Photography by Vito Palmisano
Mark Wagner knows Walgreen Co. isn't just part of the retail channel-blurring that's occurring throughout the nation. With a new emphasis on wellness and more food in its stores, the company hopes to profit from it.
But its position wasn't always that clear.
"We were really concerned with the blurring of retail in America," says Wagner, 51, who is president of operations and community management for the Deerfield, Ill.-based drug store chain. "People really didn't care if they picked up their scripts at Walmart but bought their beauty and personal care at Walgreens."
The problem gave Walgreens pause. With more retailers competing for consumers' pharmacy purchases, "How were we going to clearly define ourselves in the drug store space?"
Walgreens answered its own question, deciding to shed its stodgy image as the neighborhood pharmacy to join the wellness movement and the digital age in a customer-centric way. "We knew we needed to create the white space in drug store. We needed to create the drug store model. We needed to create the reason to draw people into those 8,000 stores," Wagner told Retail Leader.
With more – and many say better – locations than any other drug retailer in the nation, Walgreens boasts of being within five miles of 75 percent of the nation's population, often with the convenience of a drive-through pharmacy. During the past three years, Walgreens invested in that real estate by remodeling existing stores to make them brighter and easier to navigate. It has added more fresh groceries, among other items, and improved service in its pharmacies and Take Care Clinics.
Besides more designer-branded beauty products, its seven new multilevel flagship locations in five cities feature gourmet cheese, expanded wine selections and plenty of freshly prepared foods, including sushi, fruit cups and submarine sandwiches. And thanks to its $6.7 billion equity purchase of 45 percent of U.K.-based drug store chain Alliance Boots, it fully expects to become a dominant player internationally.
"Walgreens has been known as a pharmacy. That's how they've grown," says Vishnu Lekraj, a senior analyst at Morningstar in Chicago. "But now you have supermarket chains and others taking share and challenging Walgreens from that standpoint. In order to entice customers, they have to offer other products to get them to come in through the doors."
Drawing people into the stores hadn't been a challenge for most of Wagner's 35 years with the company, starting as a part-time clerk in 1977 and advancing from store manager to his current position in 2010.
Walgreens has maintained the same store culture the Walgreen family developed in 1901 with its first store. "It's kind of odd. We're a $72 billion corporation, but it feels like we're working for a family, the Walgreen family."
But as the external world began changing in 2008, particularly the level of competition Walgreens faced as rivals CVS and Walmart expanded and mail-order drugs took off in the recession, the company began bringing in outside experts to help with marketing, strategy and finance. "That's what really changed more than anything," Wagner says. "We used to be a promote-from-within [company]." Walgreen's board of directors also has been updated and hasn't included a member of the Walgreen family since Charles Walgreen III stepped down in November 2009.
With the new blood has come a willingness to give up some caution. Walgreens lost momentum last year after it couldn't come to an agreement with pharmacy benefits manager Express Scripts and, effective Jan. 1, 2012, walked away from the partnership that had generated about $5.3 billion in revenue for Walgreens in fiscal 2011 and involved 88 million prescriptions a year.
The retailer, which estimates the separation resulted in $4 billion in lost revenue, was still feeling the effects in the quarter ended Nov. 30, when same-store pharmacy sales declined 11.1 percent, reflecting in part the growth of lower-cost generic drugs. In the second quarter, it reported a 2.7 percent decline in comparable store prescription sales, though the actual number of prescriptions filled in comparable stores rose 4.3 percent.
In retrospect, CEO Greg Wasson says, "The long-term ramifications of accepting Express Scripts' offer in 2011 would have been far greater than the impact we felt short term. Today as a result of our successful agreement with Express Scripts that took effect last September, we believe we are extremely well positioned with our commercial book of business going forward."
Still, to analyst Lekraj, who gave Walgreens a "poor" rating for stewardship in a March report, the Express Scripts incident indicates how important – and fragile – relationships can be. "The main thing to focus on is the [company's] relationships within the industry," he told Retail Leader.
Goldman Sachs removed Walgreens stock from its "Conviction Buy" list March 20, despite the stock's 31 percent gain from a year ago, but it is maintaining a "Buy" rating on the stock and has raised its 12-month target price to $50 from $46. In a research report, the firm, which is a financial adviser to Walgreens, said the company's distribution deal with AmerisourceBergen could "drive synergies beyond our current forecast."
