DEERFIELD, Ill. — Walgreens Boots Alliance will be emphasizing improved front-end margin contributions across its U.S. Walgreens store base once the merger is complete, mirroring the peformance of its U.K. store base Boots, in an effort to counter margin pressures from the pharmacy side of the business.
"The pressure on the pharmacy is a global issue," Stefano Pessina, executive vice chairman Walgreens Boots Alliance, told analysts Wednesday morning. "Everywhere in the world the margins of the pharmacy are under pressure," he said. "Twenty years ago, Boots, as you know, was making its money on the pharmacy — so 75% of the profit of Boots was coming from the pharmacy. Today, 75% comes from the front of the store. Are the pharmacies losing money? Not at all. They are still very profitable in Boots because the margin has suffered, but of course they are selling much more, so they are still very profitable."
To combat restricting margins, Boots developed the front of the store into what it is today — one of the premier shopping experiences in the United Kingdom.
"There's real opportunity in the front of our store," said Greg Wasson, president and CEO of Walgreens Boots Alliance."[Boots'] operating margins are significantly higher than what ours are, and that's primarily as a result of that front-end business. So we do think that there is opportunity to drive operating margin out of our front-end business," he said. "I feel confident with what we've been doing so far, the proof points we've seen that there's opportunity there. ... If we look across the Pond to the Boots model, we have some similar opportunities at the front end of our store."
"This is what will happen in the United States," Pessina said. "I can assure you that after the merger, we will have a step up in the margins of the front of the store. You will start to see it growing from next year on. ... We have clear plans for it."