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Boots (UK)

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Boots is one of the UK's best known retailers, dispensing prescriptions and over-the-counter medicines as well as a wide range of cosmetics, personal care products and low-cost appliances. However, diversification into a broader selection of health services and beauty treatments from the late 1990s onwards proved less successful. In its main domestic market, the company was forced to wrestle with a slump in performance generated by fierce competition from supermarket retailers such as Tesco, while expansion into international markets was patchy at best. After several difficult years, Boots' position strengthened considerably in 2005 following a takeover by European drug wholesaler and pharmacy operator Alliance UniChem. In 2007, Alliance's former chairman successfully took the merged group private, backed by private equity investment. Strong and steady growth since then has resulted in record profits each year since 2010. In 2012, US pharmacy giant Walgreens acquired a 45% shareholding in the group, and bought out the remaining shares at the very end of 2014, prompting a full merger of the two groups to create Walgreens Boots Alliance.

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Brand & Activities

Once an unchallenged giant of the British high street, Boots struggled for several years to withstand fierce competition from supermarket retailers such as Tesco, Asda and Sainsbury's, all of whom have encroached on what was once its sovereign territory of health and beauty retail. Its biggest mistake was to respond to the challenge by adding a series of increasingly marginal premium services ranging from beauty treatments and dentistry to hearing aids and pedicure. Eventually it was forced to realize that it needed to go back to basics, reinforcing its heritage offering as the country's biggest pharmacy and healthcare retailer.

In 2005, the group announced plans to merge with pan-European rival Alliance UniChem, although this deal was greeted with a mixed response from investors and analysts. Under the terms of the £7bn deal, billed as a merger of equals, the main Boots chain absorbed Alliance UniChem's smaller Alliance UK pharmacy chain, as well as outlets in Norway, Italy and the Netherlands. More significantly perhaps, the merged group also inherited Alliance UniChem's substantial pharmaceutical wholesale business. The Alliance Boots merger was completed in July 2006. Nine months later, Alliance UniChem's founder Stefano Pessina launched a management buyout of the merged group, backed by private equity investor KKR. After a brief tussle with a rival bidder, that deal was sealed in April 2007, with a bid of £11.1bn.

In June 2012, Walgreens agreed to acquire 45% of Alliance Boots for $6.7bn. It took an option to acquire the remaining shares at an agreed rate of $9.5bn, plus the assumption of any outstanding debt. That deal took place at the very end of 2014, prompting a full merger of the two groups to create Walgreens Boots Alliance (see separate profile). It was in effect a reverse takeover of the US business, since Pessina is now group CEO, and most of the merged company's senior management team was transplanted from Alliance Boots.

Walgreens Boots Alliance now has three main divisions of US pharmacies (see Walgreens), UK & international pharmacies and global pharmaceutical wholesaling.

Wholesale & Generics

Wholesaling was actually already the biggest business within the former Alliance Boots entity. As Alliance Healthcare, it distributes drugs and other products to more than 110,000 pharmacies, health centres and hospitals from a network of more than 289 distribution centres in 11 countries. A joint venture was sealed in China in 2007 with local wholesaler Guangzhou Pharma Corp and in Germany through local partner Anzag, in which the group subsequently acquired a majority shareholding. It continues to expand its footprint through local acquisitions. It also has a minority stake in Nanjing Pharmaceuticals, a wholesaler in East and SE China. In the US, Walgreens Boots Alliance acquired a 26% stake in local drug distribution giant AmerisourceBergen in 2016. In 2018 it was revealed to have made an approach to buy out the remaining equity as well in a deal worth in excess of $20bn. The group also controls a substantial generic pharmaceutical manufacturing operation, under the Almus brand.

Retail Pharmacy International

However the group's best-known brand outside North America is Boots, the leading health and beauty retailer in the UK & Ireland. Around a third of the UK population shops at Boots every week, and it is by far the country's biggest pharmacy, comprising around 2,486 stores in the UK and 86 in Ireland, dispensing well over 100m prescriptions a year. It also has the largest share of the general beauty & personal care sector but faces stiff competition from supermarkets, especially Tesco.

To maintain its strong suit of customer loyalty, around half of the group's UK network is now positioned as "Your local Boots pharmacy". Virtually all pharmacies are licensed to offer private medical consultations or "medicine check-ups". Several also have an in-store doctors' surgery. BootsWebMD is an online information service operated in partnership with WebMD of the US.

