Walgreens’ 2010 results affirm strategy change

Customer Centric Retailing as of 4Q 2010 Source: Walgreens fourth-quarter and fiscal-year conference call, Sept. 28

DEERFIELD, Ill. —The Walgreens hedgehog is officially retired. Its fate was sealed by a successful fourth quarter and fiscal year that confirmed that the retail pharmacy and health services giant is on the right track in its sweeping campaign to transform its business model and rejuvenate its store base.

Walgreens’ top brass used to affectionately characterize the company’s business model as a “hedgehog” that stuck close to its core competencies, like customer convenience and high-volume pharmacy services. But now, nearly two years after Walgreens threw out its old playbook, brought in new management and embarked on a top-to-bottom overhaul of its core operating strategy—and even its approach to merchandising and marketing—company leaders in search of inspiration from the animal world more likely would choose an entirely different kind of symbol. These days, Walgreens aspires to be something more like a panther—muscular but quick, with lightning-fast reflexes and a predator’s ability to sniff out market opportunities.

To capitalize on those opportunities, Walgreens has been in rapid change mode since fall 2008. Among the most recent examples:

Another overhaul of top management aimed at streamlining and decentralizing the company’s reporting structure. The quiet move, confirmed by Walgreens in mid-September, reduced the number of direct reports to president and CEO Greg Wasson and gave additional management oversight and the new title of divisional president to two EVPs: Mark Wagner, in charge of operations and community management, and Kermit Crawford, now president of pharmacy services. In line with the change, two other senior officers, VP merchandising Bryan Pugh and VP and chief marketing officer Kim Feil now report directly to Wagner. Colin Watts, VP new product development and chief innovation officer, now reports to Crawford. Prior to the change, said one Walgreens insider, “Virtually all the senior management team was directly reporting to Greg Wasson.”

Anew test of an online shopping and store-pickup service called QuickShop at six stores in California and Illinois. The new feature gives customers in the high-tech arena of Silicon Valley and in Libertyville, Ill., a suburb north of Chicago, the option of buying nonprescription products via a new Walgreens website, e-mailing the product order to the test store of their choice and picking it up at that store, sometimes within the hour. In some cases, the participating stores even offer curbside pickup for orders costing more than $20.

An asset swap with Omnicare that substantially muscles up Walgreens’ home infusion business while getting the company out of the long-term care pharmacy industry.

But the clearest sign yet that the panther is beginning to hit its stride may be the company’s fourth-quarter and fiscal-year results, announced Sept. 28. The 7,561-store drug chain drove its fourth-quarter net income up 7.9% versus the same period a year ago, to $470 million for the period ended Aug. 31. For the full fiscal year, net profits rose 4.2% to $2.1 billion.

Sales were up 7.4% to a record $16.9 billion for the fourth quarter, and up 6.4% to a record $67.4 billion for the year. Same-store sales rose 1.5% over prior-year levels in the final quarter—anemic by Walgreens’ historic standards but in line with the economy—with prescription sales climbing 6.5% overall and 1.6% on a comparable-store basis. More tellingly, the company filled 3.3% more scripts in the fourth quarter versus the same period last year, with 90-day prescriptions accounting for 1.2% of those unit gains.

Walgreens, Wasson asserted, is on the right track with its Customer Centric Retailing initiative. CCR has led to a major revamp of store merchandising, presentation and decor, as well as a significant reduction in SKUs and higher sales per customer. The company has converted a total of more than 1,800 of its stores to the CCR merchandising presentation, and more than 1,500 of its units now feature the new decor package.

“I’m very encouraged by the favorable customer response these stores have been receiving, and the improved performance we’re seeing from this investment,” Wasson told analysts Sept. 28. “In fact, the overall performance of our CCR pilot stores is getting better and better as we continue our refinements.”

Walgreens also announced an ambitious goal for its flu shot program. The chain has expanded its network of certified immunizers and other health professionals to more than 26,000, up from 16,000 at the start of last year’s flu season, during which it administered 7 million vaccinations. “We have truly reformed the delivery system for flu shots in this country,” Crawford asserted. Buoyed by ample supplies of flu vaccine, the increase in professional staff and a new Walgreens flu shot gift card program, he said, “our goal is 15 million shots” during the current flu season.

Walgreens also continues to make inroads with employers and other health plan payers as it positions itself as an integrated, broad-based provider of lower-cost patient care and preventive health solutions, Wasson said. “Maybe the difference between us and [our competitors] is that we’re focused on working with all payers…and improving total healthcare costs,” he noted. “It’s all about providing value. Payers going forward are all going to be looking to improve the quality of their healthcare spend.”

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