March 30, 2007

Alliance Boots: Community Pharmacy Upgrade

During its pre-close trading update, Alliance Boots announced its plans for the refurbishment of the Alliance community pharmacy chain as "your local Boots pharmacy" following trials. These stores will have to show significant uplifts to prove the benefit of the merger to the City.

Over the past four months, following the July merger, Alliance Boots has been trialing a new format for the Alliance local community pharmacies which combines the Boots branded retail offer, its own label products and the Boots Advantage Card loyalty scheme, with a tailored local community pharmacy proposition.

According to the company the trial has produced substantial increases in both retail sales and dispensing volumes which has encouraged it to roll-out this new format, "your local Boots pharmacy", using it to emphasize its credentials as the leading UK pharmacy-led health & beauty retailer. The rebranding and refit program will take at least two years to complete across the majority of the chain and will cost GBP65 million.

The point of the merger was to bring greater scale to Boots and Alliance's businesses in the pharmacy sector and the company is in the middle of a three stage process - firstly cost savings from the merger, secondly UK retail development and thirdly international expansion. By leveraging the value of the Boots brand in the pharmacy sector the company expects to establish itself as the leading UK health-led retailer and fight off competition from the supermarkets. However, the slowness of the conversion may dilute its strength.

The supermarkets have steadily been building share of the health & beauty market - so much so that they account for nearly half the market and with their growing non-food space and expansion of pharmacy operations are beginning to build a significant share in the retail pharmacy sector too. The Verdict Research report How Britain Shops 2007 Personal Care shows that supermarkets have all increased their share of visitors and main users, while Boots share has declined.

The convenience of buying personal care products with your weekly shop is expanding into picking up prescriptions and getting advice from in-store pharmacies. Furthermore, often these in-store pharmacies are larger and more attractively merchandised than many of Boots' own stores. Therefore, it becomes even more pressing for Alliance Boots to establish its new format as soon as possible or it will be in the position of having to win customers back from competitors.

The initial uplifts from the trial format are reported to be very good and margins should be enhanced in these stores from the addition of Boots own branded products. With around 900 stores still under a variety of fascia (not all are branded Alliance) the total like-for-like increases and margin improvements could make a significant difference to the business. Naturally, the logistics of refurbishing 900 stores as well as the costs poses a problem, but the sooner it can complete this phase, the sooner it will be able to capitalize on the merger.

Source: Verdict Research