Walgreens is on a beauty binge – Consumer News

on Jul26

25 July 2017 | 6:30 pm

Walgreens has a beauty problem—and it’s pulling out the big guns to fix it.

The Deerfield-based pharmacy giant has tried to boost its cosmetics sales for years with little to show for it. Today, it announced a 10-year agreement to outsource the manufacturing of its private-label and in-house beauty brands to Fareva, a French subcontractor, as it tries to jump-start its beauty business once and for all.

The deal will give Walgreens a multinational manufacturing, research and development capability that will help it accelerate its global cosmetics strategy, the company said in a statement.

For years, even before the 2012 merger with Alliance Boots, Walgreens has aimed to boost its beauty and other non-prescription revenue to establish much-needed stability in an increasingly chaotic health care environment. But so far, despite major efforts to revamp stores and inject new cosmetics product offerings, the company has failed to see major results.

Its beauty drive was temporarily interrupted by a $1.5 billion cost-cutting initiative instituted by Stefano Pessina, the billionaire Boots chief who took control of the combined Walgreens Boots Alliance in early 2015 and was named permanent CEO six months later. Now, after a two-year austerity program, he says the company is ready to once again push aggressively into the lucrative world of mascara, concealer and anti-aging serums.

Walgreens, which pulled in $117.4 billion in global revenue last year, has historically derived two-thirds of its U.S. sales from prescription drugs peddled at the pharmacy counter in the back of its stores. The remaining third comes from the sale of “front-of-store” beauty, food and household products. The front-of-store performance becomes increasingly critical as the margins of Walgreens’ drug business decline, hit by steady reductions in reimbursements from private insurance companies and the government, which pays for Medicaid and Medicare prescriptions.

Walgreens assumed it scored a cosmetic coup when it coupled with Alliance Boots, which owns No. 7, the European powerhouse brand. Boots stores in Europe are trusted go-tos for beauty shoppers and earn roughly half their money from non-prescription sales.

In a summer 2015 interview with Crain’s, Walgreens then-U.S. president and current co-COO Alex Gourlay said the company would use Alliance Boots’ research pipeline to create its own exclusive cosmetics. Later that year, Walgreens bought Liz Earle, a U.K. line of skin-care products, from Avon Products for $215 million.

But those efforts haven’t produced material results. The No. 7 line is also sold at Target and Ulta stores, and doesn’t have the same cachet here as it does in the U.K. According to its 2016 annual report, Walgreens non-prescription sales actually declined to 33 percent of its overall income, from 36 percent in 2014.

In the most recent quarter, the company saw its U.S. pharmacy sales increase more than 6 percent year-over-year, while its non-pharmacy income fell 0.4 percent—in spite of what the company characterized as an increase in health and beauty sales. (The company doesn’t break out beauty sales, but the division “is still a relatively . . . I wouldn’t say small, but it’s not as big a part of our business” as food, Gourlay said on a June 29 earnings call.)

Gourlay and Pessina say Walgreens is starting to double down on its cosmetics effort now that they’ve finished the initial round of post-merger cost cuts. They characterize the strategy as the combined company’s customer-friendly second phase, following the first one that focused on integrating and streamlining operations.

“We have started to roll out more products, we have started to test many models, but now it’s time to really go back and really put in action—put (health and beauty products) in the stores,” Pessina said on the earnings call. In the short-term, that translates to rolling out new products in the U.S., including Boots’ Botanics line, and adding additional beauty SKUs to more than 1,000 Walgreens stores by the end of 2017.

Analysts today echo a sentiment they’ve held since Walgreens began its beauty buzz: The chain faces a major challenge in luring choosy cosmetics consumers away from Sephora and Bolingbrook-based Ulta, which has been on a multiyear tear.

“I’m not sure they’re going to win shoppers from department and specialty stores,” says Vishnu Lekraj, a Morningstar analyst in Chicago. “They’re bringing in new products, but the jury’s still out.”

Fareva, which generated 2016 revenues of 1.3 billion euros, or about $1.36 billion, is one of the world’s largest contract producers of household, cosmetic, industrial and pharmaceutical products. The family-owned company, based in Tournon-sur-Rhone in south-central France, has a presence in Richmond, Va., where it purchased a former Pfizer plant in 2011. Fareva spent $40 million to update the facility and introduce an aerosol manufacturing line that lets it create dry shampoos and spray-on sunscreens.



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