The long-awaited sale of Superdrug to Dutch drugstore giant Kruidvat for £280m has come at a crucial time for the UK’s second largest health and beauty chain as it faces increased competition from supermarkets.
Kruidvat should help Superdrug devise a strategy to make inroads into the £11.4bn UK health and beauty sector. But the new owners will face challenges from old stalwart Boots the Chemist, as well as from supermarkets – led by the likes of Tesco and Asda.
According to the retail consultancy Verdict, in 1995 supermarkets held a 34.3 per cent share of the health and beauty retail sector, but by last year that had increased to 39 per cent. Verdict predicts supermarkets will hold a 48.6 per cent share of a market, which is estimated to be worth £13.8bn by 2005.
Asda recently announced that it is extending its cosmetics range to include brands such as Maybelline and Rimmel, to compete directly with Boots and Superdrug, while Tesco has hired make-up artist Barbara Daly to develop a cosmetics range.
In the face of increased competition, Boots is repositioning as an upmarket supplier of health and beauty products and services. It aims to provide customers with a one-stop shop for all their well-being needs by offering the services of opticians, dentists, chiropodists and reflexologists. The company also plans to open a chain of upmarket beauty shops, called Pure Beauty, and launch Boots branded gyms.
But even a brand like Boots, which enjoys unrivalled loyalty and authority in the UK health and beauty industry, does not always translate into other markets.
Last month, the company pulled the plug on its foray into men’s grooming stores, closing the two pilot outlets and scrapping plans to open a further 60. And, only two weeks ago, Boots announced it was closing its stores in Japan at a loss of £25m.
When Wal-Mart – the world’s biggest retailer – bought Asda in 1999, many predicted that Boots would be one of the biggest losers, as the US giant cut prices to the bone.
But a spokesman for Boots says that despite the increased competition from supermarkets, with their low-price strategies, the retailer has held on to its market share.
The spokesman adds: “The supermarkets are going for the commodity end of the market and selling cheap everyday items. Boots is going for the other end of the spectrum and offering people more premium ranges that they can’t get anywhere else.”
The company has signed deals with big name hairdressers and make-up artists, and is stocking brands such as Toni & Guy, Ruby & Millie and Liz Collinge exclusively in its stores.
Retail Intelligence European retail analyst Bryan Roberts believes that Boots is adopting the correct strategy to fend off competition from supermarkets by focusing on the premium end of the market and increasing its well-being offer.
He says: “The death knell has been sounded for Boots since the price war started 20 years ago. What people tend to forget is that while price is an important part of the offer, choice, service and quality are also important to customers. Even in a bog standard Boots branch, the service, selection, and authority is superior to anything Asda or Tesco can offer.”
Analysts say that Superdrug, which lacks the strong brand image of Boots, is more vulnerable to the supermarkets’ aggressive price-led strategy. Asda recently started publishing Superdrug prices alongside its own to highlight the difference and take customers away from its high street competitor.
The challenge for Superdrug will be to carve out a space for itself in an increasingly crowded market and to find an offering that is not going to be squeezed by Boots on the one hand and the grocers on the other.
The company already has 710 outlets in the UK and Kruidvat’s acquisition of Superdrug will create a European health and beauty retail group with more than 2,000 outlets and sales of about £3.1bn.
Roberts says: “As a subsidiary of Kingfisher, Superdrug was a fairly minor part of a sprawling retail conglomerate. It is now part of the third biggest health and beauty retail group in Europe, which will increase both its buying power and give it stronger management focus.”
Superdrug managing director Liz Wright is confident the Kruidvat deal will create a “powerful combination”.
She says: “Trading conditions are tough, but Superdrug has always been able to compete through its combination of great value and expertise. We are confident that the sale will give us the opportunity to achieve even greater success.”
Over the past year, Superdrug has shifted its focus away from basic toiletries and household hygiene goods to quality branded cosmetics and health and beauty items.
It has abandoned plans to roll out a discount concept called Super D, which would have sold basic health and beauty toiletries and household ranges at lower prices than Superdrug. Instead it is trying out a more upmarket store format, which will feature services such as nail bars and health checks. If successful, the format will be rolled out to 150 outlets.
A spokeswoman for Superdrug says Kruidvat does not plan to make any changes to the company’s strategy or management team in the foreseeable future.
Industry insiders agree that the Dutch company will spend at least a year assessing the UK health and beauty market before making any changes to the Superdrug format or introducing its own brands to the UK.
But already Kruidvat has announced that it is shutting down Superdrug’s online shopping service, a move that some see as a sign of the new owner’s unwillingness to pour cash into its UK venture.
One industry insider says: “Before the sale, Kingfisher was running Superdrug more and more like the Boots model. Kruidvat is very much a discount operator and I suspect it will move Superdrug more down market and develop a model closer to other discount operators.”
Verdict retail analyst Sally Bain says that Superdrug needs to distance itself from the commoditised approach of the grocers, by extending its offering in the beauty sector and targeting a younger market. It should also continue to move into pharmacies in order to build its authority and standing in the health market.
Bain says: “Superdrug has a much stronger product proposition now, having launched its own brands like Kolor cosmetics, aimed at the young, more fashion conscious, customer.”
As it becomes increasingly difficult for health and beauty retailers to compete with supermarkets on price for basic toiletries, the likes of Boots and Superdrug have to find a point of difference in what they are offering.
Boots, which last week reported a 4.6 per cent rise in like-for-like sales in health and beauty for the first quarter of the financial year, appears, for the time being at least, to be finding its footing in an increasingly competitive market. It remains to be seen whether Superdrug’s new owner can stay upright amid the turmoil.