By  on June 22, 2012

Walgreens and Boots: Revolutionary or Risky?

It was a deal some said was in the works for a long time. Others were caught off guard by the announcement.

Some think it’s brilliant. Others think it is bewildering.

Those are the divergent thoughts summing up Walgreen Co.’s announcement this week that it is buying a 45 percent stake in Alliance Boots. At first blush, some pondered what benefits each merchant could gain from the other. “Few British retailers have succeeded in the U.S.,” said one drugstore maven. A marketer of beauty products agreed that despite the same language, the two markets are vastly different. Others said the deal is Walgreens’ effort to stem the damage done from losing the Express Scripts business. There is also fear that retailers competing with Walgreens might be less likely to want to take on Boots brands that have expanded in chains such as Target Corp. and Ulta.

Digging deeper, however, there are attractive features for both companies in the merger.  For now, drugstore growth as far as sales and expansion of store count has hit a plateau in the U.S. “All of our shopper studies show that no matter what drugstores do, they aren’t getting more sales out of existing stores,” said Candace Corlett, president of WSL Strategic Retail, using the firm’s shopping surveys as background. Europe, however, serves up huge potential. Understanding the health care and pharmacy business outside of the U.S., however, has been problematic for pharmacy merchants. In tapping Boots, Walgreens gets a company well versed in the health end of the store. Alliance Boots is the biggest pharmacy retailer in the U.K. and is also a massive pharmaceutical wholesaler. This suggests further benefits for pharmaceutical purchasing for Walgreen.

Boots is also a premier beauty merchant and has been slowly expanding its logos in the U.S. The deal with Walgreens presents opportunities to instantly get close to 8,000 doors for preferred distribution and positioning for the Boots brands. Boots can also further enhance dramatic moves that have been made in product and presentation in Walgreens and Duane Reade stores. Some of the inspiration for Look Boutiques, in fact, has been drawn from Boots stores. Walgreens can probably gain from Boots’ experience at pushing its own brands since many Boots items are the leading sellers in the U.K. and have been for years. Boots has accomplished this with its own dedicated and focused product development team. 

Some industry sources familiar with Walgreens said executives had been working on an international acquisition plan that was kept on the QT with most others at the Deerfield, Ill. headquarters. Some even believe this burnished chief executive officer Greg Wasson’s position, which needed some favorable news following financial challenges for Walgreens. Alliance Boots had also been looking for a route out of the London Stock market, market reports said, and had been looking to either a Chinese or U.S. partner.

The same day Walgreens announced the partnership with Alliance Boots, the chain said its third-quarter net earnings for the period ended May 31 fell 10.9 percent to $537 million, or 62 cents a diluted share, from $603 million, or 65 cents, a year ago. Net sales fell 3.4 percent to $17.75 billion from $18.37 billion. For the nine months, net earnings fell 7.7 percent to $1.77 billion on a 0.6 percent gain in net sales to $54.56 billion.

People, Places and Things

A few words with Walgreens ceo Greg Wasson on the goal of creating the first and largest global retail pharmacy player with the marriage of two iconic names, Boots and Walgreens.

“This creates an opportunity for us together to create an international expansion platform. We’re going to bring the two brands together to create the first global pharmacy-led health care platform. We’ll become a supply chain unmatched in the world. By focusing on our key strategies, we are positioning ourselves to be the first choice for health and daily living. We continue to learn from our 200 pilot Well Experience format stores, including some Duane Reade locations in New York City. We also continue to advance the role of community pharmacy by expanding our pharmacy, health and wellness services and deepening relationships with a number of partners. Working together, Walgreens and Alliance Boots will have access to new customers, markets and lines of business across the U.S., Europe and in key emerging markets, all of which will drive the potential for increased earnings, diversification and growth. Our combined strength gives us the breadth, resources and expertise to create an unmatched global platform now, and well into the future, to meet the challenges and needs of our customers.”

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