Ecolab: Fewer products, more profit

  • Article by: LIZ FEDOR , Star Tribune
  • Updated: May 17, 2009 - 10:16 PM

Ecolab expects to shrink its global product line by half over the next three years.

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Ecolab CEO Doug Baker in Eagan at one of the company’s labs. He said that Ecolab’s product line had ballooned to 26,000 and “this complexity costs money.” In Europe, Ecolab reduced the number of products it distributes from 14,000 to 9,000 over three years. It has 58 plants and 173 warehouses around the world.

Photo: Glen Stubbe, Star Tribune

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Ecolab, which has created cleaning solutions for customers in 160 countries, is trying to clean up its product line.

The St. Paul-based company, with $6.1 billion in annual sales last year, has 26,000 products on the global market. "This complexity costs money," Ecolab CEO Doug Baker told shareholders at the annual meeting this month.

Baker said in an interview that he wants to cut the number of products "by at least 50 percent" over the next three years.

By cutting costs associated with superfluous products, Ecolab will free up working capital, and the company hopes it ultimately will boost profitability.

Exhibit A in its bid to trim down: The company developed 44 pot-and-pan cleaning solutions for North American customers. Over time, Ecolab added colors -- such as pink, blue and green -- and scents -- including cherry blossom and lavender.

"They require a different recipe to manufacture," Baker said, adding that there aren't 44 distinct customer pan-cleaning needs.

"Common sense says this is crazy," Baker said, "You can still meet the market needs quite handily with 10."

The company insisted that despite far fewer products, revenue should not be hurt. Ecolab Vice President Mike Monahan said that, at best, culling the product line will boost sales. At worst, he said, the product lineup changes will have "no significant impact" on sales.

"When we are done, we will have a better product lineup that does at least the same job or better for customers," Monahan said. He added that Ecolab will work with its customers and sales force to ensure there's a smooth transition to the revised product line.

George John, chairman of the Marketing Department at the University of Minnesota's Carlson School of Management, said Ecolab is experiencing product "creep." But he added that's not surprising for a corporation its size that sells products directly to other companies.

"The way you compete in that business is to customize products for those clients," such as hotels and restaurant chains, John said.

Indeed, on a recent tour of Ecolab's research facility in Eagan, Baker explained how the company developed a special product for McDonald's restaurants to clean up grease. The latest version of the cleaner is packaged in a compact jug to avoid taking up much space.

'170 piles'

Ecolab was founded in 1923 by an auto dealer who created a product to clean carpets. It now has 58 plants and 173 product warehouses around the world. "If a product is offered for sale and you've got 170 warehouses, you end up with the product in 170 piles," Baker said.

Monahan said that by reducing products, "you can simplify your production." In factories, instead of operating short-run production lines for several products, it will become possible to run longer-range production lines for a slimmed-down list of products.

"It will, for sure, lower our costs," Baker said. "It will likely also improve our profit margin." The company declined to provide specific numbers on estimated savings.

It has predicted 2009 earnings, excluding special charges, of $1.95 to $2.05 per share. It maintained that projection in late April when it reported first-quarter net income of $57.4 million. Ecolab earned $1.80 per share in 2008.

About 30 percent of Ecolab's business -- full-service restaurants and lodging segments -- will be weak this year. But Ecolab envisions stronger customer demand from quick-service restaurants, health care and education institutions and government units.

Ecolab built up its product lines over many years. But it pared its products in Europe from about 14,000 to 9,000 over the past three years. "Europe sales have continued to grow during the period in which the [products] were reduced," Monahan said.

Some companies entice consumers to buy goods by introducing a flurry of products, and then they eliminate some after seeing which ones sell best.

"When pagers came out with Motorola back in the '80s, they had every color and variety known to mankind," said John Olson, a University of St. Thomas professor who studies company operations and supply chains. Motorola later reduced the number of product choices, which "makes their life and the manufacturing world easier," Olson said.

Ecolab has been cutting costs in other ways, too. In January, it announced it would reduce its global workforce by 4 percent, or about 1,000 jobs. Baker doesn't expect more job cuts. "Our goal was to be one and done," he said.

Over the next few years, Monahan said, "We are really reworking the product line to focus on providing our very best technology to customers, upgrading the line."

Baker said a key aim is to eliminate gradations in size, color and other slight variations that don't benefit customers. "We've got a lot of people spending a lot of time managing this complexity," he said. "We'd rather have them focused on doing other things for our customers."

Liz Fedor • 612-673-7709

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