A Boots Takeover Could Still Be Big, But Rocket Science Isn’t Necessary

When private equity last bought Boots in 2007, it was a big deal. Big because the buyout industry didn’t acquire UK blue chips, big because a lot of leverage was involved, big because of the cachet Boots had with UK consumers.

Boots is on the block again. That’s still going to be a big deal, even though the price tag is perhaps half of Alliance Boots’ 15 years ago. But it won’t be rocket science for a buyer to revive the fortunes of a company that still holds a special place in consumers’ affections.

The fate of the company is quite obvious. Just as Asda discovered with Walmart, a global strategy set in the US hasn’t always worked in the UK. Walgreens has been distracted by issues in its home market. The solution for Boots is some local attention, investment and a sale in four or five years.

It could go to a professional buyer. Sainsbury’s and Tesco are both run by former Boot men. But Tesco has just recovered after years of misguided deals, and Sainsbury’s is still struggling with Argos. It would be a mistake for either of you to try to buy boots.

It could go public. But as anyone who’s visited a Boots store or used its still clunky website knows, it needs some work. This is not an easy e-commerce growth story of the type that LSE investors welcome.

It will likely go to private equity – especially since CVC’s Dominic Murphy, who studies tenders, knows the business inside out. He completed the 2007 contract at KKR; he has since served on the board of directors of Boots and Walgreens.

The private equity playbook will probably work something like this.

First things first: sort through the online offer of Boots. Walgreens is touting progress on this front. Sales on Boots.com in the past quarter more than doubled from pre-pandemic levels, Walgreens said in its results last week. But it’s not hard to double things down when you’re starting from a very low base. E-commerce accounts for just 15% of Boots’ retail sales, despite boasting of being an ‘omnichannel’ retailer for years.

Second: improve how Boots uses Advantage card data and manages promotions. The more than 14 million loyalty card holders have long been a strength of the company. But that figure fell to 11.7 million active customers after the pandemic changed shopping habits. While Tesco has made carefully tailored promotions through its Clubcard prices a key part of its revival, Boots is failing to make the most of its scheme.

Third: extend investments in promising stores and renegotiate leases as they go. Boots has invested in beauty salons, but the proportion of dull stores is still too high. The majority of its stores are leased, with an average of five years still to run on leases. Next has shown the savings that can be made: in recent years it has agreed new rents at around half the previous level.

Fourth: Invest more money in marketing Boots’ own brands, including No7 and Soap & Glory. These haven’t achieved the American traction that Walgreens was aiming for, but they still show promise.

Leave with a great story about opportunity in beauty and online pharmacy.

There are clear challenges for anyone buying boots. It takes a skilled retailer to roll up their sleeves and get stuck in, but no names have been announced as of yet. The regulated pharmacy part of the business adds complexity. This can make it harder to close stores. This limits the cost savings a new owner can make, since pharmacies must be staffed with qualified pharmacists, while the NHS limits the profits to be gained.

One wonders how smart it was for KKR to buy Alliance Boots in 2007. It ultimately gave a good return, but also generated some rather less industry-friendly headlines about job cuts.

Boots is alongside John Lewis and Marks and Spencer as a brand that UK consumers love but are not really willing to shop from. Another period of private equity might not be acceptable to everyone, but if Walgreens wants to get rid of Boots, it might be the only option.

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