Wednesday 20 June 2012

Walgreens-Boots - a new $100bn global customer?

With yesterday’s Stage1 purchase, Walgreens-Boots ($100bn) began a process that in three years will see them become a $130bn global player (prescription medicines, OTC and Beauty) with $100m savings on purchases in Year1.
In other words, plenty of time for suppliers to procrastinate on issues like prices and terms disparities…Wrong!

Given the high speed at which companies move in these circumstances (see their combined site which opened yesterday, and appears to have taken months of top secret preparation…) and the fact that Wall Street appear to think that Walgreens are paying over the odds for Alliance Boots (see yesterday’s drop in share price), suppliers would be wise to anticipate early pressures on prices to both companies ‘to prove it is a good deal’.

Action:
1. Check your US colleagues for your company sales to Walgreens, along with retail/wholesale margins, net margins on Walgreens business, credit periods and terms, plus pointers on trade funding and deductions…fast!

2. Check your UK and rest-of-world colleagues for your company sales to Alliance Boots, along with retail/wholesale margins, net margins on the AB business, credit periods and terms, plus pointers on trade funding and deductions…faster!

3. Quick ‘what-if’ on all of the above rising to the highest common set, the worst scenario for the business…even faster!

4. Map out key steps to harmonise prices & terms….already overdue!

5. Selling Prices to Walgreens and Alliance Boots: Run the following numbers for discounts of 1%, 2.5% and 5% on your best selling prices to each company
- Assume your total annual sales to Walgreens-Boots                 = £120m, ex. taxes
- Assume your Net Profit margin on Walgreens-Boots business   = 7%     = £8.4m
- Assume additional discount                                                    = 2.5%  = £3.0m
- New sales                                                                             = £117m
- Assume Costs, etc. remain the same                                      = 93% of £120m = £111.6m
- New net margin                                            = 4.6% i.e. 100-[(£111.6/117) x 100] = £5.4m
- Incremental sales to restore net profit  of £8.4m                     = £65m = £182m- £117m
                                                                                          i.e. (£8.4m/4.6) x 100 = £182m

6. Time to map out your Walgreens-Boots negotiation strategy, globally?

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