over the same period last year.

A review of Henkel’s 16 August 2024 earnings call and associated financial reports provided insight regarding the importance of pricing on performance.

As a global company, Henkel’s financial performance has been impacted by geopolitical, macroeconomic, and merger and acquisition activities. Divestment from activities in Russia impaired revenue. Global gross domestic product increases have improved business activity while rising unemployment rates have impaired business activity. Similarly, hyperinflation in Turkiye impaired revenue slightly. Recent acquisitions of Seal for Life and the Vidal Sasson China businesses have improved revenues.

Given these impacts, it is perhaps best to evaluate the financial performance of Henkel on an ongoing business activity basis. On this basis, Henkel reports organic revenue growth. Moreover, it reports that pricing actions drove much of this growth.

Carsten Knobel, CEO of Henkel noted the importance of pricing actions to driving performance. In his opening remarks, he said, “Pricing also continued to contribute positively. Volumes again improved sequentially versus Q1 2024. In adhesives, volume picked up versus Q1 despite an overall demanding environment. In our consumer business, we also reached positive levels when considering the impact from portfolio measures.”

Marco Swoboda, CFO of Henkel, also pointed to pricing decisions that drove financial performance stating “We delivered good organic sales growth of 2.9%, driven by both business units. Pricing contributed 2.5%, while volumes were in the positive territory with plus 0.4%.”

Henkel has two major business divisions. The adhesive business serves the mobility (cars and such), electronics, packaging, craftsman, construction, and professional industries. The consumer products business competes in the laundry, home care, hair, and other consumer markets.

The business operations of Henkel and industry benchmarks suggest Henkel should have 45 to 225 professionals dedicated to pricing out of their 47,800 employees. The complexity of Henkel’s business suggests it should be in the upper half of this range.

• Henkel operates in multiple countries across Europe, North America, Latin America, Asia Pacific, and India Middle East Africa. Each country has its own competitive dynamics, customer preferences, and macroeconomic conditions. We would expect some pricing professionals to be collocated with its major business units across the globe and advise individual country managers and sales executives on pricing.
• In the adhesive business, Henkel sells mostly to other industrial concerns. Here, salespeople would benefit from pricing professionals providing pricing guardrails at the individual transaction level, aligning sales incentives to profits, and supporting account management in identifying where mix or price capture can be improved.
• In the consumer business, Henkel sells through retailers and is reporting increases in promotional activities. Here, product and brand managers would benefit from pricing professionals conducting promotional effectiveness studies beyond simple ROI. Consider that much of the sales in a promotional period would have occurred without the promotion and one identifies the need for a Breakeven Incremental Sales study. Furthermore, consider that some promotions do not lift corporate sales but simply shift sales from one channel partner to another and one identifies the need to calibrate promotional activities towards Henkel’s profitability, not the channel partner’s alone.
• Henkel executives touted the importance of innovation in their remarks. Financial reports indicate Henkel spends 3.8% of their revenue on research and development. Productive New Product Development (NPD) needs pricing guidance early in the process to determine if the innovation deserves investment and late in the process to set market prices. This too implies a need for pricing-setting researchers using Economic Value to Customer and Market Research.
• The wide range of products, changing input costs, and dynamic macroeconomic conditions imply periodic price actions are frequently required.
• With macroeconomic conditions impacting Henkel globally, some pricing professionals may be dedicated to applied economics.

Research into the investment by Henkel in pricing yielded encouraging results.

1. Henkel’s pricing team size was well within the expected range but on the lower end. Our research found that pricing professionals skewed towards the adhesive business. This implies the consumer business division has an underdeveloped pricing capability.
2. Titles in pricing at Henkel ranged from analyst, manager, director, and head of pricing yet no vice president of pricing was identified. This could imply that pricing has a subordinate role in pricing decision-making compared to sales, product, marketing, and finance managers.
3. Pricing professionals are collocated with Henkels activities across the globe.
4. Pricing professionals at Henkel were heavily engaged in analytics though some self-identified as strategists.

Given the importance and capability of pricing at Henkel as indicated in financial reports, management statements, and our pricing team research, and given their performance, we have come to the following conclusion as of October 2024.

Henkel Pricing Spineometer: 4 out of 5 Vertebrae for Henkel AG & Co. KGaA overall based on business unit scoring of 5 out of 5 for Henkel Adhesive Technologies and 2 out of 5 for Henkel Consumer Products. Henkel’s Adhesive Technologies business unit is strong in pricing though could use a VP. Henkel’s Consumer Products business has much opportunity to capture.

HEN3.DE (Henkel AG & Co. KGaA) rose from 78 the day of their earnings call to 81 one week later. FY 2023 revenue of €21.5 billion with a 9% operating margin and P/E ratio near 17.

For FY 2023, a 1% improvement in price would yield an 11% improvement in operating profits holding all else constant at Henkel.