May 17, 2013

Ever bigger Alliance Boots

photo: Alliance Boots
Stefano Pessina: "Our partnerships put us in a unique position to become the clear world leader in both pharmacy and pharmaceutical wholesale"
For the fourth consecutive year, pharmacy-led health & beauty group Alliance Boots has delighted its owners by increasing cash flow and earnings, while significantly reducing net debt.

Revenues at the Swiss-based company for the year to the end of March 2013 declined slightly (-2.6 per cent) to £22.8bn but remained stable in constant currency terms (up 0.6 per cent).

In a rare use of management-speak without hyperbole, Executive Chairman Stefano Pessina described 2012/13 as a "transformational year" at the company's annual press conference in London.

The billionaire co-owner of Europe's largest drugstore & pharmaceutical wholesaler was referring to the strategic partnership with leading US drugstore chain Walgreens and the recent joint agreement with American pharmaceutical services company AmerisourceBergen.

To date, dealmaker Pessina has proved he has the Midas touch. Undaunted by mountains of debt, the Italian has forged a global giant through international participations and partnerships. But will big always be beautiful?


Beauty's vital statistics


Let's look at the figures in more detail. Group top line was generally weak due to an unfavourable euro exchange rate, the expiry of patent protections, generic substitutes, and tough trading conditions on recession-hit markets in continental Europe.

Group trading profit, however, was up over 6 per cent to £1.3bn, while ebitda grew 4.5 per cent to £1.5bn. Underlying profit (after tax) rose nearly 13 per cent to just over £800m.

Trading profit at the company's 2,500-odd health & beauty stores rose just under 7 per cent to £865m, with UK retail operations jumping nearly 9 per cent to £813m.

However, trading profit was lacklustre at the international retail division. UK trading was mixed, with strong premium cosmetics ranges, such as LA-inspired Smashbox and anti-ageing ranges, but weaker fragrance sales.

The increasingly dominant Pharmaceutical Wholesale division again delivered a robust overall performance with currency-adjusted revenues up 1.5 per cent to £16.4bn with trading profit jumping over 8 per cent to £435m in constant currency.

Fuelled by the Walgreens and AmerisourceBergen arrangements, Pessina was gung-ho about the prospects of the group, which in 2015 will run at least 11,000 drugstores in twelve countries and whose pharmaceutical wholesale division already supplies over 170,000 chemists and hospitals in 20 countries:

"In a world where globalisation is increasing at a pace, our transformational partnerships put us together in a unique position to become the clear world leader in both pharmacy and pharmaceutical wholesale."


No pause for breath


The 71-year-old, whose current 8 per cent stake in Walgreens could rise to around 20 per cent when the second phase of the merger is completed in 2015, isn't pausing to consolidate Alliance Boots. True to form, he sees "a great future for the group".

This could include entry into large, high-growth markets such as South America and, above all, the expansion of operations in China from currently 17 provinces to full national presence in all 34.

Despite Pessina's uninterrupted run of success at Alliance Boots, it was perhaps surprising that the journalists attending the press conference seemed content merely to record yet another presentation of monumental corporate weight, breathless growth, and seemingly limitless ambition.

But does size always equate to success in retailing & wholesaling? For we live in a world where every second merger eventually fails (cf. Daimler-Chrysler), succumbing to diseconomies of scale or corporate culture clashes. And big, illustrious retailers such as Ahold have come a cropper in the past due not least to their international complexity.

Given the relentless succession of global partnerships, participations, and internationalisation that staff have had to cope with over the last six years at Alliance Boots, itself the product of a big merger, is it unjust to question a success story?

Does the left hand still know what the right hand is doing?  And is management, involved in a permanent game of catch-up, losing its customer orientation?

After all, long-term retail success does not only depend on the hunt for ever greater inter-group synergies and back-office efficiencies. Far more important are the experience of customers every day in the stores and whether they still trust the retail brand.


UK consumer snapshots


As the press conference was held at Alliance Boot's office in Oxford Street, London's busiest shopping area, it was worth asking a few passers-by afterwards about how they see the company:

"Assistants are like most others in big stores: young, untrained, and mostly part-timers. I guess that all the retailers want to avoid charges on tax and pensions! But at least Boots personnel are attired in white coats which makes them look more professional. One thing's for sure, though, they can't be more incompetent than the Tesco pharmacies I've encountered."

