How Walgreens-Alliance Boots deal is future of drug store retailing

WHAT IT MEANS AND WHY IT'S IMPORTANT — As much as CVS created a category of one for itself with its vertically integrated retail pharmacy-pharmacy benefit manager-clinic model, Walgreens has cast itself in a category of its own: A pharmacy-driven, global health-and-wellness company with the purchasing strength of more than 11,000 stores.

(THE NEWS: Walgreens, Alliance Boots to merge. For the full story, click here)

This is a play for the future of drug store retailing. Let’s face it: Pharmacy margins continue to take a pounding, as payers — public and private — continue to whittle away at reimbursement levels, and seemingly more and more entities are willing to sell the same script for a cheaper price. DSN has been saying it for years: The drug store of the future will have to become known for something else than just the ability to fill a script, because that part of the business is becoming more and more commoditized every day. As the largest single purchaser of prescription drugs in the world, with a global pharmaceutical wholesale operation to match, in-house manufacturing capabilities in over-the-counter health and wellness and generic drugs, Walgreens-Alliance Boots will have a whole lot more leverage on that side of the business.

But that’s just one aspect of the deal. There are other reasons you have to like it. For instance, it creates a myriad of other reasons for customers to want to shop Walgreens.

One area in which Walgreens will benefit immediately is in its private brand initiatives — not private label, but private brand. One factoid that may have eluded many of those who were on the June 19 conference call announcing the deal: Boots has an R&D group with 400-plus associates in Nottingham that is constantly at work on private brand innovation. Walgreens has taken steps in this direction in recent years with the creation of brands like DeLish and Nice!, but Boots has long been acknowledged for its private health and beauty brand development, with a long, rich tradition dating all the way back to the launch of its No 7 beauty brand in 1935. In addition to No 7, it also features the Boots Pharmaceuticals (OTC), Soltan (sun care), Botanics (natural skin care), Boots Laboratories (anti-age partnership with Procter & Gamble) and Almus, which currently makes generic pharmaceuticals in five European countries. Given the market for multisource generic pharmaceuticals and future projections, having an in-house generic pharmaceutical manufacturing capability would be a decided advantage for a drug store operator.

This is about the future of drug store retailing. If you want a sense of what the future will look like, take a look at Walgreens’ revenue mix today and how the company expects that to change over the next five years. Currently, Walgreens’ total sales tops about $73 billion for the trailing four quarters through May 31 — about two-thirds of that is in pharmacy. In 2016, Walgreens expects sales of the combined companies to total more than $130 billion, and the pie is reshaped drastically, with only about one-third coming from its U.S. Pharmacy business. That looks a lot like the Boots revenue mix today: 35% of sales come from dispensing. Beauty accounts for 32% of sales and about 60% of profits, Alliance Boots group finance director George Fairweather noted.

Make no mistake, when this deal was announced Walgreens emerged into a category all of its own.

WHAT DO YOU THINK? Do you expect to see more of these types of international deals? Maybe a U.S.-Canadian connection? Something in South America perhaps? Post your comments below.