Garry Watts: Rubber soul
The Business Interview: Sex and feet are two pretty decent businesses to be in during the worst recession in living memory the boss of SSL International tells David Prosser
Thursday 15 April 2010
Did the Cold War begin with an attempt by Winston Churchill to humiliate Russia's men? Garry Watts, the chief executive of the condom and footwear group SSL, thinks it just might have done.
As the Second World War ended, Mr Watts reports, Churchill received an urgent message from Joseph Stalin. Thousands of Russian troops were on their way home from the front, eager to celebrate the end of the conflict with their womenfolk, but the motherland was desperately short on prophylactics. Could the Prime Minister help? Spotting his chance to secure an early psychological advantage in the post-war carve-up of Europe, Churchill told the London Rubber Company to make millions of over-sized condoms for the Russians, hoping to foster an inferiority complex in the East.
Six decades later, Mr Watts concedes that the story may be apocryphal, which is probably a good thing given the significance his company is now attaching to the Russian market. SSL, formed from a merger of London International Group, the company the London Rubber Company eventually became, and Seton Scholl in 1999, believes the deal it signed in the country last year is potentially transformational.
Contact with BLBV was first made four years ago, with SSL pinching the contract to supply the Russian condom distributor with 400 million products a year – around 20 per cent of its total output. SSL then took progressively larger stakes in the company before taking full control last year. Now that SSL consolidates BLBV's results within its own, it is clear just how much it contributes – around 25 per cent of profits, figures released at the end of last month suggest.
"We know some British businesses have run into difficulties in Russia, but we haven't had any of those problems," says Mr Watts. "The founders of BBLV were certainly very good negotiators and we took a lot of time to get to know them – so much so that one of the four guys who set the company up is now set to be our general manager in Russia."
Having made Russia its second most important market for condoms – though it has not tried to import its flagship Durex brand – SSL hopes Scholl, the other half of its business, might also make the journey East.
To the casual observer Scholl, which makes footsprays, insoles and an array of other footwear products, looks a curious fit with Durex. "The thing people always ask me about this firm is 'what on earth have feet and sex got to do with each other?'" says Mr Watts. "The truth is that it's an accident of history, but they work very well together."
For starters, both product ranges are sold through similar distribution channels and there is plenty of crossover on packaging and, increasingly, raw materials. Also, Durex and Scholl offer demographic diversification. Traditionally, Durex was a product brought by younger men, while Scholl's customers have predominantly been women of middle age upwards.
Not that SSL isn't keen to broaden the appeal of its products, starting with Durex, where it has already had some early successes. The global condom market is worth £2bn, Mr Watts points out, but, for the sex industry, "you could double that figure and add a few zeroes".
A global player in sex – and Mr Watts reckons only Playboy rivals Durex for its brand strength – could, in theory, move into a whole host of new markets, arriving at pornography or even prostitution at the extreme. "Contraception sits somewhere in the middle of the spectrum, and our aim has been to move a little way along it."
That movement began before Mr Watts arrived at SSL, with flavoured and ribbed condoms, for example, but has continued apace. The Durex suite now includes lubricants and the Play range of sex toys. "Suddenly, the whole dynamic of what the brand is about has changed," he says. "The vision is of Durex as a brand people talk about at dinner parties – a light-year away from the days when young blokes were embarrassed to ask for condoms in the chemists."
One problem SSL thought it might face as it pursued this vision never became a difficulty. The company had originally feared chemists and supermarkets might fight a little shy of stocking its more adventurous products. "In fact, we never had a problem with distribution – we seemed to be pushing this at just the right moment," Mr Watts says. "In the space of just four-and-a-half years, this whole product category has come from nowhere."
The evolution of Scholl is at an earlier stage but could follow a similar trajectory. SSL has already begun to talk to Italian designers about producing footwear that customers might not feel quite so unfashionable – a break-out for the brand would be a move into the comfort footwear market.
For now though, Scholl's footwear products are primarily associated with healthcare rather than high fashion. That's no bad thing necessarily – in the developed world, where obesity levels continue to rise, so too does the prevalence of diabetes, which can have a devastating effect on sufferers' feet. Scholl's products are in that front line.
Though it is not an official target, Mr Watts reckons the size of both the Scholl and Durex businesses could be doubled, which would make each one worth around £1bn. Durex is most evolved as a brand in the UK, but that process can be rolled out in other parts of the world, while the condom business often acts as a bridgehead for Scholl.
Geographical diversification will continue – while SSL is present in 130 countries, it has little presence in Latin and South America, an omission it hopes to remedy – but shareholders press Mr Watts regularly on another strategic possibility too: a third leg for the business.
The chief executive admits he has had his eye on something for some time. "Elastoplast is the thing I'd really love to own," he says. The brand is currently owned by Germany's Beiersdorf, but SSL would be first in the queue of buyers. "One day it will get sold," he says, "But the pace of German business is slow."
In the meantime, Mr Watts is looking forward to a world that finally seems to be heading out of recession. SSL has weathered the storm relatively well – in part because its Asian businesses have been broadly untouched, but also because sex, and thus Durex, is hardly discretionary – but there have been hits.
In Italy, for example, the company has begun to see pharmacies running down stocks. That's a problem because most are family run and many have as much as two years' worth of stock in the storerooms – "they regard it as their pensions", Mr Watts explains. Ireland, too, has seen a downturn in business and there is some evidence of customers trading down in the UK too.
But overall, Durex and Scholl have had a good slump. "However bad things get, people still have sex and they still walk," says Mr Watts. "I would rather have been chief executive of SSL during this downturn than almost any other company I can think of."
That might not always have been the case. Mr Watts joined SSL in February 2001, initially as finance director, just as the company was plunged into crisis. Irregularities in the company's accounts picked up by an external audit became a full-blown scandal when it emerged SSL had overstated both sales and profits in end-of-year reporting. Cue a boardroom shake-out and a two-year investigation by the Serious Fraud Office that culminated in charges against several former executives of the company.
It was a hugely painful period for the company, with Mr Watts at the forefront of new management's efforts to purge SSL of the regime. It may be this experience that has made Mr Watts wary of short-term financial performance targets.
The company has a 50 per cent earnings-per-share growth goal and its chief executive says "you do need to keep a bit of tension in the business". At the back of his mind, he is aware SSL is not far off the FTSE 100 and he clearly has a personal ambition to break into the index.
"But it would be a huge mistake to get too hung up on that," he says. "There are a million things that we could make a mess of with this company, but it's in the right place with a fair wind at its back just now – to throw that away chasing Footsie membership would be a great pity."
Garry Watts: Healthy numbers
* Aged 52, Garry Watts commutes between homes in London and Perthshire, where he indulges his passion for fishing
* He was appointed chief executive of SSL in 2004, having joined the company in 2001 as finance director.
* Mr Watts, an accountant, was a partner at KPMG in 1990 before moving to the drugs group Medeva in 1995.
* He has held non-executive directorships at Stagecoach and Protherics and was awarded an MBE in 2008 for services to healthcare
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