News that Walgreens has introduced Boots’ No7 men’s skincare products across its estate in the US marks a step closer towards an exchange of marriage vows between the two health and beauty giants.

A full merger may not necessarily transpire, but the evidence points to accelerating collaboration between the two. The jury is still out though as to whether a full-blown merger would be the right thing.

‘Synergy’ and ‘scale’ are predictably the two key watchwords behind the strategic partnership. A tie-up will create an undisputed colossus in global healthcare and beauty products, with market leadership in the US and Europe, and a bridgehead into Asia with huge expansion and growth potential.

The enlarged group would have huge buying muscle in what are, to all intents and purposes, very commoditised markets. After all, headaches or flu are the same the world over. But not all aspects of health and beauty markets are commoditised, homogenised or dominated by global brands.

Indeed, the beauty market in particular is also characterised by innovation and development of new products.

This is an area where there is a major mismatch between the two suitors, in which Alliance Boots outpaces its US partner. With its vertically integrated healthcare division, Alliance Boots is one of the pioneers in product and private-label development.

Walgreens admits it has much to learn from its transatlantic suitor in this field. Clearly, it wants to launch and promote these private labels in its stores to differentiate it from rivals.

And the benefits are two-way - Walgreens’ 8,000-plus store network is a huge channel of distribution for Alliance Boots and its own brands.

It is difficult to argue against these synergies but it is difficult to list many more. Nagging doubts remain. The ownership structure of Alliance Boots and the possibility that its private equity backers may be looking for an
exit route (not to mention net borrowings of £5.9bn) cast more than a shadow.

It would be nice to conclude that the tie-up is being engineered purely for retailing reasons but the reality is that corporate finance is probably the key driver.

Considerations such as scale and synergy are subordinate to hard cash. A willing suitor Walgreens may be and Alliance Boots may have many strong attributes, but marriage may not be right for either party.

  • Stephen Springham, senior retail analyst, Planet Retail.

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