Kamcity Library - Globalising A.S. Watson – the Alliance Boots catalyst?

With the acceptance of the KKR-Pessina bid for Alliance Boots, and the relative lack of property sell-off options, it is probable that the takeover is stage one in the formation of a global retail and wholesale giant customer for health & beauty suppliers everywhere. As a result, A.S. Watson, the world’s No. 2 H&B player, will need to accelerate the aggregation of its purchasing worldwide, and speed up its acquisition programme in emerging markets.

However, even with these changes, A.S. Watson will remain at a competitive disadvantage unless it finds a way to develop a wholesale network for the group, and add retail pharmacy to its offering in order to capitalise upon opportunities arising from pharmacy deregulation throughout Europe. The acquisition of Celesio by Hutchison Whampoa would present these opportunities in one move. With a market capitalisation of €9bn, the probable purchase price of €10bn would be well within Hutchison’s ability to pay, and given the nature of the sector and structure of the market, it is unlikely that any realistic competing bids would emerge, presuming that the competition authorities would prevent an approach by Alliance Boots.

Market changes of this nature would have major implications for suppliers everywhere. On the one hand, aggregation of A.S. Watson’s buying function for its 16 retail chains, comprising 7,200 outlets in 36 countries, would be combined in one buying unit, in order to avail of scale economies. In practice, this means that it would be possible for A.S. Watson to compare local prices and terms by channel for individual suppliers. As a result, suppliers that have pricing and terms disparities across territories would be vulnerable to demands to supply at the lowest price and best terms in countries and regions.

This will have a fundamental impact upon trade prices and credit given by H&B suppliers. For instance, a 2% difference between trade prices on a given product in adjoining countries is sufficient for a third party trader to make a profit, even more in the case of a retail chain with stores in each country. The scale of potential terms disparities can be assessed through an examination of average credit periods across Europe. Retailers in the UK typically pay their suppliers in 30 days, those in France within 58 days, Italy in 90 days, whilst Greek suppliers have to wait up to 150 days on average for their money. Suppliers should therefore conduct ‘what ifs’ on possible demands from A.S. Watson for credit terms matching those of the country that are most advantageous to the retailer.

Whilst A.S. Watson will undoubtedly make savings on buying, it will also have to compete directly with Alliance Boots via in-store initiatives. This may partly explain the focus upon in-store developments currently underway in Superdrug, its UK format. Suppliers should anticipate the spread of the Superdrug in-store initiatives throughout the A.S. Watson estate, and make plans to integrate their brand strategies with those of the retailer, in the aisle. This means finding a balance between the new Superdrug initiatives and A.S. Watson’s basic retail strategy that capitalises upon a supplier’s brand positioning, and a realistic assessment of how an aggregated player will compete with the new Alliance Boots...

Hutchison already have plans to increase their penetration of India and China, where they would automatically have a short-term advantage over Alliance Boots. Meanwhile, they would have to identify opportunities in the Americas to match KKR’s ability to acquire wholesalers in South America and possibly Walgreen in the US. To this should be added KKR’s global reach and their ability to raise appropriate finance in assembling a truly global H&B operation involving most world markets. However, by acquiring Celesio, A.S. Watson would make major steps forward in extending its ability to capitalise upon a wholesale network to exploit prices and terms disparities amongst suppliers across Europe, by physically moving product from country to country. It is important that suppliers match these moves by A.S. Watson by seeking to minimise prices and terms disparities across territories.

Another advantage of a Celesio acquisition would be in gaining access to the wave of pharmacy deregulation moving through Europe via ownership of Celesio retail, and indirectly via the wholesaler’s retail customers. Moreover, diversifying into wholesaling and pharmacy would present very little difficulty for a group that has managed to combine businesses in ports and related services, telecommunications, property and hotels, retail and manufacturing, and energy and infrastructure in a company with one of the highest rated stock in the world.

Finally, the combination of the New Alliance Boots and A.S. Watson Global represents a unique opportunity for H&B suppliers to realistically globalise their retail strategies, before these customers do it on their behalf…..

See our follow-up paper on 'managing the changes' »

Date article published: 02/05/2007

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