The store is the market leading retailer in just about every personal care and baby care sector, and it also controls a large portfolio of top-selling private label products. Over 40% of all goods sold in-store are Boots own brand, and this remains the company's key advantage over supermarket rivals who have so far been slow to extend their private labels into the health and beauty sector. Boots No 7 is the UK's leading mass-market cosmetics brand, comprising around 400 different make-up, cleansing and skincare products. One of its biggest recent hits has been a low-priced anti-wrinkle cream, Serum7. Launched in the UK it has been introduced in other European markets as well, including in Italy in a partnership with Procter & Gamble. The No 7 cosmetics range is supported by lower priced teenage brand, Seventeen. Another own-brand, Soltan, is the UK's best-selling suncream, with around 24% market share. A slightly different formulation is sold by the Alliance wholesale chain to independent pharmacies in Europe as Solei SP. Boots Laboratories skincare products are sold in Italy through a partnership with Procter & Gamble, and in the US through Walgreens. In 2015 the group acquired botanical skincare brand Liz Earle. WWD Beauty estimated combined sales of private label beauty products at almost $1.2bn in 2015.

From 2000 onwards, the company took advantage of its position as the UK's biggest perfume seller to launch its own range of fragrances, branded to well-known fashion designers including Karen Millen and Patrick Cox. Since then it has launched a range of other branded or licensed products including Botanics, Soap & Glory and Boots Essentials toiletries, Liz Collinge cosmetics and Glitter Babes products for pre-teen girls. The group is also a major retailer of lunchtime snacks and drinks, with its low-calorie Shapers line its second biggest own-brand overall after No 7. Boots Advantage is the store's successful reward and credit card scheme, with 14.6m active cardholders.

Boots devised a number of strategies between 1999 and 2003 designed to reignite growth by diversifying into different sectors and international markets, but these only seemed to create further problems. As a result, virtually all have been closed. The sole remaining spin-off business is Boots Opticians, the UK's #2 in this sector after Specsavers. In 2009, this business was merged with #3 chain Dollond & Aitchison, owned by Italian eyewear manufacturer De Rigo. The enlarged business, a joint venture between Alliance Boots (with a 58% holding) and De Rigo (42%), has around 637 stores in the UK, mostly under the Boots name, and 18% share of the market, still well behind Specsavers, with around 35% share. A separate hearingcare business is a joint venture with Swiss company Sonova, operating in the UK under the Boots brand.

The group's international operations have also undergone several changes of strategy in recent years. Prior to the Alliance UniChem merger, the group initially attempted to develop its own stores worldwide. This proved unsuccessful and operations were scaled back dramatically to a chain of in-store concessions within other retailers' premises. It retained a network of what are now almost 280 stores in Thailand under the Boots name. However, the Alliance deal added a new network, and the concession arrangements were for the most part unwound. In addition to Boots-branded outlets in Thailand and the Republic of Ireland, the group now also operates around 160 pharmacies in Norway, 63 in The Netherlands and 27 in Lithuania. Most of these carry either the Boots Apotek or Alliance name. In 2014, the group took its first steps into Latin America, acquiring health & beauty retailer Farmacias Ahumada for £400m including debt. That deal added around 1,193 retail outlets in Mexico and 430 in Chile, operating under the Benavides brand. There are also around 60 franchised outlets in the Middle East, and in 2016, the group signed off on a deal to launch Boots in South Korea via a franchise deal with local giant Emart.

Divested Operations

Until 2005, the group also contained Boots Healthcare International, an important developer of consumer healthcare products, operating through over 23 subsidiary business worldwide in Europe, Asia and Australasia, including Crookes Healthcare in the UK. Brands included Nurofen, Clearasil, Strepsils and others. Boots announced plans to sell off this business in 2005. Bids were received from GlaxoSmithKline, Bayer and Novartis, but the eventual buyer was Reckitt Benckiser, with an offer of £1.9bn.

Financials

Alliance Boots showed a welcome return to form as a privately owned group, although it continues to battle currency fluctuations. They caused a 3% slip in revenues for the year to March 2013 to £22.4bn. (At constant currency rates, revenues were up almost 1%). Statutory profit for ye 2013 jumped 25% to £741m. For the year to March 2014, revenues increased by 4% to £23.4bn, while net profit jumped 31% to £971m as a result of a lower tax charge. Operating profits were up 20%.

Following the merger with Walgreens, financials are reported in US$. International pharmacy operations are small by comparison with the core US division, contributing revenues of $11.81bn for the year to August 2017, and operating income of $741m. (The US pharmacy business is eight times larger by revenues). Comparable same store sales were very slightly lower than the year before at contstant exchange rates. Pharmacy products accounted for around 35% of sales, and general retail items for the remainder. (In the US, the split is reversed, with pharmacy accounting for 65% of sales). Pharma wholesale added $21.19bn.

Walgreens Boots Alliance's total revenues from the UK were $12.55bn in ye 2017, with $16.2bn from the rest of Europe.

