Corporate Profile: Boots - Putting the boot in

Steve Russell is the man Boots has chosen to lead its fight-back against the price-cutting tactics of the American giant Wal-Mart. In this exclusive interview, he explains his strategy and how he plans to win the battle of the superstores

WHEN BOOTS reports its interim results tomorrow, two key questions will hang over the proceedings: is this respected high street retailer about to be engulfed by a supermarket price war that will wreck its profit margins and undermine the dominant position it has enjoyed for more than 100 years? Worse, is Boots about to go the way of Marks & Spencer, and experience a profound loss of confidence and direction?

The company's share price suggests it might be. Boots shares have slumped from 1,053p earlier this year to 626p on fears of a price war. These reached fever pitch in June when the mighty Wal-Mart swallowed Asda and promised to bring lower prices to Britain. The fears intensified as Tesco and Asda launched price campaigns targeting health and beauty ranges. Tesco has run "knocking" adverts, claiming to be 20 per cent cheaper than Boots.

The business also includes Boots Healthcare International, which develops and markets over-the-counter medicines such as Nurofen and Strepsils, and the Halfords chain of car accessory stores. But the chemists division still accounts for 82 per cent of profits. With Tesco on one side and on the other the prospect of Asda using Wal-Mart's huge buying power to force prices even lower, the worry is that the supermarkets are about to put the boot into Boots. As the shares sink lower there is talk in the City of Boots as a takeover target, with Tesco as the possible predator.

Boots remains unmoved. "We profoundly believe consumers in the health and beauty market are looking for a lot more than price," says Steve Russell, the 54-year-old joint managing director yesterday named as Boots chief executive ahead of the retirement of Lord Blyth as chairman next summer.

The 30-year Boots veteran defeated David Thompson, the finance director, in a straight fight for the top job. Though he faces a more challenging baptism than any of his predecessors, he is confident Boots can weather the storm.

"We have faced intense price competition before and defended ourselves robustly," he says. It is brave talk. But Boots results tomorrow will be studied for signs that the relentless march of the supermarkets is starting to have an effect. The City is forecasting a slight rise in profits to pounds 260m. But analysts will be looking closely at the underlying sales of the core Boots the Chemist business and for reductions in customer footfall.

Boots like-for-like sales growth, excluding new store openings, have historically averaged 3 to 5 per cent. But in its first quarter, sales growth fell to less than 1 per cent and the City is unsure whether there has been a meaningful recovery. Analysts are uncertain whether Boots' management is prepared to accept how serious the threat is. As one says: "They are not sufficiently price-aware yet," says one. "There is a frantic amount of activity going on within the business but they seem to be running to stand still." Mike Godliman of Verdict retail research, says: "They are extremely vulnerable to the threat of Wal-Mart/Asda because Boots' prices are higher. They will have to reduce them to compete. The challenge is that they have to differentiate themselves. If the battle boils down to selling shampoo and toothpaste, they'll lose."

With gross profit margins at around 40 per cent, compared with supermarket margins of 20 per cent, Boots seems to be there for the picking. Even so, it would be a huge beast for the supermarkets to slay. With 26 per cent of the market, it is more dominant in its sector than any other UK retailer. Its 1,400 stores also make it bigger than any other UK stores group in terms of outlets. It is on every high street, in every shopping mall and, seemingly, in every railway station and airport.

More than 12 million customers visit Boots stores every week (85 per cent of them women). A consumer survey last month showed Boots is also one of the most trusted companies in Britain, second only to Marks & Spencer. With 13 per cent of the prescriptions market, Boots has a name that evokes reassurance when consumers are at their most vulnerable. People trust Boots with their health.

But a report next week by Verdict will show just how rapidly the supermarkets are catching up. Last year, Boots controlled 25.8 per cent of the UK market for toiletries, cosmetics and over-the-counter medicines, up from 25.2 per cent in 1997. Now Tesco has 11.5 per cent and Asda is growing fast. Over the past five years Boots has only managed to push its share up marginally from 24.5 to 25.8 per cent. In that time the major supermarkets have increased their share from 33.5 per cent to 39.6 per cent.

"The challenge for Boots is to maintain its UK market share rather than increase it," says Mr Godliman. "But with so many stores it is hard for them to grow much more here." The potential for further increases in profit margin appear nearly nil.

Boots says it has a strategy to defend its realm with initiatives on price promotions, store expansions, differentiation and a push into new sales channels such as home shopping and e-commerce. These initiatives will be backed by cost cuts and returning further funds to shareholders through share buy-backs.

First, prices. Boots is not claiming to have the cheapest prices, though it insists it will be competitive on the so-called Known Value Items, such as nappies. Instead, it is offering an increased number of promotional offers such as the ubiquitous BOGOFs - the "Buy One Get One Free" offers. "Price comes only third or fourth among our customers' list of preferences," says Mr Russell. "Promotional prices are more attractive than everyday low prices because people like to test and trial products." Boots is pressuring suppliers to offer lower prices and encouraging many of its longest-standing suppliers such as Johnson & Johnson, L'Oreal and Procter & Gamble to offer Boots exclusive ranges and first access to new product launches. The company is trying to build in further margins protection by altering the sales mix to include more higher-margin, own-brand products. More staff specialists are also being employed to give advice on areas including skin - and haircare. Analysts are not convinced. "Boots margins are unsustainable," says one. "They may need to sharpen up their prices across the board."

