Changing the game of drug store merchandising
"You’ve got to skate to where the puck is going, not to where it’s been.”
That’s how Bryan Pugh, who is Walgreens’ VP and chief merchandising officer, described how the merchandising department functions at Walgreens. It’s a fast-moving game. It’s got to be fluid. And if you lose focus for even one second, you stand the chance of being railroaded into the boards and becoming less of a force in the game.
Walgreens has been actively identifying possible category opportunities by store segment and testing those categories across a manageable sample set of stores. If appropriate, the company identifies how best to roll those new opportunities across its almost 8,000-strong store base.
Beth Stiller, Walgreens division VP for category strategy, innovation and space management, does a lot of the heavy lifting in optimizing the merchandising to the stores. “Good retailers always have someone reporting into the merchant that is a neutral entity,” Pugh said. “When we look at remodels or we look at new stores, her division [reviews] the data and then sits down with the [merchant] teams,” he said. From there, they match the best mix according to store location, projected volume, selling space and customer demographics.
Pugh added, “I am very thankful that we have a very solid merchandising team with solid leadership in the GMM roles: Shannon Curtin on beauty, personal needs and seasonal; Robert Tompkins on health and wellness; and Steve Broughton in food and convenience goods. Our category managers and category specialists are making tremendous progress over the last year, and we are looking forward to continuing to change the traditional drug store into a health and daily living destination.”
With two-thirds of Walgreens’ locations being suburban stores at great corners with a drive-through pharmacy, Pugh and his team help other locations stand out, Pugh said. “There is a grocer on the same corner. There is a dollar store down the street. The competitive set is very similar,” he said.
The remaining third of its store base is very different, Pugh said. “It’s Times Square. It’s the beach store. It’s the Arkansas marina store [that’s] down the street in a little town close to a lake, and during the summer months, you do incredible float business, offer coolers, cookout gear.” These stores trade very differently, Pugh said.
The drug store company currently has four flagship locations, including a Duane Reade at 40 Wall St. in New York, State and Randolph in Chicago, Harmon Street on the strip in Las Vegas and a location in Puerto Rico. Walgreens plans to announce approximately a dozen additional flagship stores over the next 18 months. “When it comes to these stores, Mike Defazio — who is our primary store designer for flagship locations — is a great talent to have here at Walgreens,” Pugh said. “He and his team have made great progress, and we’re excited to hear what our customers think.”
“If you truly want to unlock the opportunity — content relevancy — it comes down to location,” Pugh said. That means knowing the local environment on a store-by-store basis. It’s the right offers in the right doors, Pugh said. It’s knowing the neighborhood — residential, office or tourist area. And it’s about knowing what roles pharmacy and wellness can play in those locations. “It’s just not stamping out the same thing,” Pugh said. “It’s taking the content of the entire box, not just my section of the front-end, and saying, ‘Where do we play and what is the best way to leverage that box to [realize] the maximum return?’”
Fresh is a good example of how to best match the right offers to the right door. “[In each market,] we’ve got a sandwich manufacturer, we’ve got a salad manufacturer, and those goods come from a closer proximity [and] go into a [third-party] centralized distribution center,” Pugh said. Stores carrying that merchandise get shipments regularly during the week. “That’s what that model requires. … It brings a lot of complexity,” he said. “How do you get it there? What do you sell? How much space do you give it? That’s the organizational structure changes that we’ve been making.”
What’s written between the lines, of course, is that if one category is folded in, that usually means another category is losing linear feet of selling space. That’s part and parcel to knowing where the puck is at all times.
The recently launched loyalty program, Balance Rewards, will help Walgreens further hone its mix with right-sized offerings in the appropriate settings. The loyalty program will give Walgreens a deeper look into who’s shopping their stores and why, help identify who is cross-shopping pharmacy and front end and help delineate possible nontraditional category synergies.
