Jeremy Warner's Outlook: Boots falls victim to high street influenza

Depolarisation - Lights out
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The Independent Online

It all looked so different for Boots, the high street chemist, just six weeks ago. Then, the still newish chief executive, Richard Baker, was able proudly to announce one of the better trading performances to emerge from the high street last Christmas, with like-for-like sales up 2.6 per cent. This was the tenth consecutive quarter of rising sales at Boots. Not withstanding the determined assault of the big supermarket groups, Mr Baker seemed to be defying the sceptics with a textbook defence of margins and market position. This always did look a bit too good to be true, and so it has proved.

It all looked so different for Boots, the high street chemist, just six weeks ago. Then, the still newish chief executive, Richard Baker, was able proudly to announce one of the better trading performances to emerge from the high street last Christmas, with like-for-like sales up 2.6 per cent. This was the tenth consecutive quarter of rising sales at Boots. Not withstanding the determined assault of the big supermarket groups, Mr Baker seemed to be defying the sceptics with a textbook defence of margins and market position. This always did look a bit too good to be true, and so it has proved.

Yesterday came the perhaps inevitable profits warning. The deterioration is blamed squarely on a wider slowdown in consumer spending, but with the Boots share price underperforming the rest of the retail sector by nearly a fifth over the past year, it is only right to question whether this is the whole story.

The next few months will reveal the answer, for if Mr Baker is right that the entire high street is suffering from consumer belt tightening, then others must surely follow with similar warnings. We've already had a disappointing trading update from B&Q, which seems to lend weight to the Baker thesis, and what with rising mortgage and fuel costs, the squeeze on disposable incomes is only too apparent. Yet the structural problem at the heart of the Boots management challenge - the might of the big supermarkets - is not going away, and it is not yet clear that Mr Baker has got the right formula for dealing with it.

Unlike Marks & Spencer and Sainsbury's, Boots was not obviously in a state of crisis when Mr Baker arrived. However, with some of the highest margins in retailing, the challenge at Boots was in some respects an even bigger one. Margins like these were quite indefensible, and could only really head in one direction. Mr Baker's solution was to cut prices, both through special promotions and across the board, and to deal with the consequent damage to the bottom line with cost cuts. It's worked up to a point, but prices are still notably more expensive for mainline toiletries than Tesco and Asda.

Spending over Christmas on cosmetics and higher ticket items may have disguised what was otherwise a continued deterioration in other, more core product lines. Yesterday's trading update seems to confirm this view. Dispensing was still good, but toiletries, electricals and more highly priced items were well down. In buying his prescription drugs at Boots, the consumer is hesitating before picking up the toothpaste and the shampoo at the same place when he knows he can buy them that much cheaper with his big, weekend shop. Prices may not yet have come down enough.

Mr Baker's other big initiative, which is to "declutter" the shops in the hope of making them a more appealing shopping environment, also strikes me as potentially quite dangerous. It doesn't matter how improved the shopping environment might be, the consumer isn't going to buy anything there if he finds it no longer carries his favourite brand of shower gel or some such other requirement of modern day living. This is one of the most infuriating experiences it is possible to inflict on a shopper, and, I regret to say, it is happening with growing frequency at Boots. If there is one thing that should distinguish a high street chemist from a big supermarket, it is that it carries a better range of toiletry and healthcare products.

Still, but for the reforms already pushed through by Mr Baker, the situation at Boots would almost certainly be even worse. The question is whether his job is going to be just the faintly depressing one of managing decline, or whether he can restore some decent top line growth. Strong, own-label brands plainly help, while Government attempts to focus more power on the pharmacist so as to help relieve pressure on the general practitioner potentially opens up quite considerable commercial opportunity. It was such a good start by Mr Baker, but he shouldn't feel too downhearted by yesterday's setback. He's allowed a few stumbles before the City demands his head. Yet it's an unforgiving world out there, and the operative phrase is "a few".

Depolarisation

Depolarisation is a clumsy word and it is producing a clumsy effect. The idea is to give consumers a bit more choice in the purchase of financial products without potentially creating a whole new raft of mis-selling scandals. Yet despite all the best intentions of the Financial Services Authority, it may not work out that way.

Up until now, those selling savings products have had to be either tied to one product provider, or be genuinely independent, selling anything the market offers. The system is both restrictive for most savers while offering few obvious benefits in the way of consumer protection.

The first port of call for consumers when buying a savings product is their bank. It tends only to be the better off that use independent financial advisers (IFAs). The upshot is that most consumers have gained access to only one product provider. The purpose of "depolarisation", or "deregulation" of insurance selling, is to allow banks to offer a greater range of products - the so-called multi-tie.

Not all banks will chose to go this route. Royal Bank of Scotland Group is expected to stick to its exclusive arrangement with Norwich Union while Lloyds TSB actually owns a big league product provider, Scottish Widows, so it would only be cutting off its nose to spite its face by going multi-tie. Not so Barclays, which yesterday announced plans to replace its previously exclusive arrangement with Legal & General with a panel of six providers, including Axa, Prudential and Standard Life.

Whether this will noticeably improve matters is open to question. A bit more choice, yes, but what have these providers had to offer Barclays by way of commission to ensure getting on to the panel so that they can thereby gain access to the bank's customer base? In theory, banks that decide to go multi-tie should be selecting from the best available products on the market for their customers. Yet there's no such thing as a free distribution system, and the reality is that all other things being equal the bank will opt for the providers that pay the most money.

The effect of depolarisation is greatly to reduce the size of the IFA market - what's the point in an IFA if you can get access to the main insurance products by going to a bank? - while not obviously improving things very much for the consumer. Indeed, the introduction of choice may mean the saver ends up paying more. Hey ho.

Lights out

IT'S A noble aim - that of reducing carbon emissions 60 per cent by the middle of this century. It's also a completely meaningless one, since the government which has set it, this one, will be barely remembered by the time anyone knows if it has succeeded or not. These are easy promises for politicians to make but, as the Government is finding, they are not at all easy to deliver.

While Tony Blair battles for world leadership on climate change, what passes for an energy policy back home has sunk into state of such hopeless confusion that large parts of the generating industry have given up investing altogether. This is the startling observation of Andy Duff, chief executive of one Britain's biggest power generation companies, RWE npower. And he warns that unless something is done about it soon, Britain won't within seven years be able to support its own electricity needs.

Investment in electricity generating capacity is on an exceptionally long lead time. In order to commit the large sums of capital required, to clean energy or otherwise, the industry has to be certain of the requirements likely to be placed on it, on carbon emissions and much else besides. Instead, ministers are serving up a diet of uncertainty and muddle. Far from leading on climate change, they find themselves in an embarrassing, self inflicted row with Brussels over allocations for the first phase of the European emissions trading scheme, while they haven't even begun to think about the second. But what's the point in worrying about the short term when there's the pipedream of 2050 to talk about.

jeremy.warner@independent.co.uk

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