‘Boots needs more TLC to create value, whoever owns it’

Convenience. A range encompassing essentials such as pharmacy alongside discretionary but feel-good products like makeup. One of the biggest loyalty schemes in the industry. One of Britain’s most trusted brands. Boots certainly has a lot going for it.

So owner Walgreens’ failure to sell the famous health and beauty retailer is surprising. Or maybe not, considering both wider market conditions and reasons specific to Boots.

“Boots has felt very much like the junior partner in the Walgreens portfolio for a while as the action increasingly moved Stateside”

After months of talks with potential buyers, a deal proved impossible. Walgreens said although there had been “significant interest from prospective buyers”, market instability meant funding could not be raised – certainly not at the level, £5bn or more, that Boots was judged by Walgreens to be worth. So the retailer and its sister business, No7 Beauty Company, will remain part of the Walgreens stable for now.

The hurdles to raising debt at present, affected by factors such as the impact of the rising cost of living on consumers and the the war in Ukraine, will likely be felt beyond Boots – including on the costs and conditions of refinancing or raising M&A war chests. Tightening money markets may also hold implications for highly leveraged retailers as they make hefty repayments – Asda, for instance, paid £375.1m in interest last year alone. 

In a tough trading environment, retailers will need as much financial flexibility as possible to continue to invest and grow.

New rivals

However, abandoning attempts to sell Boots also says something about where that business now stands. Like others, it took a hit during the pandemic – when it also stepped up to the plate as a provider of essential goods and services – but there are signs that it is now recovering.

Walgreens reported this week that Boots’ UK sales rose 13.5% in the three months to May 31, albeit against softer comparatives. Like-for-like retail sales climbed 24% year on year during the same period.

Boots made “market share gains across all categories, led by beauty”, Walgreens trumpeted, though footfall to its shops remains below pre-pandemic levels. Walgreens’ international division as a whole generated adjusted gross profit 11.3% ahead of 2021 levels, “reflecting strong sales growth in the UK”.

That is good to hear because Boots has felt very much like the junior partner in the Walgreens portfolio for a while as the action increasingly moved Stateside. A new generation of beauty specialists, including the likes of Revolution and Beauty Pie, has emerged over the last few years, leaving Boots looking and feeling old fashioned.

At the same time, established names such as Primark, Harrods and Next are pushing into beauty – the latter pair have opened standalone beauty halls – and two of the big grocers, Sainsburys and Tesco, are led by former Walgreens executives that are building strength in the category more than ever. As it faces an assault on its position from all angles, Boots cannot afford to be a laggard. 

Despite a new store format unveiled in London’s Covent Garden, much of Boots’ estate feels tired, even with, in the most recent quarter, more “reinvented stores” such as the flagship on Kensington High Street. But Boots has 2,247 branches – a massive estate to ensure consistent appeal and freshness across as it faces greater competition.

Leaning on legacy

It seems a bit rich for Walgreens to say none of the bids reflected the “high potential value” of Boots and No7. Potential? Boots was originally taken private by tycoon Stefano Pessina in 2007 and the entrepreneur completed the creation of Walgreens Boots Alliance in 2014. 

There has been plenty of time to build the business further and fulfil that potential – but it seems to have lived on its legacy for much of that period.

As she revealed news that a sale of the business was off the cards, WBA chief executive Rosalind Brewer maintained that “it is an exciting time” for Boots. No particular reason was given for why that should be the case. What are its plans exactly? Why is now a more exciting time than earlier in Walgreens’ ownership, and if it is so exciting, why did Walgreens hope to sell in the first place?

“Why would the public markets welcome back Boots as second choice to make money for the owners?”

There is no doubting the deal-making skills of Pessina. If he could not see a deal to be done on Boots at this juncture, you can be confident that was the case.

A sale may yet occur in future, though talk of an IPO as an alternative route looks optimistic. After failing to find a buyer at the right price, why would the public markets welcome back Boots as second choice to make money for the owners?

Whether Boots is ultimately sold or retained, it needs further TLC to truly live up to its heritage and to create value in future, whoever the owner may be.

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