Walgreens unveils major overhaul to transform, rejuvenate its business

CHICAGO “More from the core.”

That’s the mantra now guiding Walgreens strategy for riding out today’s economic maelstrom and regaining the sales and profit momentum that—until recently—made Walgreens the envy of Wall Street and chain drug retailing.

“More from the core,” said the company’s newly elected interim chairman and chief executive officer, Alan McNally, means leveraging the company’s assets and exploiting untapped synergies to bring new solutions to a health care system “in crisis.”

Battered by a decline in consumer confidence, rising operating costs and slowing sales and profits, Walgreens has embarked on a dramatic shakeup of its entire business structure. Henceforth, said McNally, the nation’s top drug chain will “create value for our shareholders by being part of the health care solution in America.”

The goal, McNally and other company leaders told Wall Street analysts yesterday, is to unlock the massive potential within the company’s core businesses by leveraging and tying together its powerful and growing assets in drug store market penetration, ambulatory clinical care, specialty pharmacy, health services and on-site workplace pharmacy and health care.

“Going forward, we intend to be quicker and more aggressive with our strategy,” asserted McNally. Equally important, he said, “Our cost structure needs to be fundamentally reduced.”

McNally joined a phalanx of top Walgreens executives Oct. 30 to host an all-day meeting with many of Wall Street’s most influential retail analysts to outline the company’s plan for restoring its luster. That plan involves a top-to-bottom analysis of how the 107-year-old retailer goes to market and reaches its customers—and a dramatic shift in its long-term strategy for growth and profitability. 

Some of those changes are already underway. Among them: the rise of McNally himself to interim chief executive officer, following the abrupt retirement of former chairman and chief executive Jeff Rein Oct. 10. A search is underway for a successor, who could come from either inside or outside the company, McNally said.

Walgreens’ renewal will be based on a transformation of many long-term aspects of its strategy, said the new chairman. One key facet: a significant scaling back of its growth strategy—long known as the most aggressive store-development program in the industry—from an average of 8 percent a year to roughly 5 percent.

“We opened 529 stores in the past year,” noted Mark Wagner, executive vice president of store operations. “By the year 2011, we will only open 365 stores at a five percent growth rate.”

Along with other cost-saving initiatives, the slowdown will save the company hundreds of millions of dollars in capital expenditures. This year, said executives, Walgreens’ capital spending program will shrink to $1.8 billion from $2.2 billion in fiscal 2008, and over the next several years, the chain has targeted $1 billion in total cost reductions.

“Walgreens’ 6,500 retail drugstores remain the centerpiece of our strategy for growth and value creation,” said president and chief operating officer Greg Wasson. “Our intent is to transform Walgreens into a more efficient and customer-focused company serving the needs of shoppers for consumer goods and services and for patients and payors seeking quality pharmacy, health and wellness services that are accessible and affordable.”

Added Wade Miquelon, Walgreens’ new senior vice president and chief financial officer, “We are targeting $1 billion in annual cost reductions.” To accomplish those savings, he said, Walgreens is focusing on corporate overhead and labor savings through initiatives like POWERx, a new workload balancing system that will offload more and more prescription dispensing activities to centralized fill sites.

But cost-cutting is only part of the picture. One of the company’s primary areas of focus will be rejuvenating store demand with new merchandising techniques aimed at boosting per-customer transactions and making the shopping experience easier—an effort that will lead eventually to a completely redesigned store prototype, company officials indicated.

Indeed, said Miquelon, improving the customer shopping experience will yield more in gross profit dollar growth than any of the other levers Walgreens can work to build value.

“Just one more item per basket will add $1 in …growth,” he told analysts.

The company will build on a powerful foundation as it works to rejuvenate anemic same-store sales and boost average spending per customer, Wasson said. “Most of our store locations are locked up [in leasing agreements] for more than 50 years. We serve 5.3 million customers daily. We’re number one or two in 70 percent of the nation’s drug store markets. We have a strong balance sheet and financial flexibility,” said Walgreens’ president. “And our strongest core strength is our history of innovation,” reflected in a century of initiatives from drive-through pharmacies to pharmacy computer systems linked by satellite.

Walgreens has already taken some steps to improve its performance. Its recently introduced prescription savings card program has signed up more than one million customers. Its worksite pharmacy and health care initiatives are growing rapidly through the Take Care Health division, as employers take advantage of the health and prevention capabilities Take Care can bring to their employees right inside the workplace. What’s more, Walgreens is rapidly building up a national presence in fast-growing areas like specialty pharmacy and home infusion.

Now, say company executives, it’s time to tie all those capabilities together and transition its 6,479 drug stores, its specialty pharmacies and health services, its more than 600 in-store clinics and its worksite health care centers into a comprehensive, national system of “points of care.” With 47 million Americans without insurance and costs rising for patients, health plans and health providers, Walgreens leaders see the company evolving into a broad-based set of solutions for a stressed health care system.

“It’s all about surrounding the patients and the payers with cost-effective, convenient, coordinated care,” said Stan Blaylock, president of Walgreens Health Services.

In all, Walgreens officers unveiled seven initiatives to recharge sales and profits, boost customer loyalty and put Walgreens front-and-center within this unsettled and rapidly changing health care landscape. They include:

• Slowing store growth “to allow more time to develop the company’s management ranks and focus on improving the customer experience, while freeing up capital;”

• Re-inventing the customer experience by streamlining merchandise selection and shifting promotional focus toward essential consumer needs. The company is also expanding its private brand products to provide value to customers and higher profit margins to stores;

• Transforming its pharmacy operation through workload balancing, which is already in place in 152 Florida stores;

• Expanding the Health and Wellness division, which now encompasses more than 600 in-store clinics and worksite health centers. Walgreens expects to have more than 800 of these facilities by the end of fiscal 2009.

• Expanding the specialty pharmacy and home infusion business.