Boots UK Ltd filed statutory accounts for the year to March 2016 showing turnover of £6.88bn, and net profit of £437m.

Background

The roots of Boots lie firmly in the British midlands city of Nottingham. It remains the town's single biggest business. John Boot opened the British & American Botanic Establishment in Nottingham in 1849 after ill health forced him to retire from his job as a farm labourer. Despite its grand name it was just a small shop selling home-made herbal remedies. In 1877, son Jesse took over the business, renamed it Boot & Co, and expanded its range to include low-priced toiletries and household goods. Most chemists catered to a comparatively wealthy clientele, but Jesse Boot set out to attract working-class customers with what was effectively a general store, selling soap and candles as well as remedies. In 1888, he set up Boot's Pure Drug Company under the management of qualified chemist ES Waring to manufacture medicines as well. As the business grew, opening outlets in Sheffield and other cities, Jesse and his wife diversified into stationery and books, and opened cafes in their stores to attract shoppers. By 1900, there were more than 200 outlets around the country. However traditional chemists campaigned fiercely against the business, and the case was eventually brought to the House of Lords. Finally, in the Pharmacy Act of 1908, Parliament sided with Boot, ruling that general stores should be allowed to dispense medicines provided there was a qualified chemist on the premises.

The First World War gave the company a major boost, when supplies of Bayer's miracle drug aspirin, imported from Germany, were suspended. Boots began to manufacture its own version, as well as gas masks and sterilizing tablets. By 1920 Boots had attracted the attentions of the US-based United Drug Company, which acquired a majority stake in the business. Jesse Boot was knighted in 1929, becoming Lord Trent, but died two years later. However the company continued to thrive. By 1933, it had expanded to more than 1,000 outlets throughout the country. That same year, United Drug went bust as a result of the Great Depression, and a group of British investors bought back the business, making Jesse's son John Boot managing director. He extended the range of company brands to include cosmetics, launching No 7 in 1935.

In 1968, Boots extended its chain further with the acquisition of Timothy White and Taylors chemists. The company's pharmaceutical laboratory developed the drug Ibuprofen that year, which it launched in the UK in 1969 on prescription. US rights for the product were sold to what was later Pharmacia & Upjohn, who launched it in 1974 under the name Motrin. The success of Ibuprofen encouraged the company to extend its pharmaceutical business, acquiring Crookes Healthcare in 1971 and US-based Rucker Pharmacal in 1974. In 1972, the group came close to merging with pharmaceutical group Glaxo, but the deal was blocked by regulators. Ibuprofen was approved for non-prescription sale in 1983, and was in the UK under the brandname Nurofen. The company licensed OTC rights to Wyeth who introduced it in the US as Advil. In the same year, Boots acquired eye-cleanser Optrex.

The 1980s were marked by a series of aggressive acquisitions designed to increase Boots' presence on the UK high streets. The group took over Clement Clarke opticians in 1986, followed by Underwoods chemists and the Ward White group in 1989. The latter purchase cost Boots £896m, and generated a whole host of problems over the years to come. As well as a chain of chemists, the Ward White portfolio included motoring accessories chain Halfords, wallpaper retailers Fads and Homestyle, and DIY store Payless. In 1990, Boots merged Payless with WH Smith's competitive Do It All, and the two companies spent the next six years attempting to make that joint venture work, notching up substantial losses. Fads was also a disaster and was sold in 1997 for a nominal £1. WH Smith pulled out of Do It All in 1996, actually paying Boots £50m to take over their share, but the group eventually gave up on the business in 1998, selling it to Focus Retail for £68m. (The group kept hold of Halfords for several years however before selling it to private equity investors in 2002). In the meantime, Boots had also sold its baby foods company Farley's to Heinz in 1994, and a prescription pharmaceutical division to BASF a year later. Instead the company focused its attention on the OTC sector, acquiring Laboratoires Lutsia of France in 1996 (for £115m) and Germany's Hermal Kurt Hermann in 1997 (for £175m).

As competition from supermarkets became more intense in the late 1990s, Boots announced plans to experiment with several new health and beauty retail offerings. The first Boots dental practice opened in Milton Keynes in 1999. The group also tested chiropody and medical centre outlets, but a pilot health insurance scheme launched in partnership with Sun Alliance in 1998 was suspended after a year. As the financial markets shifted their attention towards the internet sector, Boots attempted to bolster its flagging share price with women's portal site handbag.com, a joint venture with The Telegraph newspaper. Later that year, the group teamed up with Granada Media to launch Wellbeing, a short-lived e-commerce business and cable channel. As a result of the subsequent downturn in advertising, the channel closed at the end of 2001.

