Walgreens’ announcement on 6th August 2014 that it intends to complete its takeover of Alliance Boots signals a monumental change in H&B distribution. In a stroke, they have created a company that is three times the size of Boots, with buying-muscle to match…
The new company has a truly global footprint and so becomes a vital partner for global brands, especially in H&B categories…
Working through the detail, it becomes obvious that, given its high combined gearing, the presence of a key shareholder KKR, one of the world’s largest private equity companies, the main measures of success will be financial. In addition, it is possible that part of the original strategy was to consider an inverse taxation move whereby Walgreens would transfer its tax domicile to Switzerland – like Alliance Boots – and thus escape high corporation tax rates in the USA of 37%, and save up to say $400m per annum by availing of Switzerland’s 21% tax rate.
Walgreens’ decision to remain domiciled in the US means that Walgreens-Boots would therefore need to generate up to an additional $400m/annum in order to neutralise the potential ‘loss’ in after tax profitability.
WBAD (Walgreens-Boots-Alliance-Development) was set up to generate synergies and these have already yielded $154m in the first year, and these results will be expected to continue to meet stock market expectations…
What does this all mean for H&B suppliers?
Essentially, as of the takeover date, they will be dealing with a financially driven public company, like never before. However, as a result, Walgreens-Boots are now in a position to appreciate the financial benefits of stocking H&B products, in a world where cash is king. This makes it imperative that H&B suppliers are able to calculate and demonstrate the financial impact of their brands on the customer’s P&L.
In other words, given that retailers operate with average retail gross margins of 25%, Net Margins of 5%, and average stock rotation of 20 times per annum, it can be seen that H&B brands can provide significant advantages to the retailer. In fact, with their gross margins upwards of 40%, potentially netting the retailer 8-10% or more, and with daily deliveries of best-selling SKUs resulting in 200+ rates of annual stockturn, it means that many H&B brands are net contributors to the retailer’s profitability.
This has to appeal to Walgreens-Boots, as it enters this new phase in its development as a public company with a global footprint. However, the onus is on the supplier to take the initiative in calculating and demonstrating this financial impact on both supplier and customer businesses, in order to leverage these advantages in negotiation…
In practice this means that H&B suppliers need to be able to calculate the full cost of dealing with retailers as a basis for demonstrating value to the customer. In other words, in the case of a H&B supplier on 10% net margin, for every £10k invested in a customer, the supplier must achieve incremental sales of £100k to break even, or suffer profit dilution…
This means that individual brands need to be costed in terms of what the retailer actually receives, such as margin on sales, free credit of 45+ days, at a nominal interest-cost of 10% per annum, together with any settlement for early payment of invoices. Special attention should also be paid in calculating the full trade investment given the retailer.
As you know, in the case of H&B brands trade investment can amount to 20% of a supplier’s sales or more…
Finally, a fast developing element in the UK/EU supplier-retailer mix are payments via ‘deductions’ off invoice, taken by the retailer because of issues related to non-fulfilment of supplies agreements. In the US, deductions can amount to 7% or more of supplier’s sales.
To add this ’cost & value’ element to the negotiation process, the supplier-NAM simply has to be able to make simple calculations of Net Margin, and Stockturn from the retailer’s annual accounts, all available from Companies House at £1 per company report.
While online, it can be interesting to download details of competitor H&B companies to gain an appreciation of the relative profitability of other players in the category.
However, the most revealing insight may be derived from a download of your own company annual report, when you can see how your results appear to a curious buyer, allowing you to hopefully pre-empt obvious questions…
Welcome to the new financial world of your Walgreens-Boots trading relationship…