Second, store expansion. In the last three years Boots has opened 200 new UK stores including 37 large edge-of-town sites. These stores have more space, enabling Boots to offer its full range, including children's- wear and food. Boots hopes for 200 edge-of-town superstores within five years, though this may lead to the closure of smaller high street outlets.

Third, differentiation. This is the key to Boots' strategy and one which it claims has enabled health and beauty retailers such as Walgreen and CVS to prosper in the United States despite the Wal-Mart threat.

Boots plans to be more than a retailer of basic commodities. It wants to move "up the value chain" as the analysts put it, by adding more health services and upmarket ranges less price-sensitive than commodity items such as deodorant and soap."Health and beauty is very close to people's hearts, particularly women's," says Mr Russell. "Boots stands for reassurance, expertise and trust. That enables us to do all sorts of things to protect ourselves."

In America, health retailers including Walgreen, CVS and Right-Aid, have been enjoying double digit sales growth by moving into drive-through pharmacies and convenience food ranges. In May, Boots opened its first dental practice and now has six outlets. It has also moved into the chiropody market with four units. In August it announced plans for a trial of Boots for Men stores with one in Bristol and another in Edinburgh.

Boots has enjoyed success with its skin care and facial treatment centres in its Manchester and Bluewater stores and more units are expected to open. Mr Russell also sees scope for Boots services in weight management, holiday health, physiotherapy and alternative remedies.

Fourth, Boots is looking at using the database derived from its 10 million Advantage loyalty card holders to reach its customers in new ways. This includes the roll-out of in-store kiosks that target customised discounts to card holders. The database is also being used to support Boots' moves in home shopping catalogues. So far, Mother And Baby Direct and Health & Beauty Direct have been launched as well as Christmas catalogues.

E-commerce is another inevitable part of Boots' expansion. In September it co-launched the strangely named Handbag.com, a free Internet service provider aimed exclusively at women.

Fifth, costs. Boots has pledged to reduce its operating-cost-to-sales ratio by an average of 1 per cent a year for four years, indicating an annual average of pounds 40m.

Sixth, Boots is taking its brand abroad, with expansion in the Netherlands, Thailand and, most recently, Japan. In 10 years, Boots would like to be an international company with 2,500 stores in 10 countries. Its optimism about its overseas potential is supported by figures which show that winning just 3 per cent of the pounds 200bn global health and beauty market would give Boots a pounds 5bn business.

Boots is expected to target more markets in Europe and the Far East, with a key opportunity seen in the possibility of relaxed regulations over the ownership of pharmacies in France. "This (the overseas division) is now a very real business," says Mr Russell says. "We are determined to internationalise the brand."

Can Boots pull it off and halt the advance of the supermarkets? So far it has, but as Marks & Spencer demonstrates, things can deteriorate with frightening speed.

Ten years ago Tesco was not the force it is now, and Asda was slipping into the sea. Both are now much more robust competitors. But the Boots brand is still a powerful asset. Consumers may follow the value route with groceries and clothing, but whether they do the same with health and beauty products remains to be seen. It promises to be a Titanic struggle.

Fact File

Turnover: pounds 5bn (year to March 99)

Pre-tax profit: pounds 170m (after pounds 319m exceptional charges including loss on disposal of Do It All)

Market Value: pounds 5.7bn

Number of UK Stores: 1,400 Boots the Chemists, 400 Halfords, 300 Boots Opticians.

Overseas stores: 50 outlets in Holland, Thailand and Japan.

Key directors:

Chairman: Lord Blyth of Rowington (to be succeeded by John McGrath next July)

Deputy chairman: Sir Michael Angus (non-executive)

Chief executive: Steve Russell (from April)

Deputy chief executive and finance director: David Thompson

Managing director of Boots the Chemists: Ken Piggott (from April)

Principal businesses:

Boots the Chemists accounts for more than 80 per cent of group profits. Other businesses include Boots Opticians, Boots Healthcare International, Boots Contract Manufacturing, Halfords, Boots Properties

The Story Of A Family Store Going Global

1849: First Boots shop opens in Nottingham by Methodists John and Mary Boot. It sells herbal remedies to the poor

1877: Jesse Boot (left) runs family business until 1920

1892: Boots opens first department store in Nottingham

1914-18: Boots invests heavily in manufacturing capacity

1920: Boots acquired by the United Drug Company of America until 1933. UDC introduces advertising and marketing campaigns

1933: 1,000th Boots store opens

1935: Launch of No7 cosmetics brand

1968: Acquires Timothy Whites and Taylors chemist chain of more than 600 stores

1987: James Blyth named as first externally appointed chief executive

1989: Acquisition of Ward White, which includes Halfords, Payless DIY, AG Stanley (includes Fads and Homestyle) and the Underwoods chemist chain

1990: Merger of Payless DIY and WH Smith's Do It All

1991: Formation of Boots Healthcare International and Boots Contract Manufacturing

1995: Sale of Boots Pharmaceutical to BASF of Germany

1996-97: Sells Children's World to Storehouse. Takes full control of Do It All. Launches pounds 300m share buy-back. Opens first stores in Ireland

1997-98: Opens first stores in Thailand and Holland. Pays pounds 400m special dividend to shareholders. Launches Advantage loyalty card. Sells AG Stanley

1999: Names Steve Russell as chief executive and John McGrath as chairman to fight supermarket price wars