Perfecting the standard – Walgreen Co – Walgreens Co., company overview

Laura Heller

Like a fine wine, Walgreens keeps getting better with time. As it enters its second century, the 101-year-old retailer continues to stand at the forefront of innovation, implementing new technology and pushing ahead to attain its goal of operating 6,000 stores by the end of the decade.

It’s true that Walgreens doesn’t hold the title of the nation’s largest drug chain in terms of store count; that honor goes to CVS. But while CVS and Rite Aid have closed underperforming stores and have shrunk in size, Walgreens continues to open stores at a rate of one net new location per day, neatly blowing past all its competition in terms of organic growth.

Walgreens can boast at holding the No. 1 ranking in the industry’s 2002 Annual Report with annual sales topping $24.6 billion.

The retailer racks up higher total sales than its competitors, largely due to its higher-than-industry-average front-end sales. And those are largely attributed to the company’s finesse at picking prime locations and operating a convenience-based format, a trend Walgreens management spotted and jumped on earlier than its competition.

“Management really deserves tremendous praise for its foresight,” said analyst Mark Miller of William Blair. “Their insight into the economics of the business goes far beyond their competition.”

More than 10 years ago, approximately 60 percent of prescriptions were paid for in cash, said Miller. Eleven years later, just 11.6 percent of prescription sales at Walgreens were cash transactions in fiscal 2001, which ended Aug. 31.

Forward-thinking management saw this transition early on and quickly executed a strategy to position Walgreens as the most convenient drug store in any given neighborhood. Once managed care made price a non-issue, convenience gave Walgreens the edge it needed over its competitors. The company at the time headed by newly appointed chief executive officer Daniel Jorndt, began scouting corner locations with easy access and began aggressively building stores.

“Walgreens has a well-defined character,” said Neil Stern, a partner at McMillan/Doolittle Consulting. He credited this “character” to the company’s leadership and vision. Walgreens also invested in store systems and other technology well before it was in vogue; much like WalMart, another best-in-class retailer that pulled ahead of larger chains, in part because of this foresight.

Notably, Walgreens’ more progressive managerial decisions didn’t originate from new voices or consultants from outside the company. Rather, the chain’s management has come up through the ranks overwhelmingly, with each executive having spent decades with the retailer.

In the business book “Good To Great,” author James Collins identifies 11 companies that have made the leap from good to great, one of which is Walgreens. And what attributes do all these companies have in common? A corporate culture that remained true to its foundation; one that has rigorously identified and fostered disciplined people to think and act in a disciplined manner–which pretty much sums up Walgreens management for the last century.

Traits of a Walgreens executive

For 98 of Walgreens’ 101 years, the company was led by someone with the Walgreen last name. Jorndt, the first non-family member, became chairman in 1998. When David Bernauer assumed the chief executive officer title in January of this year, he became only the second person wit out the Walgreen moniker to hold that office; albeit he is an executive with more than 35 years tenure in the company.

According to securities analyst Miller, the leadership transition from Jorndt to Bernauer “should be relatively seamless.” He added, “The priorities are relatively consistent; however, we believe that David Bernauer’s strong background in technology will be a positive for Walgreens as it implements several major systems initiatives going forward.”

The biographies of Walgreens’ executive and senior vice presidents read pretty much the same: decades of service and experience working in the stores–traits that help keep the company in touch with its customers no matter how big or how fast it is growing.

True to form, Jorndt’s response to Collins’ praise was subdued. Although he noted the distinction with pride at the company’s annual meeting in January, he also was cautious not to be too proud. “If we wrote this book, our title would be ‘Pretty Good to Good,”‘ he said. “Because we’re not there, wherever there is, by a long shot. We have lots of plans and lots of strategy to keep this company growing and prospering for many, many years to come.”

Walgreens continues to pour an average of $1 billion in capital investments per year back into the company. For its fiscal year 2001, that number was $1.3 billion. “We think capital investments are cannon balls that win the war for you,” said Jorndt. “We’re investing more than our next three drug store competitors combined.” Capital expenditures for 2002 are expected to be in line with years past.

New store openings are on schedule and will continue to ramp up as Walgreens works to reach its goal of 6,000 units by 2010. But Walgreens doesn’t plan to stop at 6,000 stores nationally. “At this point in time we think there’s ample room to put 10,000 Walgreens drug stores across America,” said Jorndt. “So we’ve got our work cut out for us.”

The chain also has to contend with increased pressure on pharmacy margins, not just from managed care, but governments in to cut Medicaid reimbursements. After a scuffle with Illinois legislators last year, the company flexed its muscles, threatening to cut back the number of stores it operates in areas with high numbers of Medicaid customers. Walgreens’ increasing size and the greater consolidation in the industry should give the chain even more bargaining might as other states faced with tightening budgets look to cut Medicaid funding.

Sharpening its mix

The retailer continues to hone and refine its merchandise mix, and once the Basic Department Management Program is implemented, it can better tailor assortments in each market based on demographics. “That’s a big deal for Walgreens,” said Miller. “It could allow the company to achieve [the] same sales, but potentially with a lower level of inventory investment.”

It’s also another point of differentiation, giving Walgreens a stronger competitive edge with encroaching competition from mass merchants. Tailoring assortments is much more attainable for a retailer with a trading area of one to two miles, compared with big-box retailers who draw from upward of 10 times that. “BDM is the most important change [at Walgreens] over the next five years,” Miller said.

Even as it ages, Walgreens keeps getting younger. With a store base of 3,700 and an average age of less than 5 years old, the company is positioned for growth without the worries of updating aging units that often plague large retail chains. And with the bulk of its rapid expansion behind it, Walgreens now can enjoy the financial fruits of its labor. The company entered nearly 60 new markets in the past decade and now can enjoy the profits from maturing stores without the financial outlay needed to open them.

The Walgreens management team is focused on competing not only with rival drug chains, but mass merchants, as well, and already claims some success in this area. Bernauer told attendees at the company’s annual shareholder meeting in January that the company is growing its top 60 categories at a faster rate than mass merchants, outperforming its big-box competition.

It also is focused on increasing customer counts and market share in existing markets. “Our customer count is the best we’ve seen in 20 years,” said Bernauer. “And I’m not talking about because we’ve got all these new stores. I’m talking about our established stores, stores that have been open two years or more are up that much. There’s tremendous opportunity for us. That customer count represents real potential growth for us, and we’ll get it.”

Fighting words from the company’s newest chief executive officer who, like all Walgreens’ previous leaders, has one foot firmly planted in the past and another stepping ahead to build the future.


Headquarters: Deerfield, Ill.

2001 sales: $24.6 billion

Percent change versus 2000: + 16.1 percent

No. of stores: 3,520

Average store size: 11,500 square feet

Pharmacy sales: $14.3 billion

Percent of sales from pharmacy: 57.5 percent

Source: Drug Store News research

COPYRIGHT 2002 Reproduced with permission of the copyright holder. Further reproduction or distribution is prohibited without permission.

COPYRIGHT 2002 Gale Group

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