Apart from the obvious advantages of collaborating enthusiastically with a US$100bn customer determined to achieve global potential in Health & Beauty, it is important to appreciate that Walgreens-Boots is committed to achieving savings on purchasing of US$100m in year one. With the Stage 1 purchase, Walgreens-Boots (US$100bn) began a process that in three years will see them become a US$130bn global player (prescription medicines, OTC and Beauty).
In other words, there is plenty of time for suppliers to procrastinate on issues like prices and terms disparities…Wrong!
As you know, for a retailer, purchasing savings can best be delivered via a combination of:
- Extended credit and early payment discounts (vital to be able to calculate and demonstrate the cost-value implications of settlement discounts).
- Smaller & more frequent deliveries (with penalties unless zero-defect).
- Scale buying (quantity discounts, the Walgreens-Boots combination is 3 x Alliance Boots turnover).
- Trade funding increases (can be 10-15% of a supplier’s sales).
- Deductions (up to approx. 7% of a supplier’s sales in the US).
- ‘Harmonising’ suppliers’ prices and terms, globally i.e. across Alliance Boots’ footprint in UK and Rest-of-world, and Walgreens’ footprint in US and Rest-of-world (most suppliers have defensible pricing and terms in most places, but everywhere?).
It is vital for suppliers to be able to calculate their current exposure on these trading conditions, in terms of real cost and also value to the customer, before rather than on receipt of a request…
Our workings for the impact on your business of just one of these: quantity discounts, are illustrated in Step 6 of our recommended action, as follows:
Action:
- Sales & Terms US: Check your US colleagues for your company sales to Walgreens, along with retail/wholesale margins, net margins on their Walgreens business, credit periods and terms, plus pointers on trade funding and deductions…fast!
- Sales & Terms UK: Check your UK and rest-of-world colleagues for your company sales to Alliance Boots, along with retail/wholesale margins, net margins on the AB business, credit periods and terms, plus pointers on trade funding and deductions…faster!
- Disharmony exposure: Quick ‘what-if’ on all of the above rising to the highest common set, the worst scenario for the business…even faster!
- Getting harmonised: Map out key steps to harmonise prices & terms….already overdue!
- Selling Prices to Walgreens and Alliance Boots: Run the following numbers for discounts of 1%, 2.5% and 5% on your best selling prices to each company.
– Assume your total annual sales to Walgreens-Boots = £120m, ex. taxes
– Assume your Net Profit margin on Walgreens-Boots business = 7% = £8.4m
– Assume additional discount = 2.5% = £3.0m
– New sales = £117m
– Assume Costs, etc. remain the same = 93% of £120m = £111.6m
– New net margin = 4.6% i.e. 100-[(£111.6/117) x 100] = £5.4m
– Incremental sales to restore net profit of £8.4m = £65m = £182m – £117m
i.e. (£8.4m/4.6) x 100 = £182m - Negotiation: Time to map out your Walgreens-Boots negotiation strategy, globally?
- Partnership: Then ready to talk real synergies, and potential opportunities, only then…
The Walgreens-Boots merger is one of the most important trade developments in years, with much potential for suppliers to optimise global scale. Running the numbers on both downside and upside will help in producing the quality of trade partners that Walgreens-Boots needs, providing you can calculate and demonstrate your value in achieving the necessary synergies, on a fair-share basis…
Ready for the ride of a lifetime?
