Transatlantic tie-up creates healthy future for Alliance Boots

The partnership between health and beauty groups Alliance Boots and Walgreens is one of the biggest international deals in years.

Not since Walmart’s move on Asda has there been such a significant transatlantic tie-up and it has prompted much debate.

There have been some concerns about the future of such a famous UK name should control be transferred across the pond, and questions about how complementary the retail businesses are.

And in the US, Walgreens’ shares fell 10% in the two days after the deal was announced, as investors there sought to digest the implications.

But Alliance Boots executive chairman Stefano Pessina and Walgreens president and chief executive Gregory Wasson are united in their conviction that the partnership makes sense and will position both brands to play an even bigger role on a global stage.

They are confident that both businesses share fundamental common values. “Walgreens is the best possible partner for us,” Pessina says. “Walgreens is the closest to Boots for history and values and I believe it understands that the world is changing. It has adapted as we have adapted.”

Walgreens, a 100-year-old drugstore group, has almost 8,000 stores across the US and Puerto Rico. The retailer’s proposition is viewed by many observers as different to that of Boots, epitomising the American drugstore model, which has more in common with convenience stores in the UK.

But Wasson echoes Pessina’s view and maintains: “I don’t think there are two better brands in the industry. Anywhere in the world, people would recognise one of those two names.”

Worldwide presence

The global point is central to the deal. Pessina, who created Alliance Boots through a merger with his pharmaceuticals business Alliance UniChem in mid-2006, had his eye on the creation of a global operation even before that transaction and his subsequent acquisition of Alliance Boots alongside private equity firm KKR.

Pessina has long been convinced that the industry needs a global player to fit with the suppliers, which are international giants, and to take advantage of the opportunities brought by rapidly developing technology.

He says: “It is quite obvious and natural that a global player will be able not only to compete better, but to understand the needs of the customer and the patient.

“This was obvious to me many years ago and I’m still convinced this is the appropriate route.”

One of the biggest opportunities of linking with Walgreens lies in the potential to sell Alliance Boots’ flagship brands such as the No7 and Soltan ranges through Walgreens’ US network and further afield as the partnership grows in emerging markets such as China and Latin America.

Alliance Boots already sells product through Target stores in the US, and Wasson says it’s likely that Target and other retailers will benefit from increased recognition of the brand once it is sold in Walgreens stores.

Access to such brands is a key element of Alliance Boots’ appeal to Walgreens, which has been overhauling its stores.

“I’d like beauty to be a much bigger part of our offering,” says Wasson. “Boots has about 50% of the market share in the UK, which is impressive. It has relationships with prestige brands such as Estée Lauder. They will be able to accelerate what we’ve already begun to head towards.”

Wasson explains that the Walgreens proposition went through a transformation after he began slowing the rate of store openings. The approach has allowed the continued addition of new space – “ample store growth” as Wasson puts it – but also changes to the existing portfolio, which includes the Duane Reade chain.

Changing focus

Using what Walgreens calls the Well Experience, it has piloted 200 store refurbishments, bringing the proposition closer to that of Boots, although still retaining the drugstore elements US shoppers expect.

Wasson says he has opened up stores by lowering the shelves and moving fittings away from the windows to let in more light.

“We’re expanding beauty and putting in more of an eloquent beauty offering,” he says. “We’re also extending our fresh food offering. We want to take advantage of convenience.

“People’s habits are changing. Before, people would go to the grocery store for their shopping but today it is more about ‘today’ and immediate meal consumption.”

Retail Week revealed last month that Boots hopes to expand its food offering, focusing on healthy evening meals, and a launch is expected in pilot stores later this year.

The retailer is understood to have been talking to Budgens owner Musgrave about a food offer, but again the tie-up with Walgreens could help Boots develop that side of its business. Wasson says Walgreens’ Delish food brand is a ‘great example’ of its developing food offer.

But from the perspective of Alliance Boots, one of the greatest attractions of the deal is to share Walgreens’ pharmacy and associated IT know-how.

“The best thing we can take is Walgreens’ expertise in software and pharmacy,” says Pessina. “In the US they have developed pharmacies much more than we in Europe. We in Europe don’t perceive the sophistication of the pharmacy part. For sure we can take advantage of that know-how.”

