Institutional investors believe that Boots' 27 per cent share of the UK retail pharmacy market is under fire, and no amount of corporate spin will change their mind.
And starting tomorrow, Asda has confirmed it will wage an all-out price war on Boots. It will cut prices on a number of health and beauty products and put up signs in its aisles comparing prices with Boots, which charges premium prices on many brands (see table below).
A senior Boots spokesman who earlier last week argued that the company would not be forced into a price war now says: "There have been price wars before and we'll take appropriate action."
But instead of talking about this, Boots last week attempted to tell representatives from international investment banks that it will trim pounds 160m in costs over three years, open 200 edge-of-town sites over five years, launch new health and beauty products, and also accelerate its overseas expansion.
"It's a bit of a joke," laughed one analyst who attended. "They were at pains to talk about their cost savings initiative and their overseas expansion plan, and the City drove down its share price for the rest of the week."
Yet there is a sense that by focussing on the price issue, the City is missing the point. Many Boots customers are apparently not "price sensitive" and value the company's brand and generous loyalty card scheme (which gives 4p back for every pounds 1 you spend). It is true that retailers' scope for cutting prices is limited by high land costs, and high petrol and sales tax. But savings of pounds 160m, partly from the shedding of 500 head- office jobs, will give Boots more room for manoeuvre than most.
However, more significant is its ambition to become a world leader in the fragmented health and beauty market. So far it holds a 1.75 per cent global market share, but if the expansion succeeds, its growth potential could rocket.
There are no dominant companies in the global health and beauty market, which is currently worth pounds 200bn a year. In Europe, regulations have largely prevented any multiples gaining a foothold in a market dominated by independents.
Now there are signs of a thaw. In Holland,for example, Boots owns 10 stores. It is so confident regulatory pressure is easing that it is looking to grow to 50 stores within five years.
And in France, which is dominated by independent pharmacies and has Europe's most stringent regulations governing this sector, there are indications that a relaxation of the laws could be under way.
City insiders expect Boots to launch fresh acquisitions in Switzerland, Belgium and South-east Asia. If it can muster just 3 per cent of the world market share within five years, which is hardly a dramatic exposure, the company could be in line for earnings worth pounds 5bn.
Other than Holland, Boots is charging into Thailand where it has 40 stores - mostly in Bangkok. However, the real firepower is being reserved for Japan where the market is worth some pounds 17bn - four times higher than in the UK.
With its joint venture partner Mitsubishi, Boots will shortly have four stores trading in Japan. The three already open are trading well and the company has confirmed that the Japanese market can support the 400 stores which Boots hopes to open within 10 years.
The record of British retailers abroad in recent years has been nothing to write home about, but Isabelle Payet, a retail analyst at Sutherlands, believes Boots can succeed. "I think they can achieve growth," she says. "The regulations in Europe are changing. They were first into Holland, and if they succeed in Japan they could be in for a windfall be-cause the market is huge. The fact they have a partner is important be-cause Mitsubishi has the local knowledge and will know which products appeal. The redesign of certain lines will boost its output. It's a strong possibility they could crack it."
A bounce-back in Boots' shares cannot come too soon. For years it has been a victim of its disastrous pounds 900m acquisition of the Ward White retail portfolio during the 1980s consumer boom. Two years ago it took a pounds 312m write-off when it sold all but the Halfords chain.
The saviour for the company has been its its core health and beauty division which, while the Ward White businesses were bleeding cash, consistently delivered margins of more than 10 per cent and accounted for 85 per cent of group profits. The company has recently been trying out in-store surgeries and dentists at the larger outlets. It is a service that only a trusted healthcare brand name like Boots can realistically offer.
Given that its shares have fallen by a third in the last year, this reputation is something the City seems to have forgotten. It is a decline which could rapidly be reversed when Boots begins to stamp its authority on the global market.
HOW EXPENSIVE IS BOOTS?
Boots Superdrug Asda J Lewis*
Ambre Solaire pounds 8.50 pounds 8.19 pounds 6.49 pounds 8.15
factor 6, 200ml
Sun block own brand pounds 9.20 pounds 7.99 pounds 2.49 -
factor 25, 200ml
Own brand tampons pounds 2.49 pounds 1.79 pounds 1.25 -
Gillette sensor Xcel pounds 4.65 pounds 4.65 pounds 4.19 pounds 4.45
24 Neurofen pounds 2.99 pounds 2.99 pounds 2.99 -
Own brand deep pounds 5.00 pounds 2.75 pounds 1.99 -
cleansing lotion, 200ml
*The John Lewis branch chosen was at Oxford Street in LondonReuse content