Why Energizer Is Better Off As 2 Companies

Source: Energizer

While Energizer Holdings (ENR -1.04%) is best known for its bunny commercials involving its branded batteries, it is a diverse consumer company competing in the broad categories of personal care and household products. Besides Energizer and Eveready branded batteries, Energizer also boasts leading brands like Schick and Playtex in shaving and feminine care products.

In April, it announced it planned to separate its personal care and household products divisions into two independent, publicly traded companies, a move expected to be completed in the second half of fiscal 2015.

Will Energizer create greater value with two separate entities? It's also worth comparing Energizer with fellow consumer company Kimberly-Clark (KMB -0.57%) to draw further insights.

Specialists versus generalists
It's almost the same story with all successful consumer companies that evolved into conglomerates. They start off by focusing on a specialized area they are very good at and eventually branch out into completely different areas outside of their core competencies. As these companies venture into more products and businesses, corporate overhead grows, and customer response time lengthens. Profitability suffers at the expense of top-line growth.

Energizer is no exception to the general rule, having built its personal care business with a series of M&As. It's worth noting that its ROICs in the past five years, from fiscal 2009 to 2013, fall in the high single-digit to low double-digit region, compared with ROICs above 15% in the fiscal 2004 to 2008 five-year period.  One key factor is the lack of synergies between Energizer's two divisions.

The personal care and household products divisions differ in terms of geographical focus, retail strategies, and marketing approaches. Energizer's household products business sells globally, while its personal care business is primarily operating in the developed markets.

Its household products business is also far more complex with respect to retailing strategies, compared with personal care. The household business involves multiple buyers per account, whereas the personal care division usually deals with a single buyer for each individual category.

Furthermore, the sales of household products are dependent on good merchandising and product visibility, but heavy advertising is required to drive the sales dollars for personal care.

More importantly, the two businesses are completely different animals, requiring totally diverse mind-sets and managerial approaches. Energizer's household products business need to focus on cost optimization, while its personal care division's emphasis should be on investing in growth via product innovation. The separation of the two businesses will allow them to direct attention and resources in a manner that ties to their distinct priorities.

Source: Energizer.

Focusing on personal care
Energizer isn't the only company engaging in strategic actions to pursue the growing personal care market. Kimberly-Clark announced in November last year that it plans to spin off its health care division, slated to be completed by the second half of this year.

Notwithstanding the fact that its medical device business boasts attractive growth prospects, it's noteworthy that the division's EBITDA margins have fallen behind the Group's overall margins to the tune of 100-200 basis points, based on a May 2014 Forbes article.

In the first quarter of 2014, Kimberly-Clark's Personal Care segment led all of the company's different divisions with best-in-class organic growth rates and operating margins. Its personal care division registered an impressive organic sales growth rate of 7% and achieved operating margins of 19.4%.

In contrast, the health care business boasted an inferior organic growth rate and operating margin of 1% and 18.1%, respectively. In the words of management, the strategic rationale of the proposed spin-off is to "further sharpen focus" on its growing personal care business.

Energizer has market-leading positions in the respective personal care categories in the developed markets. In the U.S., its sun & skin care and infant care brands have the largest market share domestically, while it is among the top two local players in the wet shave and feminine care categories. In addition, Energizer's products in the wet shave and sun & skin care segments are also best-sellers in other developed markets such as Western Europe, Japan, Mexico, and Australia.

The upcoming separation will allow Energizer's personal care business to allocate greater resources to drive product innovation and advertising. One example is its Schick Hydro Disposable Razor, the only disposable shaver with the function of hydrating one's skin with a water-activated gel reservoir to make the shaving process more comfortable. Introduced in January 2013, this product was an instant hit with consumers, with the help of heavy sampling with bonus packs.

Foolish final thoughts
I am positive on Energizer's separation plans. With the spin-off, the respective management of the two separate personal care and household products companies will be accountable for their own profits and share prices, which should provide strong motivation for them to perform well.