“Loyalty helps you get to a better place to make real estate decisions because you actually know who’s traveling from where,” Pugh said. “We have stores that have 70,000 cars a day that pass them, because they happen to be on a commuter route either going home or going to work. Those types of stores will have a much bigger trade area than a store tucked away in a community that is [only] 15,000 cars per day, but they’ve got 8,000 people within a small trade area,” he said. “[Those stores] don’t survive on car traffic, but then you have a much tighter net; you know 90% of your sales will be coming from a much closer proximity.”
The consumer insights culled from loyalty also is expected to help improve Walgreens’ merchandising of its store brands. Private brands play a big role in the merchandising mix, Pugh acknowledged, and for good reason — it helps the retailer better compete for what has become a more post-recession, value-conscious consumer. Keeping abreast of how a particular category plays in-store is a big part of Walgreens’ private-brand strategy. “We’ve had a huge emphasis on private brand, whether it be Nice! [or] Delish. You can see a lot of the new Studio 35 beauty that’s just coming off the line right now,” Pugh said. “We’re also seeing more customers reaching for our PetShoppe products, which are giving our private brand a boost.”
Moe Alkemade, VP retail brands and global sourcing, manages Walgreens’ private brand strategy, and he works with Pugh and Walgreens’ GMMs to develop forward-looking action plans for how private brand plays in each category. “How do we do more sales, grow topline, but at the same time grow profit dollars faster than sales dollars?” he asked. “You’ve got to do what’s right for the business and get the best return for the shareholders and offer the best value for the customers. Otherwise, that kind of renders you irrelevant to consumers.”
For noncore businesses like paper, which represents a convenience play, the strategy is to generate volume with the larger vendors in that space and position private brand as the value proposition rather than competing on a broader assortment against mass and supermarkets, which can move paper more efficiently — a learning from Customer Centric Retailing. In other categories? “Brands are more important, so you’ve got to be careful not to move too much. But there are some categories where you can really change the game,” Pugh said.
That’s what all of Walgreens’ merchandising efforts really boil down to — changing the game.
So with all of Walgreens’ ever-evolving market strategies — from CCR to a greater presence in fresh, the Well Experience stores, the flagship locations, Balance Rewards loyalty and even private brand — it all comes back to keeping your eye on the puck. “If you keep doing the same thing and the world is changing, you’re doing [something wrong],” Pugh said.
Re-imagining the great American drug store
How do you transform a drug store into something else? Something new. Something no one has ever seen before. And what would it look like?
To truly reinvent something, you have to be willing to let go of everything you’ve ever known or thought you knew about it; you need to erase all of the preconceptions and abandon the archetypes of what you think it is, what people told you it should be. You need to find the white space.
If you ask Joe Magnacca, Walgreens president of daily living products and solutions, that’s what the best retailers have done all over the world. The chance to be able to do that himself is what brought him to the United States, to Duane Reade and then Walgreens, after many years as one of Canada’s rising stars of merchandising, with an impressive track record at Loblaw’s and Shoppers Drug Mart.
“Drug, particularly in the United States, was an area that had seen very little advancement over the last several decades, both in the format and the content,” Magnacca told DSN in a candid and wide-ranging discussion on retailing and his vision for store and content development. “Even though at Walgreens, there had been some pretty major advancements, those had been primarily pharmacy-based.” Magnacca believed the front-end could “contribute at a much faster rate as part of that innovation.”
“What I saw when I was in Canada was an opportunity … to move away from being primarily a very specific, needs-driven reason to shop and become a place where people want to shop,” Magnacca said. “Here in the United States, and in Canada, we had become focused mainly on size and replicating the existing model — and doing a great job of it, getting the best corners in America. But even more importantly, it was basically a pharmacy-led model.”
Meanwhile, over in Europe, retailers like Boots in the United Kingdom — Walgreens’ brand-new corporate partner — were shaking up the box as if it were a giant Etch A Sketch, and creating a whole new take on the shopping experience. “We thought the European model had really progressed at a much faster rate,” he said. “What we thought they had done so effectively was just to release themselves from the traditional drug store format and become more focused on what we call the three pillars: health, beauty and convenience. They had become focused on reinventing themselves and not just living with the existing model.”
