Boots was the blot on the copybook of Walgreens Boots Alliance’s fourth quarter results last week after recording declines across its pharmacy and retail divisions.

Strengths

Scale – Boots is the largest health and beauty retailer in the UK, with approximately 2,500 outlets and 90% of the population within a 10 minute drive of a store.

The retailer’s reach was further enhanced by its merger with US pharmacy giant Walgreens, which makes it part of the world’s largest pharmacy chain comprising more than 13,000 stores in more than 10 countries. This scale gives Boots an advantage over its high street rivals in term of its brand recognition, accessibility to shoppers and the higher profit margins.

Loyalty card – The Boots Advantage Card is a key promotional tool and has given the retailer a competitive advantage. The loyalty scheme is one of the largest in the UK, with around 16 million active cardholders. Boots says that 60% of purchases are linked to the card, and users spend 60% more on average than non-users.

Own-label expertise – Boots has a strong stable of well-respected own-brands including No7 cosmetics, plus Soltan, Botanics and Soap & Glory. Most of the development and production of these takes place at its Nottingham facilities. There is potential for reinvigoration of these products, but the retailer has a strong foundation in these brands which are trusted by consumers.

Online initiatives – Boots had been focusing on delivering an integrated multichannel offer well ahead of the merger with Walgreens. It has sought to combine product sales with services and advice in-store and, increasingly, online. This has become a major focus.

Weaknesses

Lack of innovation – Boots has rested on its laurels in terms of store and product innovation in recent years.

While rival Superdrug has tested formats such as a vegan pop-up and beauty treatment store at Fosse Park, Leicester, as well as partnerships with hit TV show Love Island to keep it front of mind with younger shoppers, Boots has continued with business as usual.

This combined with an at times lacklustre in-store shopping experience is likely to be a factor in Boots losing out on beauty sales to its competitors.

Mature operation – Because of its dominance, it will be difficult for Boots to increase its UK market share. Its store network would appear to be saturated and there is limited room for further expansion.

Ownership structure – While there are undoubtedly advantages to the scale its merger with Walgreens offers, it does make the biggest fish in the UK health and beauty sector the junior partner.

Boots’ 2,500 store estate is dwarfed by Walgreens’ 8,000 US branches – a disparity that will only increase in the wake of Walgreens acquiring 2,000 stores from pharmacy rival Rite Aid last September. Because of Boots’ diminutive stature by comparison, the retailer is at risk of being less of a priority in terms of innovation or investment.

And although Walgreens has taken Boots’ success stories such as its Soap & Glory range Stateside, to date there has not been much innovation brought from the US division over to Boots’ stores.

Opportunities

Cross-selling – The merger with Walgreens offers scope for Boots’ product brands to be sold in the US and further afield, both in-store and via the various Walgreens-owned ecommerce sites. The Rite Aid deal in September 2017, including nearly 2,000 pharmacies across the East Coast of the States, offers even more scope on that front.

Sharing best practice – Boots is keen to take advantage of Walgreens’ expertise in pharmacy software.

While investment at the Boots network had focused primarily on the retail rather than the pharmacy side of the business ahead of the merger, the recent recommencement of acquisitions on the community pharmacy side serves as an indication of intent.

Meanwhile, the retailer told Retail Week in 2017 that it would continue to focus improving pharmacy services over the year ahead.

International – There is still plenty of opportunity for further international expansion, with emerging markets such as China and Latin America high on the agenda. The retailer has opened 13 stores in South Korea over the past year in collaboration with local operator Emart.

Boots’ expertise in wholesale is proving to be an important advantage for the enlarged group given that strict regulations on pharmacy ownership in many emerging markets means that it will initially need to enter the market through the wholesale route.

Healthcare services – With its healthcare background and strong own-label expertise, the company would appear particularly well-placed to benefit from regulatory issues resulting from recent government spending cuts, in particular the extension of the number of medicines available for retail purchase.

Boots will also be able to capitalise on government plans to shift a number of routine health tasks from doctors’ surgeries to pharmacists.

Threats

Competition – Competition continues to intensify from players focused on the value end of the market such as Savers and Superdrug, as well as non-specialists including the single-price retailers, all of whom have benefited from constrained consumers’ incomes over the past few years.

Department store businesses including Debenhams and John Lewis are also upgrading their beauty halls in a bid to win customer spend, meaning Boots has lots of competition that threatens market share and less opportunity to increase it.

The big supermarket chains are continuing to improve their health and beauty offers in a bid to widen appeal and drive footfall.

Underlining the fact that this remains a lucrative sector for the grocers, Sainsbury’s is testing a new beauty department across 11 of its stores.

Community pharmacies – Community pharmacies, of which Lloyds Pharmacy is the largest operator in the UK,  could become an increasing threat given that neighbourhood locations are likely to be more accessible for the ageing population than Boots’ high street network.

Direct to consumer – The rise of online retail and social media has made it easier than ever for new brands to gain scale and a loyal customer base without ever setting up a concession in a traditional health and beauty player such as Boots.

This presents increasing challenges for Boots to snap up brands that customers will want to go in-store to snap up.