A sleeping retail giant in health and wellness has emerged with Walgreens flexing its core muscles in attempting to reinvent itself.
Some might say it was the loss of Longs Drug Stores to CVS Caremark Corp. in 2008, plus an infusion of new blood at the top that has spurred Walgreens to veer from its traditional organic growth strategy of adding new stores to a more aggressive acquisition mode.
“I think it's clear that Walgreens fell behind CVS in acquisition and innovation in recent years and is playing catch-up. There is almost an entirely new management team in place and a renewed focus,” commented Neil Stern, senior partner at McMillan Doolittle, Chicago
Walgreens' new direction culminated with the purchase of the 257-store Duane Reade drug store chain in metro New York earlier this year. At a cost of just over $1 billion, it was Walgreens' biggest store purchase to date, giving the Deerfield, Ill.-based drug store retailer the No. 1 position in the nation's largest drug store market. The deal was granted U.S. Federal Trade Commission clearance last month and is expected to close by mid-April.
Greg Wasson, Walgreens' president and chief executive officer, said in a press statement that the Duane Reade acquisition would go a long way to build upon Walgreens Customer Centric Retailing (CCR), an initiative begun last year to enhance the overall shopping experience.
CCR, which appears to be a work in progress, combines a number of in-store elements — new decor package, low-profile shelves, improved sight lines and brand blocking — with SKU rationalization. The goal is to improve the overall shopping experience by making it easy and efficient to shop and, it is hoped, boost front-end sales. By scaling down the assortment, Walgreens cut inventory by $500 million. Fewer SKUs and fewer items in the stock room also resulted in a reduction in labor costs.
DUANE READE UPGRADES TOO
Duane Reade also was in the midst of a much needed store overhaul under the leadership of John Lederer, the former president of Loblaw Cos. Remodeled stores consisted of upscale decor, wide aisles, redesigned pharmacy with lower service counters for personalized interaction, “Doctor on Premises” walk-in health care and a store-within-a-store prestige beauty concept called “Look Boutique.”
Lederer also launched new private brands including DR Delish, a food and beverage line that initially included healthy snacks such as gluten-free trail mixes and soy snacks made without trans fats.
During Walgreens' second-quarter earnings call last month, Wasson detailed how Walgreens' CCR program was developing.
In analyzing its front-end assortment, the drug store retailer identified four product classes:
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Signature: Those categories for which Walgreens is well known. Vitamins are one such category. In a test of about 35 stores in the Dallas and Houston areas, this class represented 29% of front-end sales.
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Power: Categories like hair care for which Walgreens strives to be best in the drug store class of trade. This class generated nearly half of front-end sales in tested stores.
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Staples: Categories that satisfy everyday needs like paper goods. The staples class represented just 17% of front-end sales at test stores.
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Complement: Impulse purchases or convenience items like automotive. This class contributed only 6% to front-end sales at test stores. This class may have suffered by too much editing of the assortment. Walgreens is reevaluating the assortment.
Sales results for the four category classes in the pilot stores achieved a 2% sales lift over the control group of stores, Walgreens reported.
Wasson noted during the second-quarter call that to date Walgreens has reset 36 categories to the new CCR assortment chainwide, representing nearly 40% of front-end sales. It also eliminated about 3,500 SKUs per store. So far, 700 stores have been converted to the CCR design and Walgreens has dedicated more space to key categories like skin care and vitamins across all 7,100 stores. The drug chain also added new categories like beer and wine.
The cost for a store conversion is between $40,000 and $50,000, said Wasson.
Besides the upgraded store base, Walgreens has been investing in and building upon multiple health care and wellness platforms. Last month, it announced it would restructure its health care divisions to better integrate its many ventures into pharmacy and health and wellness solutions across the entire company with a unified sale force. These ventures include an array of services that include specialty pharmacy, worksite health centers, mail service, preventive health and wellness services and Take Care Clinics, among others.
“Walgreens has built the deepest, broadest multi-channel platform for pharmaceutical distribution and has an especially strong position in specialty drugs,” explained Adam J. Fein, president of Pembroke Consulting, Philadelphia.
“The other large specialty pharmacies primarily dispense self-injectable specialty drugs via a single channel (central-fill mail order). None can offer the seamless trade-off between medical vs. pharmacy benefit, which is a significant point of differentiation for Walgreens.”
He added that it would be difficult for supermarket chains to make significant investments in non-retail drug delivery. Some like Hy-Vee and Safeway have skirted the edge of other health care service offerings, but for the most part, Fein said, “Prescriptions are a convenience play for supermarkets, who view pharmacy as just another merchandising category. Over the past few years, supermarkets are losing pharmacy sales and market share to Wal-Mart and chain pharmacies.”
Meanwhile, expect Walgreens to take a hard look at its food offering and take a cue from Duane Reade. Last year, Duane Reade tested a simple fresh food offering at several stores. Items included fresh sandwiches from local fresh food suppliers and pre-packaged salads from Ready-Pac and other convenience food items, including drinks and yogurt, SN reported.
“Walgreens will continue to grow their food presence and the new design includes more convenience foods like coffee and fountain. They have announced that fresh foods will be a major initiative, so we would expect to see some announcements there soon,” said Stern.