So, Magnacca and his team at the time at Duane Reade — empowered by former Duane Reade chief John Lederer, who brought Magnacca in to help create a new identity for what had become a tarnished brand with great real estate — set about on a long process of redefining the old Duane Reade, and really, the old drug store model. While that’s not exactly something you can just flip a switch on, Magnacca’s group moved fast. After decades of dusty window displays and cluttered stores, Duane Reade opened up the windows, lowered the shelves, widened the aisles, cut away at declining categories and “put more relevant content in the stores,” he explained, and rezoned the stores around three basic areas: “how I look,” “how I feel” and “what I need now.”
The results began to show up in the registers.
“Customers gave us significantly more credit across our store,” Magnacca said. “One of the things that was pretty clear was that when you began to expose the store to the street and you brought in the natural light, and even though you reduce the linear footage, you tended to get more credit from the customer for having more selection in the store.”
It was the birth of the health and daily living store — call it version 1.0. And it was a big part of why Walgreens wanted to buy Duane Reade. Besides the fact that the deal made it the market leader in one of the most important markets in America, it also spring-boarded two of Walgreens key strategic goals: to transform the drug store and elevate the customer experience.
There is no denying the influence of those early learnings in the evolution of version 2.0, Walgreens’ new Well Experience store format, which the company began to roll out slowly last year, completing its first market, Indianapolis, in late 2011. Well Experience marries the best of what Duane Reade had been doing in the front end, with the considerable work Walgreens had been doing over the past several years to reinvent community pharmacy and advance the profession beyond just dispensing.
One of the key things that the Duane Reade deal brought to Walgreens was a much more localized approach to merchandising. It’s something of a necessity in a market like New York, where the trade area and the people shopping in it literally change from one block to the next. But as a chain of 8,000 stores, to be able to move away from the one-size-fits-all approach that had defined U.S. pharmacy retailing for decades, and achieve that level of content relevance in markets all across the country, would be a decided advantage.
“Each market is about making choices,” Magnacca explained. “What we want to focus on with our merchants is: We think we can sell anything in our stores — with our traffic count and 6 million customers in our stores, you probably could sell anything. But one of the key disciplines we put on ourselves is, what’s the right product to sell in the right store, and what products do we just not want to enter at all? The toughest thing to do is to decide what not to sell as opposed to what to sell. It’s saying no to certain categories and making some very tough adjustments.”
In the Well Experience stores, it means some very tough choices in categories that were once destinations for drug stores — some are easy, like VHS tapes and film; some are harder, like batteries and greeting cards. “Those categories are less relevant today than they were years ago,” Magnacca described. “Yet our footages in these categories really didn’t change. … So now part of what we do is making sure we have the right footage in the right stores to get the right productivity — we’re very focused on productivity per SKU per store.”
That basic mindset ties in very neatly with the Customer Centric Retailing work Walgreens had already been doing prior to the Duane Reade acquisition. It’s about understanding how different categories play in different stores. Take its Chicago locations at the intersection of State and Randolph streets, and 75th and State streets, for example. “Both stores are about equal in size … only a few miles apart, but they’re very different in terms of content,” he said. Both stores feature expanded food offerings, but how that plays out in each store is dramatically different.
The store at 75th and State serves a community faced with limited access to healthy food options and medical care. In a sense, the location serves both as the local supermarket for the community, and the Take Care Clinic in it is an entry point for the many people in the area with no medical home. It is a strong example of the role Walgreens believes it can play to help fight America’s massive healthcare crisis, and provider shortage, from a total health and wellness perspective.
Meanwhile, down the road, the store at State and Randolph — one of Walgreens’ souped-up flagship locations — plays to a downtown professional. “It has expanded food,” Magnacca explained, “but it’s a very different mix; it’s got fresh sushi and a very high-end wine and spirits play. And of course, it has our high-end [LOOK Boutique].”