"I buy my 'Boots No.7' make-up from them although I find it expensive. It's good, though less than Yves St. Laurent, which I preferI buy no. 7 twice a year from them when there are 'buy 2 get 3'-offers."

"To enter my local Boots somehow is no longer a pleasure. I did request once that they turn down the terribly loud disco music, and I must admit that since last year I have not heard it again. They are very expensive like most chemists, but Superdrug are cheaper."

"The worse thing about my Boots is that there are never any 'walking' staff on the shop floor. You can't find what you want, and there is never anyone to help you. Sometimes I have to get in a queue at the cash counter to ask where something is."

"Two years ago, I went to Boots for my free yearly eye test. It cost me an extra £10 for them to look at the back of my eye, and they showed me on a computer screen how I had a bit of macular degeneracy. SpecSave were doing the same service for nothing, so that the last two tests have been with them. At Boots, the display of spectacles is not pleasing, so I even bought a pair of TV glasses from SpecSave for £25. So SpecSave gets my vote!"

Of course, such a spot check could never be representative, but five people asked and five negative opinions! What is one to make of it?


Global scale, local commitment?


Alex Gourlay, chief executive of the Health & Beauty Division, would presumably vehemently deny this criticism. He says he is "passionate" about customer care and providing a broader range of services. Gourlay is convinced that Alliance Boots "can achieve global scale without losing commitment to the UK High Street".

So who is right? Certainly, Boots has always been accused of being pricey historically — long before the Pessina era. But the stores do offer quite a lot of changing, well-priced offers at any one time, plus trusted ranges, with mixes of all the brands, and competitive own label. Clearly, however, they still have some work to do on customer price perception.

The generally bright, airy stores certainly generate huge footfall with their prescription business. But this can be slow and over-bureaucratic, although this may be to encourage folk to wander around and make extra purchases while they are waiting.

Service on the shop floor can also sometimes be slow and hard to find although this seems to vary from store to store.

Independent pharmacies in the UK generally feel much quicker, but admittedly for a restricted range of OTC medicines. Boots has a much wider offer than many community chemists, and the service is certainly better than at Superdrug or the supermarkets.

So has Alliance Boots under Stefano Pessina gone big and global only to lose it on the High Street? Despite continued high customer footfall, the jury is still out.


Big boy in pharmaceutical wholesaling


When it comes to pharmaceutical wholesaling, however, Pessina's vision is much harder to doubt. Historically, margins in the trade have been painfully low in many European countries, and increased scale will give the company more clout with the global pharmaceutical manufacturing giants.

If Ornella Barra, the quietly spoken chief executive of Alliance Healthcare, calls them on the phone today, it is highly unlikely that they would ask the lady to ring back later.

In Germany, where Alliance Boots acquired Anzag, one of the country's top three pharmaceuticals wholesalers, in 2010 managers at what is now Alliance Healthcare Deutschland talk very positively about the change in perspective within their company.

"The takeover by Alliance Boots has freed us from the clutches of pure wholesaling and its desperately low margins. We now have the money to also develop value-added customer services."

So Stefano Pessina looks very right in pharmaceutical wholesaling and services where the big guns count.


Adieu junk bond status


Parallel to all this, Alliance Boots has been reducing net debt and using its strong cash flow to deleverage towards investment grade status.

After ending the historical handicap of gross overstaffing behind the scenes at head office etc., Pessina has cut costs and boosted margins with a better product mix. In fact, you can almost feel global products being pushed through the corporate vertical chain to enrich assortments within the stores.

In the run-up to the second and final round of the Walgreens merger in 2015, the pressure is on to hunt for even more international synergies that Pessina believes could exceed one billion dollars in only four years.

Doubtless he will find them! But let us hope that this colossal exercise will also come with better service and sharper pricing within the stores.

Finally, what will become of the vast group when strategic mastermind Stefano Pessina leaves? This is surely not an unreasonable question to ask when the man is already in his 70s.

But Pessina shows no inclination to retire to his home in Monte Carlo. After all: "Youth is the gift of nature, but age is a work of art."

 
Related article in German: By Mike Dawson, Lebensmittel Zeitung, no. 20, 17.05.2013


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