Boots Dental Care launched in 2000, a specialised spin-off from the main retail brand. At its peak it controlled almost 60 practices, and owned the country's leading dental laboratories, Portland Ceramics. The group also operated a chain of LASIK laser correction eye clinics to partner the main optical service. In 2001, the group announced a move into hearing care, with the launch of 45 hearing care centres across the UK, selling Songbird disposable hearing aids. Also in 2001, the group announced it would test a series of Boots-branded concessions within larger Sainsbury's out-of-town supermarkets. Under the terms of the trial, the Boots range of health and beauty products replaced Sainsbury's existing range of products, occupying clearly branded space within Sainsbury's stores. In 2002 the company introduced a range of children's clothing in partnership with Adams Childrenswear. Also that year Boots redeveloped the Wellbeing name as the umbrella for an expanding range of services including complementary medicines, massage and beauty treatments. A cosmetics-only retail unit Pure Beauty was also launched in 2002. Yet few of these ventures were successful, and between 2002 and 2003 the group gradually closed down virtually all of the new ventures it had launched. The Wellbeing offering was steadily scaled back and eventually canned altogether. Even the Sainsbury's trial fizzled out in 2003 after the two companies failed to agree terms for a full rollout.

There was a similar lack of clear direction outside the UK. Boots Retail International had been established in 1997 to spearhead the company's move into foreign markets. The company first dipped its toes in the water in Europe, opening a chain of retail pharmacies in the Netherlands in 1999. However, these proved unsuccessful and were sold off to local retail group Ahold a year later. Experiments in Asia were equally inconsequential. After pilot tests in Thailand in 1997, the group made plans to develop this market and opened over 67 outlets in the country, mainly in Bangkok, while other stores opened in Taiwan. In 1999, the group opened the first of four stores in Japan as a joint venture with Mitsubishi Corporation. But none of these businesses made money, and from 2001 the group gradually extricated itself from most of its foreign markets, opting instead for a new strategy of concession outlets within other other retailers' stores.

This lack of focus was reflected in a complete overhaul of the group's senior management team. Virtually all of the top jobs changed hands, culminating in the departure of chief executive Steve Russell in May 2003. New CEO Richard Baker, recruited from supermarket chain Asda, stepped up the unwinding of unsuccessful diversifications. The laser correction, dental care and hearing care units were sold, and the group's last few chiropody and hair-removal clinics were closed. In 2005, the group sold its 50% shareholding handbag.com to Telegraph Newspapers. In the year to 2005, Boots spent more than £200m on price cuts across more than 2,000 items to maintain its competitiveness against the supermarkets. Yet it was not enough to prevent two profit warnings as a result of what Boots called continuing "subdued consumer spending". In a clear sign of the severity of the group's problems, it announced plans to sell off the Boots Healthcare unit in an attempt to placate shareholders with a cash bonus, and also raised additional funds with the sale and leaseback of 300 of its smaller stores.

Finally in 2005, the group announced a merger with European retail and wholesale group Alliance UniChem, itself formed in 1997 from the combination of UniChem of the UK and Franco-Italian group Alliance Sante. UniChem had commenced operations in London in 1938 as a wholesaler of pharmaceutical products to independent pharmacy outlets. In 1991 it established a retail presence with the purchase of the Moss Chemists chain, which it expanded from around 90 to 500 outlets by the late 1990s. Alliance Santé was established in Italy in 1977, and had grown to become the second largest pharmaceutical wholesaler in Europe by 1997, operating primarily in France and Italy, but with interests in other markets including Portugal, Spain, Greece and Morocco. Following the merger in 1997, Alliance UniChem expanded its presence into several other European markets.

In its last year as a standalone business, Boots' revenues for the year ending 2006 fell to £5.0bn, reflecting the disposal of BHI, and operating profits fell further to £349m. However the BHI sale generated a significant exceptional profit, creating a net after-tax profit of £1.8bn. Around 98% of revenues were generated in the UK. Alliance UniChem was more than twice Boots' size by revenues. Including a share of income from associates, sales for 2005 were £11.1bn, with operating profits of £332m. Wholesaling accounted for gross revenues of £8.7bn; and retailing for a further £1.3bn. Richard Baker, previously chief executive of Boots, retained that title in the merged Alliance Boots group but left following the private equity-backed buyout of group by Alliance Santé founder Stefano Pessina, along with health & beauty retail director Scott Wheway. Andy Hornby, the former chief executive of HBOS prior to its takeover by Lloyds, was appointed as group chief executive in July 2009 but resigned that role less than two years later in March 2011. No direct replacement was appointed.

Last full revision 23rd March 2018

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