The Merger between Walgreens and Alliance Boots: A Match Made in Heaven?

Walgreens’s announcement that it intends to merge with Alliance Boots sent shockwaves through the health and beauty industry. Despite only operating in the US, Walgreens is already the largest health and beauty specialist retailer in the world. Alliance Boots, on the other hand, has retail stores in over a dozen countries but only ranked fourth in the world in 2011. With both retailers operating in separate geographic markets, could this be the health and beauty merger of the decade?

How the two companies are expected to merge

The merger between Walgreens and Alliance Boots will take place in two phases staggered over several years. The first phase will see Walgreen acquire 45% of Alliance Boots equity in exchange for US$4 billion in cash plus US$83 million in shares. Once phase one has been completed, Walgreens will have the option to purchase the remaining 55% of Alliance Boots equity for a further US$5 billion in cash plus US$144 million in shares. The option to acquire the remainder of Alliance Boots shares will only remain open during a six month window and is only exercisable 2.5 years after phase one has closed. The earliest the full merger could occur would be 2015, although the impact of phase one will still be felt by rival retailers, suppliers and consumers in many of the world’s health and beauty markets.

Health and Beauty Specialist Retailers – Top 10 Companies by Value, 2006/2011

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Source: Euromonitor International, Retailing

Note: 2011 data is provisional

Synergies, savings and sacrifice

Much of the rationale behind the Walgreens/Alliance Boots merger is the fact that whilst cost savings can be made across the board, almost no cannibalisation is expected to occur as a result of the merger. The primary reason for this is that whilst Alliance Boots has a global retail presence in over a dozen markets, Walgreens is confined to the US. Consequently the two health and beauty giants do not compete in any of the same geographic markets and are unlikely to do so in the future.

Walgreens has been highly successful in its domestic market, managing to defend its position as the number one health and beauty specialist retailer despite the 2007 merger between second-placed CVS and Caremark. However, the company has reached a point of saturation in this channel and whilst last year’s acquisition of gave the company an additional revenue channel, it has always needed to look outside US borders in order to secure future growth.

Alliance Boots provides that very opportunity for foreign expansion. Whilst the vast majority of its revenue comes from Western Europe, Alliance Boots has ventured into a number of emerging markets, most notably Thailand and also managed to franchise its eponymous retail brand across several Middle Eastern markets. The geographic fit appears perfect for these two companies, but there are further reasons as to why this merger makes sense.

Combination of Walgreens and Alliance Boots private label portfolios to have a major impact on the industry

Whilst sales of Walgreens’s private label products exceed that of Alliance Boots in absolute terms, the latter has achieved a great deal of success in building up a credible brand presence in key beauty and personal care product categories such as colour cosmetics. Alliance Boots’ No. 7 brand was the best selling brand in the UK for facial make-up, lip products and the second best selling brand for eye make-up. Walgreens by comparison, has no meaningful private label presence in colour cosmetics. The possibility for Walgreen to capitalise on its newly expanded private label lines is enormous and is likely to result in a greater focus on introducing many Alliance Boots proprietary brands to Walgreens stores, ultimately resulting in improved profitability.

This news, however, does not bode well for many of Walgreens suppliers. Brands such as Maybelline and Cover Girl, owned by L’Oreal Groupe and Procter & Gamble respectively, are currently the best selling brands in the US colour cosmetics market. 22% of colour cosmetics that retail in the US market are sold through health and beauty specialist retailers and Walgreens controls 28% of that channel. Any strategic push to sell more Alliance Boots products is likely to have a severe impact on the market share of major brands in the colour cosmetics category, particularly given the mid-market positioning and credibility of the No. 7 brand.

This challenge will by no means be limited to colour cosmetics and suppliers in many of the US beauty and personal care categories should consider what the likely impact for them will be.

Domestic private label penetration: Walgreens vs. Alliance Boots, 2011

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Source: Euromonitor International, Beauty and Personal Care, Consumer Health

The future of health and beauty retailing? Consolidation

With Walgreens pushing further ahead of its rivals in terms of share, the health and beauty retail market is likely to see more mergers and acquisitions as rivals play catch up. Some of these alliances will occur between retailers eager to either expand geographically or consolidate their position. Vertical linkages, particularly with the pharmaceutical supply chain are likely to be a winning formula as growth slows in many of the world’s major markets.