Stefano Pessina is picture of good health at Boots

He’s not usually one to show much emotion, but Alliance Boots executive chairman Stefano Pessina this week spoke about the healthcare group with the same pride as a father talking about his child. “I can’t hide how proud I am,” the Italian billionaire said. “In a challenging economic environment we have reported strong revenue and profits.”

And Pessina, who took the business private in June 2007 in an £11bn deal backed by private-equity group KKR, has every reason to be proud. His baby, which many commentators feared might suffer in the hands of private equity, has flourished. But with the supermarkets aggressively building their healthcare offers and a sizeable integration job on his hands with Boots’ optical business, there remains plenty to do if momentum is to be maintained.

For the year ending March 31, Alliance Boots reported an 11.3 per cent rise in EBITDA to £1.25bn on sales up 15.5 per cent to £20.5bn. Trading profit jumped 11.6 per cent to £953m. It has also delivered £100m cost savings from the merger synergies 18 months ahead of schedule.

Pessina believes the results show the “underlying strength of our two core businesses” – the health and beauty division, which includes retail, and the pharmaceutical wholesale arm. And he is keen to point out that success is down to the team. “This is a great company,
a great brand. The team have shown great commitment and entrepreneurial flair and I strongly believe we have a great future,” he says.

He explains that the performance affirms the group’s transformation strategy and takes it one step further down the path to becoming “the world’s leading pharmacy-led health and beauty group”.

Alliance Boots’ health and beauty division – which operates the flagship Boots UK – reported revenue up 4.4 per cent (or 2.9 per cent in constant currency) and profit up 11.6 per cent. Boots UK revenue climbed 3.2 per cent and like-for-like revenue was up 1.3 per cent. Pessina’s main focus is the healthcare side of the business. He says: “I’ve said many times before that I consider Alliance Boots a healthcare company and the vast majority of our business comes from healthcare.”

Alliance Boots group finance director George Fairweather explains that half of the revenue from the health and beauty division is health related. The number of prescriptions it dispensed in the year increased 8.5 per cent to 204 million and medicine check-ups soared  45 per cent. Boots now has private consultation facilities in more than 80 per cent of pharmacies and it has doctors’ surgeries in six stores.

Fairweather says Boots is in a strong position to continue to lead in health. “The Government is keen for pharmacies to develop their services in terms of preventative medicine,” he says.
“Services such as medicine check-ups are easy for pharmacies to carry out and we have the facilities to add even more
of this type of offer. It’s our job to
understand the Government’s objectives and align our business model to make sure we are well positioned to deliver these services.”

The focus on health is one of the key reasons why Alliance Boots is prospering, according to Verdict Research senior analyst Maureen Hinton. “Alongside food, the healthcare sector is holding up and by aligning themselves with various health-related services such as doctors’ surgeries their authority in this sector will only increase,” she says.

“We have an ageing population and therefore a greater need for health services. The sector will continue to grow despite the global economic environment and as brand leader in the UK, Boots is well placed to take advantage of that.”

Rude health

Alliance Boots has wasted no time in investing in healthcare. It has rebranded 400 pharmacies to “Your local Boots pharmacy” and will complete the programme by the end of the year. It has upgraded its Boots.com site and is also jointly developing a healthcare portal with WebMD. The idea, according to Fairweather, is for the shops and the online operation to be more integrated. Its order online and collect in-store service is now available in more than 1,300 Boots shops, for example.

Boots UK’s beauty and toiletries revenue is up 0.4 per cent to more than £2bn and the group has also invested in product development during the year. Last month the retailer published the results of an independent test that claimed its No7 Protect & Perfect Intense Beauty Serum has long-term anti-ageing benefits and Pessina says the relaunch of the cream “sold 1 million units” in just two and a half weeks. When the cream first launched the stores’ shelves were empty within hours of it going on sale after it appeared on BBC2’s Horizon.

The No7 brand remains market leader in its category, says Fairweather, and alongside Protect & Perfect several other products have been added to its range such as No7 Dual Protection Tinted Moisturiser.

Retail Knowledge Bank partner Robert Clark believes Boots has health and beauty sewn up in the UK. “Despite the downturn, Boots is well placed to expand above the average level,” he says.

Clark believes that despite Boots operating in a very competitive market, it will continue to perform if it remains focused. Alongside health and beauty competitors such as Superdrug and Lloydspharmacy, Boots also faces stiff competition from the supermarkets.

