WAG takes Manhattan

Suddenly, New York is Walgreens’ kind of town.

If the company’s agreement to acquire New York-based Duane Reade is finalized later this year, as expected, the industry’s top pharmacy chain will become “king of the hill, top of the heap,” to quote the song: the dominant drug store power in the nation’s richest drug store market. It’s the kind of bold acquisition that only healthy companies with strong balance sheets and deep pockets can pull off, and it promises to upend what is arguably the nation’s most stratified, impenetrable and tightly controlled retail arena.

The merger, announced Feb. 17, would be the biggest ever for the 109-year-old drug chain. If approved, it will instantly thrust Walgreens into a commanding position in the densely populated New York market, where the chain has worked for years to gain a solid foothold. Its chief barrier has been the company it’s set to buy; Duane Reade has been a high-traffic retail fixture since its first store opened on Broadway in Manhattan, between Duane and Reade streets, 50 years ago, and it has a 13-year lease lock on many of the best locations in the city, according to retail analyst Ed Kelly of Credit Suisse.

The deal is expected to close before the end of Walgreens’ fiscal year on Aug. 31. It would include all 257 Duane Reade stores, including roughly 150 in Manhattan. Also included are its corporate office and two distribution centers.

By contrast, Walgreens operates 70 stores in the metro New York region, including just 13 in Manhattan.

Walgreens leaders were jubilant over the capture of Duane Reade. In a conference call with analysts, Walgreens president and CEO Greg Wasson predicted the deal would begin contributing to earnings within a year or so.

While the purchase of Duane Reade constitutes the company’s “largest retail acquisition to date,” Wasson said, “we have a proven record of successfully completing and integrating retail acquisitions, including Happy Harry’s, Drug Fair and El Amal Pharmacies in Puerto Rico.”

Plans already are well along. In an interview the day after the announcement, Wasson told Drug Store News that the chain will retain the Duane Reade logo and merchandising programs, particularly in Manhattan, and will pursue a “co-branded strategy” for some time. The company also will continue to support the rollout of Duane Reade’s store-renovation program, even as it rolls out its Customer Centric Retailing initiative to Walgreens stores.

Wasson praised Duane Reade chairman and CEO John Lederer, a veteran of Canadian supermarket and pharmacy chain Loblaws who has led a major transformation at the 257-store chain, including the introduction of a new store prototype.

To date, Duane Reade has opened or converted 30 stores to the new format and has plans for up to 30 more new or remodeled stores in 2010.

“It’s a nice format,” Wasson told Drug Store News. “They’ve widened the aisles, lowered profiles and taken the gondolas away from windows so you can see the inside.”

Walgreens also is looking hard at Duane Reade’s Look Boutique upscale beauty department. That concept, Wasson indicated, could serve as a template for a dramatic upgrade in coming years for Walgreens’ own beauty aisle.

“It elevates merchandising of cosmetics, skin care products and many prestige brands, and is in line with where we believe we can take the beauty experience in our own stores over time,” he told analysts Feb. 17.

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