In big shift, Walgreens eases growth throttle

DEERFIELD, Ill. —Bowing to the realities of a bleak economic outlook, a crowded drug store marketplace and its own need to bolster profitability, Walgreens revealed this month that it would scale back significantly on its organic store construction and expansion program beginning this summer.

The reduction in ground-up store development for Walgreens marks a major shift. For much of the past two decades, Walgreens has been on a torrid expansion campaign, marked by the industry’s most aggressive store-construction program and a bold and seemingly unstoppable march into every major market in the continental United States. Along the way, the company has opened hundreds of new stores each year, smashing through the 6,000-store barrier last fall in New Orleans and repeatedly reaffirming long-stated plans to operate 7,000 stores in all 50 states by 2010.

Fiscal 2008 is no exception: Walgreens will open more than 500 net new organic stores in the fiscal year ended Aug. 31, 2008. But that white-hot development campaign will cool off significantly in the coming years.

New store construction will slow from this year’s program—which will add a nearly 9 percent increase in net new stores—to “a goal of about 6 percent in fiscal 2010 and approximately 5 percent annual increases beginning in fiscal 2011,” the company said.

That marks a significant departure from Walgreens’ previously stated goal of 8 percent annual long-term growth.

“This move allows us to improve both return on invested capital and overall shareholder value,” chairman and chief executive officer Jeff Rein said. “At the same time, it gives us the flexibility to invest in our core strategies.”

Even with the scale-back, new store openings that are already in the pipeline are expected to result in approximately 8 percent organic store growth in fiscal 2009, adding about 495. But beginning in fiscal 2010, development will flatten, with 425 new stores expected that year and 365 new stores going forward.

Those figures exclude any acquisitions in those years, company officials noted.

By moderating its organic store growth, Walgreens said it expects to cut capital expenditures by about $500 million over the next three fiscal years compared to the company’s previously announced plans. Still, the company said it “remains on track to reach its goal of operating more than 7,000 stores by 2010 and continue expanding throughout the U.S.”