New Medicine

As supermarkets encroach on the health and beauty market, and a government investigation threatens to slice drug prices, Boots is retaliating with a fierce programme of brand extension nationally and overseas. Can one of the most trusted UK br

Boots’ media relations manager Francis Thomas was on the end of a close shave last week – to promote the launch of the company’s men-only stores. The publicity stunt, in front of an assembled throng of business journalists, is an example of how Boots is openly looking into every conceivable area to extend its brand and keep the company at the forefront of UK retailers.

It has every need to do so. Despite having a brand more trusted than the Royal Family (according to research), Boots is facing fierce pressure from a number of quarters. It is about to lose its influential chairman and chief executive Lord Blyth, who will step down at the end of July next year. Furthermore, a high-street price war is forcing Boots to prove it is not price-led but driven by brand value. To add to this, its pharmaceutical heartland is under assault from lower supermarket prices and a government inquiry into retail price maintenance (rpm), a practice used by over-the-counter medicine manufacturers to keep their products at a premium level. Finally, City analysts have dented corporate confidence by derating the Boots share price.

The men-only stores are an attempt to tap into the male market following estimates gleaned from the company’s Advantage loyalty card that 80 per cent of its regular trade comes from women. The stores launch with trial outlets in Bristol and Edinburgh before the end of the year and will sell only men’s toiletries.

Last week the move was received in the City with a drop in the share price of 6.5p to 779p.

At least one retail analyst is sceptical. He says: “I didn’t believe the data Boots used to support the men’s launch. It says 45 per cent of men use a moisturiser every day. I doubt it.”

Whatever the success of the new stores, which are hoped to be rolled out over the next three years at a cost of &£1m per store, the new initiative points to wider problems for the Boots Group, and particularly its core Boots the Chemist chain.

Expanding services

Boots has recently embarked on massive expansion. This has included the testing of in-store chiropody, dentistry, in-store doctor’s surgeries, an innovative share scheme for employees and a new-look Website.

The company is also considering adding life insurance services and banking to its health and travel insurance services, launched last year (MW August 19). Next month, the chain’s Website will be extended to take in e-commerce, probably directed towards its core female consumers.

In addition, Boots is revamping the look and layout of each of its 1,300 UK stores, starting with flagship units at the Bluewater shopping centre and a new store in Manchester.

In tandem with this, the group is also pursuing an aggressive programme abroad where Boots Health & Beauty stores are now operating in the Netherlands, Thailand and Japan. The company is in discussions with Mitsubishi regarding a joint venture in Japan, which could lead to the opening of 400 Boots outlets.

It is part of a fierce programme of redevelopment and brand stretching which analysts put down to the company’s need to reduce its exposure to the UK market, where they predict a tough future. Boots’ is up against pressure from the Government to abolish rpm, which the pharmaceutical industry argues exists to support local chemists by keeping margins high. However, it is the supermarkets, and most recently the entry of American general merchandise retailer Wal-Mart with its &£6.7bn takeover of Asda, which present the most significant problems for the chain.

Wal-Mart’s deal with Asda is expected not only to hit the supermarkets in food and general merchandise, but to lead to wide-ranging price cuts in Asda’s health and beauty ranges.

One analyst says: “Boots has come to the conclusion that it has to distance itself from the pricing game by differentiating itself from the supermarkets. It has traditionally allowed the supermarkets to compete over the sale of small items such as toothbrushes and toothpaste. But now supermarkets are after the high value areas as well. With all these investments, there is an element of Boots running quite close to standstill.”

Another leading analyst says: “Boots has had scares before, but this time there is a feeling that the competition will get nasty and it will have to respond. It is going to be difficult not to compete on price or through other promotional offers.”

Last year, Boots’ pre-tax profits before the sale of the troubled Do It All DIY business, rose by 1.3 per cent to &£561m in a tough retail environment. Its core Boots the Chemist chain in particular performed well, achieving like-for-like sales growth of 2.6 per cent. However, despite these well-received results, the company’s share price has dipped over the last twelve months to 770p from a high of &£10.67.

Nick Bubb, retail analyst at SG Securities says: “The devaluation does seem a little overdone but it is a reference to the concerns the market has about competition. When Boots might have recovered, the entry of Wal-Mart stalled things. Behind the derating lies the issue of whether it can keep moving up gross margins.”

Boots’ response to increasing competition has been to launch a wealth of investments in new services, based on the trusted Boots brand.

A Boots spokesman says: “Our strategy has to be to differentiate the brand – we are not a health and beauty supermarket, we are a health and beauty expert.”

Exploiting opportunities

However, concerns are emerging that none of the new initiatives, of which Boots promises more, will be enough to stave off pressures on its central chemists business.

A City source comments: “Generally there are some good opportunities for the company but they are small. Boots is stretching its brand based on its perceived trust, but these ventures are minimal compared with the size of its core business.”

Another market source adds: “There is a feeling that it needs to pull something special out of the hat which will not only differentiate itself, but will also make money.”

Boots’ dilemma has parallels with electrical retailer Dixons, which this year gained plaudits and a &£2bn valuation for its free Internet service provider Freeserve. Partly floated, Freeserve’s continuing expansion has revived attitudes towards its parent group, which faced increasing competition and falling margins in its own sector.

Boots must find its own Freeserve if it is to break the shackles of its core market.

The company points with pride to its Boots Healthcare International – its over-the-counter business abroad – which increased sales by 12.7 per cent last year, and widened the scope for expansion in Japan. This overseas strategy lies at the heart of Boots’ response to competition in its traditional home.

Last year, the company more than doubled its presence in both the Netherlands and Thailand, taking its number of stores abroad to 28, as well as launching its first store in Tokyo, Japan. A company spokesman states: “We have not gone into these places to have a minimal presence.”

Should Boots’ overseas expansion succeed, it would go against the grain of UK retailing abroad. The country’s biggest and most trusted brand names – including Sainsbury’s and Marks & Spencer – have enjoyed patchy success overseas.

M&S, which shares with Boots a position of dominance in its prospective markets, this year announced it was pulling out of many foreign markets, where its format has failed to take off.

However, Boots’ success in the UK, where Wal-Mart could eventually take share in the pharmaceutical sector, relies on extending the Boots brand. Combined with new brand extensions, Boots has invested heavily in store refurbishment.

The aim of the revamps is to offer customers trained health and beauty staff in the stores as opposed to shop assistants and cashiers. For example, a new flagship store includes consultants on nailcare, hair styling, cosmetics and a new-look carousel dispensary service which cuts waiting times by 75 per cent.

This move, combined with &£250m of investment last year, is reported to have increased the company’s operating costs to around ten per cent of turnover.

Adding value to higher prices

But some question whether the changes, while securing a point of differentiation from supermarkets, offer enough to balance higher prices.

Bubb, of SG Securities, says: “Customers will ask themselves whether they are getting value for money. When you come out of a Boots store you have to ask whether you feel you’ve been ripped off. I’m afraid to say that, well, yes you do.”

However, despite problems many in the market are not prepared to dismiss Boots.

Boots joint managing director Steve Russell is mooted as the most likely replacement for the influential Blyth, while his co-director David Thompson has been suggested as a replacement for chairman. They are considered two of the most competent retail managers in the UK. As Boots enters an era of even tougher competition than that which Blyth watched over in his ten years at the company, strong leadership may determine its survival.

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