Grocers Tesco, Asda and Sainsbury’s are all rolling out pharmacies in their stores and stepping up the amount of services they offer, including medicine check-ups. Tesco has even developed a more compact-format pharmacy, which it will roll out in smaller stores to expand this service in more locations.

“It’s easy to pick up beauty products or prescriptions when you’re doing your food shopping so supermarkets are a big threat to Boots,” says Clark. “But Boots is such a strong brand and carries such loyalty that as long as it keeps up momentum, it should still be able to thrive.”

He believes one area where Boots needs to concentrate is making a success of the merger of its Boots Opticians with Dollond & Aitchison, which it completed during its last financial year. Pessina says both businesses are “very competent” and the merger has created a “strong number two player in the UK”. He adds that although the merger will lead to some redundancies, in the long term the opening of more opticians will create new jobs. “The deal has been done to grow the business, not to shrink it,” he says.

Clark believes Boots Opticians has underperformed for some time and the group needed to do something to develop this part of the business. “Specsavers is the runaway market leader but some of the smaller chains such as Vision Express and the independents have carved out niches for themselves and are very well run businesses,” he says. “There is an argument that putting together two underperforming businesses doesn’t necessarily make a good one. What Boots needs to do is make the scale work.”

Another key part of Pessina’s plan is to take Boots global and expand the brand into new areas. He is considering appointing someone to take charge of the day-to-day management of the company while he concentrates on deal making. He intends to remain executive chairman but focus on the strategy, growth and development of the company, removing the burden of micromanagement. One strategy he is considering is introducing financial services to Boots stores – in a similar vein as Tesco plans to.

He has also promoted the heads of the two businesses to the board. Alex Gourlay, chief executive of the health and beauty division, has responsibility for Boots UK while Ornella Barra is chief executive of the pharmaceutical wholesale division.

Global hurdles

The performance of the international health and beauty division has suffered in the downturn. On a constant currency basis revenue increased 1.3 per cent and like-for-like revenue decreased 1.3 per cent, while profit increased 1.9 per cent.

Total revenue in countries outside the UK increased 15.7 per cent to £804m year on year. Profit increased 18.4 per cent to £45m, mainly as a result of currency translation and strong profit growth in the Republic of Ireland. However, it was partially offset by lower profits in the Netherlands and Norway.

The group operates 36 shops trading as Boots Apotek (the Norwegian word for pharmacy) in Norway and it is also trialling a Boots Apotheek concept in the Netherlands.

In the pharmaceutical wholesale division Pessina said the group is “operating in the most difficult market conditions we have ever seen”. Over the next year it will cut 10 per cent of its workforce from this division globally in an attempt to improve efficiencies and reduce operating costs by about £55m a year by 2011/12.

For the year, the wholesale division reported that revenue jumped 17.8 per cent to £11.3bn and profit increased 4.4 per cent to £215m. Like-for-like trading profit decreased 8.4 per
cent, almost entirely due to a poor performance in France and Spain.

Clark points out that while its international arm has not performed as well for the group, with Pessina’s leadership it remains in safe hands. “Posting a dip in profit in some global markets would mean a danger sign would have been hoisted over the retailer by the City if it was still a public company,” he says. “But the international opportunities and the investment in community was long underrated by the City and because Pessina has a wider, long-term view, he has got away with an absolute steal in buying the group.”

Clark adds that while countries such as Germany limit the number of pharmacies an operator can open, there will be deregulation in time. “There is movement to change these rules already and while this will take some time yet, when it happens Boots will be well placed to take advantage. There are other global pharmacy groups but Pessina is making sure the business is lined up to act fast when things change.”

Clark says the robust results show that “private equity and Pessina have provided an opportunity for Boots that the stock market wouldn’t let the previous management achieve”. He says: “Pessina has got himself a bargain and he’s got a long-term vision, but that vision needs time and the City doesn’t allow for that.

“While there is an argument that private equity are in and out of a business in a relatively short amount of time, it will be Pessina’s job to persuade the backers to stick with it. And with the strategy he has laid out and the results already achieved, they are likely to be backing him 100 per cent.”

Pessina is confident that Alliance Boots will become the world’s leading pharmacy-led health and beauty brand and is anxious to secure the deals to achieve that. As for calling time on the recession though, Pessina is more cautious. He says: “Recent numbers are good but whether that’s the effect of the ending of the global recession or the success of our stores, it’s difficult for us to assess.” For him, strategy and deal making occupy his mind – he has no time for navel-gazing.