Boots and WH Smith: overdue housekeeping
This week’s Retail Note focuses on the true implications of two high street stalwarts seemingly downsizing their respective physical footprints.
7 minutes to read
Key Messages
- Boots to close 300 stores over the next 12 months
- Less alarmist than headlines suggest
- Essentially de-duplication of overlapping sites
- Also consolidation of Opticians into larger stores
- Very few major town centre stores likely to be affected
- Cost-cutting to make the business more saleable
- WH Smith “not opening” High St stores essentially a non-story
- The business will continue to deploy more capital into its Travel business
- The US a particular focus
- UK High St stores to receive limited investment
- No new openings, but limited closures.
The media just can’t seem to help themselves when it comes to story of supposed retail distress. “WH Smith won’t open any more UK High Street stores” reads the shock-horror headline on the landing page of the BBC this morning. WH Smith has opened precious few new high street stores over the last decade and has generally been scaling down its in-town presence for years. Not so much fake news as not news at all.
This comes hot on the heels of another retailer shock headline: “Boots to close 300 UK pharmacies over the next year”. Major UK high street name retrenching in response to terrible market conditions? Or just doing what it should have done years ago when it embarked on a massive acquisition spree and didn’t rationalise locations where it had duplicate sites? Or is US partner / unofficial “parent” just trying to cut costs to make it a more attractive proposition when it tries to sell it again, having failed first time around? The latter two infinitely more plausible than the first, which the headline implies.
Boots – de-duplication
Boots and WH Smith are two of the longest-established retailers, not just in the UK but globally, founded in 1849 and 1792 respectively. They have been features on virtually every major UK high street for all our lives. They are left standing when many of their fellow stalwarts (e.g. Woolworths, Debenhams, Bhs, Littlewoods) have long since bitten the dust.
Despite their storied pasts, the roots of this week’s announcements lie in the fairly recent past, the last 20 years or so. Without going into Boots’ full history of acquisitions (Ward White, anyone?) some of the more recent purchases are behind today’s need for rationalise. The key one was the merger with Alliance UniChem in 2005, which completed the following year. At the time, Boots had ca. 1,400 stores, Alliance UniChem ca. 1,200.
Slightly smaller in scale, but the acquisition of opticians Dolland & Aitchison (D&A) in 2009 is also worth flagging in this context. The 300+ D&A stores were subsequently merged with Boots Opticians, forming a chain of 690 stores.
Fast-forward to the present day and the legacy of these two acquisitions (plus several other, smaller deals) is plain to see. Many high streets still have two Boots pharmacies when they only really need one, the former Alliance UniChem outlet having simply been rebranded. Or there is a Boots Opticians trading a few doors down for a mainstream full-line Boots store.
The proposed 300 store closures will see the Boots portfolio reduce from ca. 2,200 sites to 1,900. But this will effectively be de-duplication and consolidation rather than a merciless hatchet. We’re unlikely to see many city centre and major town centre closures. In essence, this is overdue housekeeping, as fellow stalwart Marks & Spencer is also belatedly undertaking. Nothing more, nothing less.
So, very little to do with the pathetic reasons that the BBC gave – “a surge in people shopping online and choosing own-brand labels as customers looked to save money”. As for the filler, “earlier this year the retailer courted controversy after it changed the way its loyalty card worked by offering discounts on more of its own-brand products, but reducing the points earned per pound” and “the company was recently a victim of cyber-crime when it was targeted in a world-wide hack”, please do not get me started...
Walgreens + Boots = unhappy alliance
There is no doubt that Boots has suffered from ownership issues over the years. The rot started to set in in 2007 when the business was taken private by KKR in a deal worth £11.1 billion. At the time this was the first ever instance of a FTSE 100 company having been bought by a private equity firm.
But obviously with this came debt and the need for an exit strategy. This duly materialised in
2012 when Walgreens purchased a 45% stake in Alliance Boots for US$6.7 billion. Walgreens duly exercised the option to complete a full merger of the organisations within three years for an extra $9.5bn in 2014.
On paper, the merger of two pharmacy-based healthcare giants seemed to make sense. The reality, very different. Boots and Walgreens are hugely different businesses, the former very much more a health & beauty specialist, the latter very much a general merchandise drugstore. Synergies were actually more limited than they first appeared. Whisper it, but Boots is probably the better business, but was never fully understood nor appreciated by its over-bearing partner cum parent in the US.
It wasn’t therefore altogether a surprise when Walgreens initially put Boots up for sale in January 2022. With a reported price tag of £7bn, no suitable buyers emerged and the sale was pulled that summer. Walgreens is again facing institutional pressure to break up, which could entail either selling or floating Boots. So-called “industry experts” in the US believe Walgreens should spin off its international operations, supposedly citing Boots and other businesses in Europe as a “distraction”.
A “distraction” that will be slightly more saleable if its cost base is trimmed by shedding 300 or stores, presumably?
WH Smith – a non-story?
What of today’s other “hold the front page retail story”? WH Smith’s CEO Carl Cowling broke the news to the BBC that they won't be opening any more UK High Street stores, but will instead focus on UK airports and train stations, as well as opening stores in the US and Europe.
As opposed to anything else it has been doing for the last decade? How many new WH Smith UK High Street stores have opened during that time, other than re-locations or in new developments? Mr Cowling stated: "We've got a very healthy High Street business in the UK. But we've got no ambitions to grow that". WH Smith has about 550 UK High Street stores and opening more "would just be a duplication".
It's hard to argue with that. Nor that the High Street business is being run as a sideshow, with very limited investment compared to the Travel business. A cynic could say that the High Street business was actually subject to woeful neglect and was effectively being run down.
Ravaged during COVID, the Travel business is now going from strength to strength and this is clearly where the main focus is going to be. Over the past 20 years, WH Smith has expanded its presence in airports, train stations, motorway service areas and US-based casino resorts. The company’s biggest growth market is the US, where it has captured about 12% of the retail market in airports, a figure it is looking to expand to 20% over the next four years. It will spend about £120m this year opening shops in the US and Europe. In the first half of this year, it opened 30 stores in North America and has a pipeline of a further 60 stores.
It is difficult to argue against the business logic – Travel retail must be infinitely easier than High Street retail. How hard can it be to sell high margin products at inflated prices to a captive audience in high footfall locations?
What is interesting is that many of us perceive WH Smith to predominantly be a high street retailer and that the travel business is a recent diversification. In fact, the opposite is true – its origins were as a travel business, principally operating out of UK railway stations.
A retail business actually going back to its roots rather than re-inventing itself. Not exactly a front page news story. Nor a barometer of high street distress.