Walgreens Boots Alliance is thought to be seeking a buyer for its UK business – and Tesco could provide the perfect suitor, writes Retail Week editor Luke Tugby

One of Britain’s most venerable retail names could soon be under new ownership. Walgreens Boots Alliance (WBA) has drafted in advisers from Goldman Sachs to assess options for its Boots UK arm, including a sale or a potential IPO. 

Ken Murphy Tesco

Ken Murphy’s knowledge of Boots ‘is all but unparalleled in UK retail’

WBA revealed in October plans to increase the focus on its North American business but, in truth, Boots had been starved of meaningful investment from its US owner long before then. 

A new owner could be the best medicine – and Tesco could be the perfect fit. 

The potential sale of the health and beauty specialist, for a fee likely to be north of £5bn, will pique interest among several parties. On paper, all of the big four grocers could put together a decent investment case given Boots’ presence in postcodes across the UK and the additional buying power the combination would provide.  

A swoop by Sainsbury’s, however, could be a distraction from boss Simon Roberts’ drive to put food “back at the heart” of the business. Asda owners the Issa brothers have already loaded the grocer with enough debt, for the time being. Morrisons’ new owner CD&R has only just forked out £7bn to buy the UK’s fourth-largest grocer, making another big deal unlikely.

US private equity firm Fortress remains keen on bringing more British retailers into its portfolio having narrowly missed out on Morrisons but it would prefer to buy a business with a greater freehold position on its property portfolio – the majority of Boots’ stores are leasehold. 

And any M&A discussion these days feels incomplete without a mention of Amazon, though the online goliath may find a reluctant seller in US counterpart WBA.  

Big four moves in beauty

Where there are hurdles for others, the stars may be aligning for a Tesco bid – the timing, the personnel, the strategic direction.

Britain’s biggest retailer has already laid the groundwork in the City for future M&A. Boss Ken Murphy flagged in his strategic update in October that Tesco would “consider inorganic growth opportunities that may arise”.

Murphy is no stranger to the Boots business, his knowledge of which is all but unparalleled in UK retail. The Irishman was previously managing director at Alliance UniChem’s Italian arm and went on to work closely with Stefano Pessina following its merger with Boots in 2006, having been entrusted with leading the integration of the two businesses. 

Murphy later became commercial director and chief operating officer of Boots UK, before taking on several senior roles at WBA after its formation in 2014, as one of Pessina’s most trusted lieutenants.  

“Big names such as Chanel, Dior, Mac and Benefit like to showcase their products and engage with shoppers in a physical setting – a presence lost when Debenhams stores were closed”

Given that background, Murphy will already have a clear view of the strengths, weaknesses and – perhaps most importantly – opportunities that a Tesco-Boots combination could provide for both businesses. 

Aside from the obvious clout it would add to Tesco’s already substantial buying power, there is scope to make better use of Boots’ network of 2,200 UK stores and strengthen Tesco’s foothold in the growing health and beauty market.

Behind the scenes, Tesco is already understood to be keeping a close eye on the development of Boots’ bricks-and-mortar proposition. The opening of newer-format Boots stores, such as those in London’s Covent Garden and on the Strand, and the high street stalwart’s plans to roll out 30 smaller-format beauty halls, have pricked ears at Welwyn Garden City as the grocer seeks to increase its slice of the health and beauty pie.

Tesco and its big-four rival Sainsbury’s have both been beefing up beauty and wellbeing aisles in their new and revamped supermarkets, as they seek to capitalise on the two-pronged opportunity presented by January’s collapse of Debenhams and consumers’ increasing focus on health and wellbeing during the Covid-19 pandemic.

Basket size boost

But the duo is far from alone in pursuing new revenue streams in a resilient and growing category. Prior to the onset of Covid, analysts at GlobalData predicted that health and beauty spend would rise 8.8% in the UK by 2024, equating to an additional £2bn of purchases. 

Fashion giant Primark has expanded into the beauty market with dedicated cosmetics areas in many of its stores, while other retailers such as Next, Harrods and Flannels have launched standalone beauty formats to increase their presence and reputation in the category. 

Just last week, Boohoo, which acquired Debenhams out of administration at the start of the year, opened its first Debenhams.com beauty store in Manchester’s Arndale shopping centre, as it seeks to retain the strong relationship that the former department store had with major beauty brands. 

“Although many Boots shops are tied to longer leases that are much less attractive in today’s multichannel world, Tesco could make them work in ways befitting modern shopping habits”

Big names such as Chanel, Dior, Mac and Benefit like to showcase their products and engage with shoppers in a physical setting – a presence lost when Debenhams stores were closed.

Tesco could bring Boots’ expertise in working with such big brands into its existing supermarkets and could even open Boots shop-in-shops in its largest Extra stores with the most excess space.

Bringing the Boots proposition into Tesco’s online business could also boost average basket sizes if it can upsell grocery shoppers into higher-margin areas such as makeup and fragrances.

Options for stores

There are opportunities within Boots’ existing store estate, too. Although many of its shops are tied to longer leases that are much less attractive in today’s multichannel world, Tesco could make them work in ways befitting modern shopping habits. 

The grocer is already rolling out urban fulfilment centres at its larger supermarkets to service online food orders and could see scope to transform some Boots sites into automated warehouses, servicing the increased online audience it has attracted during the pandemic. 

Similarly, underperforming stores in prime city-centre locations such as London, Liverpool, Manchester and Cardiff could be turned into dark stores to boost Tesco’s fledgling Whoosh rapid delivery service

At worst, the Boots portfolio would arm Tesco with hundreds of new click-and-collect points for shoppers making non-food purchases. 

None of these ideas will be lost on Murphy – such thoughts will have already raced through his mind and those of his strategy team, particularly given the noises Tesco has already made about potential M&A. 

If Boots is indeed on the block, Tesco looks primed to swoop.

  • Don’t miss the best of the week – sign up to receive the Editor’s Choice every Friday