It’s no longer just a matter of rolling out one store concept and making local modifications along the way. It is a key reason that Walgreens will proceed so slowly with the rollout of Well Experience. The new stores represent a major investment to try to engage customers in health and wellness, from the new pharmacy design that puts its more than 27,000 pharmacists in the center of the action, to the addition of a Take Care Clinic in many stores, to the iPad-armed Health Guides who will help customers navigate it all. It all creates a need for the front end of its business to ensure that it models Well Experience on a market-by-market basis, Magnacca explained, at a pace that enables it to drive better top-line results. It’s about making choices, and whatever it puts into the box means something else has to come out to make room.
Guiding those choices is a rather sophisticated, multidisciplinary approach to regional buying it calls “mass localization.” Coordinating that effort is a group created out of the restructuring of Walgreens’ merchandising and marketing teams in late 2011, the inventory strategy and localization team. “We had become a very good retailer in terms of localizing, but a lot of that was happening at the store level — we believed we needed to make that a core competency of our corporate office,” he explained. “The team works with our local operators to make sure we get the best products in our stores at the best price.”
A good example would be in the wine category. “We would say that a percentage of the wine that we carry in our stores should be locally sourced,” he said. “In markets where [they’re known for wine production], such as California or in the Northwest in Washington state, we would argue that there needs to be a higher percentage of [locally sourced wines] in those stores versus other markets like New York or Chicago.” Another example would be in natural health categories in West Coast-based stores, where those types of items tend to hit the market first.
All of these decisions come back to one key mission: to be customers’ first choice for health and daily living. It’s about being different from everything else out there in the market; it’s about giving customers every imaginable option for how they could shop your brand, and then imagining a few more; it’s about making customers rethink how they shop the drug store and what they shop it for.
That is a key role of Walgreens’ growing stable of flagship stores. The stores serve as test labs for new concepts in categories throughout the store, but particularly, in fresh and beauty. Walgreens now operates flagship stores in New York, Las Vegas, Puerto Rico and Chicago, with plans to add more, including a new one in Los Angeles coming in November and Boston next spring.
Of the many new concepts Walgreens is testing in the flagship stores, which does Magnacca think offers the most promise? Some elements you’re already starting to see reflected in the stores, he said: “For example, taking nail from a traditional in-line category and putting it out in the front of the store in a unique fixture is now a standard in our new format stores.”
One new program Magnacca believes has legs in multiple stores brings a new dimension to its multichannel strategy through the integration of Beauty.com into the LOOK Boutique. “State and Randolph is a good example of that, where you can kiosk the Beauty.com business,” he said. “We think that has tremendous horsepower in terms of differentiating ourselves.”
Another of the beauty businesses it believes has potential in fashion-forward markets like Puerto Rico — which indexes particularly high in beauty relative to Walgreens’ other markets — is its OPI-Essie Nail Salon concept. The Ramy Brow Bar is another element that fits in many of its markets and is currently being rolled into select Look Boutiques. The company also is testing a blowout bar concept by PhytoNation at its 40 Wall St. store, where it also recently began offering men’s haircuts.
The other major opportunity to test new concepts is in convenience food and fresh. As Walgreens continues to experiment here, it is finding that what once may have seemed like pretty far-out ideas have much broader application across a good number of stores in a variety of markets. “Although we won’t put sushi bars in all of our locations, [it’s] something we feel we can offer without having to have a sushi bar in a particular store.”
And again, a lot of it is already starting to show up in the Well Experience stores, according to Magnacca. “In the Indianapolis market, you’ll see that all 70 stores have a big fresh component to them; you’ll see that, too, in our Chicagoland stores, where several dozen locations have gone to the Well Experience format. They all have various elements of fresh, whether it’s fresh fruit and vegetables, fresh sandwiches [or] expanded fresh grocery. … Those elements have already started to be applied into our model,” Magnacca said.
What’s next? Currently, the chain is testing frozen yogurt, freezie machines, high-end barista-staffed coffee and pastry bars, and most recently, it introduced a new made-to-order salad bar it calls Chop in the new 100 Broadway store, as well as a self-service soup bar.
