ALLIANCE BOOTS is locked in a bitter battle with its suppliers over attempts to extract cost savings from its supply chain after the £6.7 billion merger in July 2006 of Boots and Alliance Unichem.

The specialist health and beauty retailer that owns Boots the chemist gave its suppliers a deadline of February 2 to respond to the proposed cuts in wholesale prices of over-the-counter medicines and toiletries.

It is understood that the company wanted to reduce some prices by as much as 8% to 15%.

City sources said that about 30 of the group’s 80 or so main suppliers had still not agreed to the changes, but the company was hopeful it could strike a deal with the majority of the contract rebels.

However, one source familiar with the talks admitted: “Some of the suppliers have been really intransigent. In a few cases talks with Boots have got very heated.”

Alliance Boots is thought to be planning further talks with suppliers who have not signed up to the new terms this week.

Boots gave the suppliers a second deadline to respond to their terms and conditions with a retrospective payment from August 1 last year. The company informed its suppliers the change in terms would be implemented with immediate effect.

Before the merger, Boots had suggested that it would harmonise prices across the group.

A spokesman for Alliance Boots said: “We’re not for shifting. Some people seemed to think these deadlines were not real and they would go away. But this isn’t going away.”

He added: “Arguments about pricing are par for the course in retail.”

Alliance Boots had pledged to extract £100m in synergies from the merger, £60m of which would be achieved by the end of the second year in July 2008.

Buying gains were expected to form a significant part of the cost savings.

In a letter seen by The Sunday Times, one supplier has threatened to stop supplying Boots and to notify pharmaceutical trade journals, supported by an advertising campaign that its brands will be made available through other wholesalers.

Some small manufacturers are claiming they genuinely cannot afford the cuts and could be put out of business by the contract changes.

One supplier claimed Boots was arrogantly out of touch and that it was not in as strong a position to negotiate as it would like.

But, tellingly, so far no manufacturer has stopped supplying Boots.

Alliance Boots has about 2,300 outlets, including 1,400 Boots stores and 900 Alliance pharmacies, which will eventually be rebranded Boots. Because it has such a strong high-street presence it is thought Boots is confident it will force through the price cuts. The company is facing increased competition from supermarkets, but analysts said that suppliers were unlikely to find much respite from the cost squeeze there.

Since the merger Alliance Boots has been expanding internationally, including into Russia and Egypt.

Stefano Pessina, deputy chairman of Alliance Boots and its largest shareholder with a 16% stake, has said that by 2010 he wants half of the group’s revenues to come from outside Britain.

Last month it became the latest British company to move into the rapidly expanding Chinese market with a joint venture with the country’s third largest pharmacy wholesaler. The joint venture will see Alliance Boots gain a foothold in the world’s fastest-growing drugs market.

The wholesale business, which will distribute traditional Chinese medicines as well as Western drugs, will be by far the largest part of the joint venture.

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