Walgreens meet Boots

Walgreens announced it is buying a 45% ownership stake in European pharmacy giant Alliance Boots GmbH for $6.7 billion, with an option to buy the entire company before 2016. Together the two chains will operate more than 11,000 drugstores in the U.S., Europe and Asia, under the Walgreens and Boots banners.  While investors appear concerned with the deal as Walgreens stock slide 6%, here's why I like the deal:

• Allows Walgreens to bring Alliance Boots' strong private label stable of products to the U.S., including No7, which is the United Kingdom's leading skin-care brand. Its interesting that while the US drug store industry average private label penetration rate is only about ~14% (30% in healthcare), industry sources suggest Boots PL penetration rate is > 40%. Now some of this delta is due to differences in consumer psychology, but nonetheless, Boots' products and expertise should be an infusion for Walgreens. Walgreens has executed this strategy, albeit on a much smaller scale, following its acquisition of Duane Reade, a New York City based drugstore, which brought them "Delish", a premium private label food brand. So this move allows Walgreens continues to build its stable of exclusive brands that both have good consumer pull and high margins, while enhancing its value equation as according to SymphonyIRI’s recent Brand and Retailer Loyalty survey, >80% of consumers feel that store brand products are equal to or better than national brands when it comes to quality and packaging, while 95% feel that store brands provide a better value than national brands.
• Makes Walgreens the largest single purchaser of prescription drugs in the world, creating significant buying power to increase margins on the the most profitable part of the store already
• Creates the largest global pharmaceutical wholesale and distribution network with more than 370 distribution centers delivering to more than 170,000 pharmacies, doctors, health centers and hospitals across 21 countries
• Boots also gives Walgreens access to emerging markets like China.

Now it's tough to say from an outsiders perspective if Walgreens paid too much for the deal, but the merger at least opens up a realm of both top and bottom line possibilities.