The recent announcement by Alliance Boots that it was to cut 200 jobs at its Beeston factory in Nottinghamshire over a two-year period has raised questions about its longstanding involvement in contract packaging.
The factory, which until the announcement had employed 1,200 staff, makes products such as Soltan sun cream, Boots No7 cosmetics and toothpaste for both Boots stores and other clients. Around 40% of its output is Boots own-brand product, with the rest devoted to contract manufacturing for third parties.
It is the Boots contract manufacturing arm, BCM, that is due to bear the brunt bulk of the cuts in a reorganisation which aims to refocus the business on Boots own-brand beauty and skincare products. Yet while jobs are likely to go, Boots is also planning a major investment in the facility – which is Europe's biggest contract packer in the health and beauty market – and to put it at the heart of its expanding business in the US.
So what has driven the move? The company said two key factors in the decision were the flagging economy and regulatory demand. "As a result of the current economic climate, there has been a reduction in external demand," an Alliance Boots spokesman tells The Contract Packer.
"The economic conditions are such that, wherever possible, FMCG companies will manufacture their own products, meaning that competition for contract manufacturing volumes is fierce and volumes are volatile."
Drop in profitability
According to the company, high fixed costs in manufacturing mean the drop in demand has had a significant impact on the profitability and success of the contract manufacturing business.
The industry in the UK has also undergone a significant rise in regulatory requirements, he adds. "There are two manifestations which have been observed in the industry as a whole, one where licenses required amendment and one where the manufacturing environment requires amendment. This has created a challenge across the wider manufacturing industry with several factory closures and/or product interruptions."
However, Alliance Boots has stressed that this did not mean an exit from third-party manufacturing altogether – "just certain areas that are unprofitable".
The spokesman suggests its focus would be "selected customers where we can build long-term relationships", and that it would concentrate on manufacturing products for third parties that had synergy with its own brand range.
But it's not all about cutbacks. One major area for exploration is the company's overseas venture in the US. Alliance Boots signed a deal with US drugstore group Walgreens in 2012, under which the US company will acquire it completely by 2015 and which will see Boots products on sale in 8,000 Walgreens stores.
"Our strategic partnership with Walgreens to create the first global pharmacy-led, health and wellbeing enterprise should be viewed positively for BCM," says the spokesman. "While we are still a long way off supplying products to the entire Walgreens network, over time, we will decide the best strategy in which to do this."
It's one hopeful sign for the contract manufacturing operation. All Boots products on sale in the US have been manufactured by BCM, including 50 Boots products available on Walgreens websites drugstore.com and beauty.com, as well as the No7 range, which is currently on sale in Walgreens flagship store in Hollywood.
"Third-party manufacturing for selected customers where we can build long term relationships remains a key component of our business model," the spokesman stresses.
Major investment
Speaking at the time of the announcement, Alex Gourlay, chief executive of Alliance Boots Health and Beauty, said in a statement: "By refocusing the business on activities where we have a sustained competitive advantage, this means it will have greater capacity to concentrate on the production of our own product brands, which are increasing in international demand. This will in turn add value to our internal supply chain."
The reorganisation is said to have incurred a one-off cost of just over £30 million in 20102/2013, with a non-cash element of £18 million. Gourlay has said that the company would be adding another £20 million in investment in the factory over the next two years to its existing spend of £25 million over the past five years. He added that the company would invest in new technologies for Boots product development.
"By modernising and improving the efficiency of our Nottingham factory, we strengthen its position for the future and make it more suited to support the increasing global footprint of our product brands," said Gourlay. "It is an important step in our continued efforts to keep contract manufacturing in the UK, despite the ongoing challenges that the industry faces."
According to recent reports, the job cuts at the factory have started with 60 night staff, with the remainder yet to be confirmed. Alliance Boots has said it will attempt to redeploy staff where possible, but will not be drawn further on this.
"We are unable to comment on where jobs would potentially be relocated," says the spokesman. "We have been talking to the Boots Stores Service Centre and Alliance Healthcare Distribution Centre on the Beeston site about available opportunities within their business. We are fully committed to supporting those affected and every effort is being made to offer redeployment to other areas within the group. Our employees will be the first to know."