All of it creates new reasons for its customers to shop its stores, new ways for customers to relate to the experience of shopping a drug store and what to expect. All of a sudden, the drug store is a place you go for your coffee in the morning. It’s the place you pick up a salad or some sushi for lunch. It’s the place you go to grab a bag of groceries to make for dinner — not just something in a box you can microwave, but a fresh meal that matches the health and wellness mission happening in the rest of the store. It’s not just a place you go to buy a bottle of nail polish or a lipstick; it’s the place you go to get your nails done, or to go talk to one of 26,000 beauty advisers about which high-end prestige brand works for your skin type. It’s not just the place you go to get a prescription or pick up a package of cold remedies; it’s the place you go to get your flu shot or a physical. It’s the place you go to get well and stay well.
That’s a massive transformation. It’s about moving beyond an item, a price and your weekly flier program to drive people into the store. It’s about selling an experience as much as the items in your store — because anybody can sell an item, and just about everybody does. “Years ago it was channel-blurring with mass,” Magnacca said. “Today, it’s everybody from Amazon to Sephora … that is going after your business. We need to continue to create theater in our stores.”
And that’s a constant process. As much as the transformation begins before the vision — in the white space that sparks the vision — the vision is constantly evolving. You’re really always in a state of transformation.
“If I told you before we started doing it, that we’d be doing fresh sushi at 40 Wall St., before we opened that store, you would have said, ‘No way,’” Magnacca said. “But as part of an overall strategy to make a commitment to the consumer, and getting that halo effect around fresh, it makes all kinds of sense.”
That’s how you transform a drug store into something no one has ever imagined. That’s how you make a health and daily living destination.
Breaking down the WAG-Alliance Boots deal
In June, Walgreens announced a two-step investment in a strategic partnership with Alliance Boots, to acquire a 45% equity stake in the privately held company for $6.7 billion in cash and stock in the first step with the option to acquire the other 55% approximately three years down the road at what is today being projected to be another $9.5 billion price tag in cash and stock.
By 2016, the deal is projected to transform Walgreens from a $72 billion operator, with two-thirds of its revenue coming from its U.S. pharmacy business, to a $130 billion global health-and-wellness player.
There are many factors unique to this deal that helped guide Walgreens toward a two-step transaction, one of the more significant of which is the fact that Stefano Pessina, Alliance Boots’ executive chairman, plans to keep 100% of the shares in Walgreens he receives in both steps for the long term.
Another significant factor: no planned SG&A savings achieved through employee layoffs. “There’ll be no reduction for us because we don’t have any overlap,” explained Wade Miquelon, Walgreens EVP and CFO. “Basically, almost all the savings will initially come from sourcing, and then later top-line revenue,” he said. “As long as we can structure ourselves to get the procurement savings, the two-step process provides us the luxury of time.” That time will allow Walgreens and Alliance Boots over the next 36 months to carefully craft an integration plan for the combined entity. “We are going to spend time to cautiously design a company that is truly global, that is structured for competitive advantage, that has the best players on both sides in the most meaningful roles [and] that maintains an equity and identity that is consistent with what it should be to the relevant stakeholders,” Miquelon said.
In the meantime, the two businesses can realize significant procurement synergies. Walgreens is planning to capture between $100 million and $150 million in first-year synergies. “Combined, we’ll by far buy the most generics in the world,” Miquelon said. “We’ll also be one of the biggest buyers of front-end items [across] branded and nonbranded.”
And with Alliance Boots as one of the largest wholesalers in the world, there are synergies to be realized across logistics, too. “They delivered more than 4.5 billion units to pharmacies, doctors, health centers and hospitals, actually more than any other wholesaler in the world in this industry,” Miquelon said. “Even though we have a very robust infrastructure and distribution system in the [United States], I’m sure they can share ideas about how to make it even more productive.”
One area in which Walgreens will benefit almost immediately is in beauty, particularly in private brand. Alliance Boots has long been acknowledged for its private health and beauty brand development, going all the way back to the launch of its No7 beauty brand in 1935.
Going in the other direction, Miquelon expects that Walgreens will be able to help improve Alliance Boots’ pharmacy systems, as well as help potentially build out a workplace and retail clinic business.