Walgreens' freshly inked 10-year contract with wholesaler AmerisourceBergen is meant to leverage efficiencies while improving service. "We'll end up transitioning to an everyday delivery model, which is going to increase our service levels, going to increase our in-stock position, increase patient-level delight....I think it helps on all the financial metrics," Wagner says.
With its recent alliances, the company aims to grow revenue to $130 billion in fiscal 2016 from $72 billion in 2012, while boosting its operating income to $8.5 billion or more from $3.5 billion in fiscal 2012.
The new partnerships come after a period of self-reflection and cost containment. Its Rewiring for Growth program started in 2009 and the company eliminated $1 billion. "We pulled out lots of costs, but it made us more efficient to be able to execute on that strategy," says Wagner, who cut several thousand positions, such as photo finisher maintenance technicians and field supervisors. The right-sizing allowed the company to reinvest in its new health and wellness vision.
"We took a world tour," Wagner says. "We stumbled across some innovative store concepts Duane Reade was testing. We felt what they were developing was exactly where we needed to go, so we bought them." Walgreens acquired the company in 2010 for $1.1 billion.
The company also has boosted its investment in technology by acquiring Drugstore.com in 2011 for $409 million, developing its own proprietary apps, updating its point-of-sale cash register system and, in September, finally launching a loyalty program.
Wagner acknowledges Walgreens was about a decade behind competitors in developing its Balance Rewards loyalty program. "For whatever reason, it was a strategy we chose not to go down. It was different regimes, different CEO, different board." But customers clearly were open to it. The company's program has gained 60 million members in about six months.
With new detail on purchase transactions, the retailer can work more closely with CPGs on marketing programs and new product development. "Balance Rewards has given us just a ton of data-rich information to work with....When we didn't have that information, it hurt us in being able to have these type of constructive conversations with CPG guys," he says. Walgreens is working with Bausch & Lomb on eye screenings and it's collaborating with Hershey on candy campaigns tied to events, such as the NCAA tournament.
Walgreens stocks each store according to the clientele it serves, while still maintaining its strong, national brand image. "What I call it, it's outnationalizing the locals and outlocalizing the nationals," Wagner says.
As it differentiates its U.S. locations, it also has slowed its domestic new-store openings. "I would say today we're opening up better stores than what we were five years ago, once we changed our real estate strategy to focus on better sites but fewer sites."
But the world is large, and the company has its sights on global expansion. "We always felt we needed to go international. It wasn't a matter of if; it was just a matter of when," Wagner says.
The downturn in Europe doesn't faze Wagner, who believes Walgreens will be in an envious position when the economy picks up again. "Three years from now, we will be truly a global company with the second step of the Alliance Boots acquisition....I think there will be nothing like it in the world. No matter what anybody does to copy us, they can't get that type of scale. When it comes to our niche in drug store retailing, no one will be better than us."
Bringing Pharmacy Out from Under Wraps
With about 70,000 clinicians on staff, 27,000 pharmacists and 8,000 locations, Walgreen Co. stands to benefit from the nation's changing health care system, says Suzanne Hansen, group vice president of pharmacy operations at the Deerfield, Ill.-based company.
"One of the things we're trying to do is connect those things together so people don't just think of us as a pharmacy, but as a health care company," Hansen told Retail Leader in an interview in March. "We're leveraging our brand."
The company's recent 10-year deal with drug distributor AmerisourceBergen Corp. is expected to improve service for customers while contributing to the company's profits by lowering product costs. The change takes effect Sept. 1.
Already consumers have witnessed a transformation in many Walgreens locations, as the retailer has broadened its vision and given pharmacists a more active role in providing service.
Walgreens' changes come as the Affordable Care Act is expected to make health care insurance more accessible to consumers. "With more people coming into the system, there's going to be more need for health and wellness," Hansen says.
Thanks to technological advances that have automated some of the paperwork associated with running a pharmacy, Walgreens is encouraging its pharmacists to interact more with consumers. "It's freed up that pharmacist to have these face-to-face conversations with patients," Hansen says.
Pharmacists now give immunizations and perform screenings for blood pressure, diabetes and cholesterol at the company's more than 370 Take Care Clinics, which also employ board-certified nurse practitioners.
Walgreens says it is the largest retail provider of flu shots in the nation, delivering more than 7 million this flu season, compared with 5.5 million a year ago. Last year, it performed more than 500,000 health tests.
Walgreens' new apps remind customers to take their medication or notify them when a prescription is ready for pickup, while the company offers 160,000 products on its website and 60,000 additional items from Drugstore.com.