The Boots Company is coming under increasing pressure to prove that its venture into “wellbeing” services will deliver a healthy alternative revenue stream for the retailer and not end up as a white elephant.
Squeezed by supermarkets and department stores, the retailer has been searching desperately for new services that both differentiate it from the competition and deliver profit.
However, the profit part of that equation is proving elusive. Boots Wellbeing Services, which includes Boots Opticians, laser clinics, dentistry, chiropody, hearing centres and beauty services such as laser hair removal and botox injections, clocked up losses of £33.1m, on a turnover of £231m, for the year to March 31.
Nick Bubb, a retail analyst with SG Securities, says: “Wellbeing has lost a lot of money and Boots needs to demonstrate to the market that the businesses can generate a profit.”
Recently, as part of a management streamlining exercise, Boots has seen a raft of departures from positions associated with the development of Wellbeing Services.
Boots Wellbeing Services managing director Phil Douty, director of business development Martin Bryant and marketing chief of the laser eye clinics and hearing care centres Martin Pettifor have all left (MW July 18 and September 5).
It also transpired last week that Boots Retail UK & Ireland managing director Ken Piggott, the man ultimately responsible for the development of Wellbeing Services, will step down from his role in January to work two days a week on the company’s social responsibility agenda. Boots Retail director of trading David Kneale will become chief executive of the division. Jon Gladstone, general manager for the new retail concept Pure Beauty, is also retiring at the end of the month (MW last week).
The reshuffle has coincided with mounting speculation in the City over chief executive Steve Russell’s performance. Analysts now expect him to take a more hands-on approach to Boots Retail in a bid to prove his worth.
Bubb says: “People have begun to talk about Russell.”
Boots strategic marketing chief ZoÃ« Morgan, who oversees marketing at Boots the Chemist, Wellbeing Services and Boots Opticians is also leaving to pursue a career in senior management elsewhere (MW July 11). She has been responsible for revamping the Boots Advantage Card and highlighting Wellbeing Services through a television advertising campaign, created by J Walter Thompson.
Of the Wellbeing services, Boots maintains that the seven laser eye surgeries are extremely profitable, as are the laser hair removal services, located at the 12 health and beauty Wellbeing centres. It also claims that the 57 dental and 46 chiropody centres are on the verge of making a profit. But the bulk of the division’s £204.7m turnover comes from Boots Opticians, which made a £9m profit before tax and exceptional items.
A Boots spokesman admits that Wellbeing Services has yet to make its case, but points out that the company also came under fire over its vision for Boots Healthcare International (BHI), “a business that didn’t exist ten years ago”. BHI makes and sells over-the-counter treatments such as Nurofen, Strepsils and Clearasil and last year made a £66.7m profit before exceptionals, on turnover of £407.3m in the last financial year. It now has a mandate to target well-known drugs brands for acquisition.
However, Boots’ investment in other new areas has not always come up trumps. The company was forced to axe a new retail format aimed at men, due to lack of demand. It has also closed Bootsphoto.com, the Internet photographic service, and the Wellbeing Network, a digital TV channel run jointly with Granada, which ran up huge losses. Its e-commerce site, Wellbeing.com – also a joint venture with Granada – made losses last year of £16.9m and handbag.com, a joint venture with Hollinger, lost £2.1m.
But Seymour Pierce retail analyst Rhys Williams welcomes Boots’ innovative approach and says: “I would prefer a company to test out ideas than not to innovate at all.”
The core retail business, Boots the Chemist, appears to be in a healthy state, with profits up by five per cent to £629m. But a two per cent rise in turnover, to £4.07bn, with a like-for-like annual increase in sales of only 1.3 per cent, has caused concern among some analysts.
Mintel Retail Intelligence analyst Richard Perks believes that sales could have been greater and that the growth in profit was based on high margins rather than sales. He says: “There is a feeling that Boots has been too concerned with profitability, when really it should have ploughed back some of the gains into lower prices.”
He believes lower prices would help Boots to compete more effectively against supermarket retailers such as Tesco and Asda, which are leading an assault by the grocery sector on the health and beauty market. According to Verdict, grocers have 43.6 per cent of the sector while specialists such as Boots have 43.7 per cent. Verdict predicts that, by 2006, grocers will have 60.7 per cent and specialists just 32.7 per cent.
Acknowledging the threat posed by the supermarkets, last year Boots embarked on a joint venture with Sainsbury’s, under which its health and beauty products are sold in the supermarket’s stores. But the nine-store trial is still being assessed and may be stopped in its tracks by an ongoing Office of Fair Trading investigation.
Boots also has a toe in the premium health and beauty market, with the Pure Beauty formats. Initial reports suggested scope for up to 65 such outlets. Only six have opened so far, and Boots is assessing the trial.
Williams does not hold out much hope for the format, predicting: “Pure Beauty is stopping – they won’t make any money out of it.”
In an attempt to boost sales and answer its critics, Boots is putting in place a three-pronged strategy – refurbishment of its 1,400 stores, improved customer service through training and bonus initiatives, and development of new health and wellbeing ranges to fill up the space left vacant by the offloading of gifts, music and other products extraneous to the company’s core health and beauty offering.
Unless this strategy can deliver increased sales growth for Boots, it is unlikely that we have seen the end of the management changes.