Wasson concurs: “We’ve invested heavily in our pharmacy systems and services. They’ve probably invested less in the pharmacy space and more into the front-end.”

Pessina says that Boots may look at exploring other categories such as fashion dependent on market demand.

“If I see clear demand for customers in this direction then we will go there,” he said. “But for the time being our offer is what the customer wants. It would be premature to expand the range at the moment.”

Both retailers are going through big changes independent of one another as they seek to improve and evolve their offering against a tough economic backdrop.

This is, say both Pessina and Wasson, one of the reasons for the transaction being phased in two parts.

Walgreens is to acquire 45% of Alliance Boots initially and is likely to pick up the remainder in three years. The aim is that both companies trade separately while they target synergies between them of up to $150m (£96m) in the first year and $1bn (£640m) by the end of 2016.

Pessina explains: “The deal is in two stages in order to allow us to accomplish projects the two companies already had in the pipeline.

“Because of the transaction, the pipeline of acquisitions and agreements has been put on hold or slowed down but we will be able to resume normal proceedings.”

Wasson says: “We wanted to focus on minimising distractions. It will give us time to think through things rationally and we have talent to put together.

“One investor asked me why we didn’t do a one-step agreement, but I think that would have been too much for the businesses to absorb.”

Despite the dip in Walgreens’ share price once the news was disclosed, Wasson and Pessina do not seem fazed. 

There is confidence that Walgreens’ US investors will welcome the deal as they get to understand it. “As the week went on and we met with as many of our large investors as we could get to, once people understood the strategic rationale, positives began to build,” says Wasson.

“What we are now is a potentially long-term growth opportunity for investors for the next 10 to 20 years.”

In the UK, some observers were concerned about the loss of a British brand and wondered about the future of Boots’ Nottingham headquarters, which is at the heart of the retailer and houses its research and development laboratories as well as its product manufacturing Wasson is keen to reassure: “Nottingham is a hidden gem for research and development,” he says.

“We certainly wouldn’t want to have redundancy if it’s not needed. We would want to leverage that talent and expertise. We would like to replicate the talent in Nottingham and maybe look towards where we have other bases to distribute products.”

Advantage points

One of Boots’ most famous assets is its loyalty scheme, the Advantage Card. It is highly regarded among the British public and often tops lists of the best loyalty cards. So will the merger of the companies include taking the Advantage Card stateside?

Wasson says that Walgreens was already preparing to launch a loyalty card this autumn. “For years we didn’t believe we needed one,” he says. “But we understand the best parts of the Boots programme, which is incredible, and we aim to strengthen it and make it more robust.”

Wasson wouldn’t be drawn on the name of the card, which has already been chosen, but he said it was doubtful it would adopt the Boots title.

Online is another opportunity for the partnership, as Walgreens owns both the drugstore.com and beauty.com websites. Boots has been driving its multichannel abilities over the past year, improving its website and opening a new warehouse in Burton upon Trent to facilitate faster and more efficient online orders and deliveries.

“We are trying to keep pace with the times and we’re going fast with online, so we will analyse very clearly if we can take advantage of Walgreens’ experience,” says Pessina.

After envisaging a transformational deal for so long, Pessina says it would make his “dream come true” to create a truly global company. He will own an 8% stake in Walgreens, and once the deal is done he expects to be the biggest shareholder in Walgreens “by far”.

But once that happens, and when Pessina will be by his own admission almost 75, what comes next for the Monaco-based billionaire?

“I will still have a very strong interest in the industry so we have to see where any project of consolidation will be at that point,” Pessina says. “In the next three years, I will work actively to continue this project.

“I believe that if this project is finished to a certain extent [within three years], I can help Greg to continue the project and bring it forward.

“I am a strategist, I can run a company and drive good results. But there have been many years when I worked on deals and created a strategy for the company where I was working.

“I believe if we look to the future and the people that we have working here and at Walgreens, we would be able to put together a very good business to drive double-digit growth.”

For Pessina, it looks as if this big deal will be a crowning moment in his career, but not necessarily the end of it.