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.
A carrot, a stick and closing the space between
A carrot, a stick and a face-to-face encounter. Those are the tools that will chisel away at healthcare costs, noted Wade Miquelon, Walgreens EVP and CFO. And Walgreens is uniquely positioned to help realize those savings.
To lower costs, you could raise co-pays or premiums to discourage unhealthy behaviors like smoking, poor diet or lack of exercise. That’s the stick. On the other hand, you could waive co-pays or a reduce premiums to help encourage healthy behaviors like regular checkups or disease-state management programs. That’s the carrot.
Or you could put the two together.
And if you add Walgreens’ 8,000-plus stores, retail clinics and employer-based health centers, on-site hospital pharmacies, specialty pharmacies and infusion centers all across the country — and the face-to-face interaction of the tens of thousands of pharmacists, nurse practitioners, physician assistants and physicians in them — then you really have something. Because then you can move the carrot and stick closer together, and shorten the distance to lower costs and expand access.
That’s how Walgreens believes it can help.
“If you do it telephonically and if you don’t have a carrot and stick in place, you can’t change human behavior,” Miquelon said. “We’ve been trying to reduce the 12 cents on the $1 [that represents prescription costs] for years, and we’ll still keep trying to do that. But if we can help people reduce the other 88 cents, that’s the big idea for us,” Miquelon added.
And that’s the big idea that keeps getting bigger in the years to come. Indeed, health reform creates more momentum for Walgreens’ transformation of community pharmacy and the expansion of the model.
“In general, healthcare reform is a net positive for our model because of a few different components,” Miquelon explained. First, will be the 32 million newly insured patients themselves — Walgreens, which already dispenses one out of every five prescriptions filled in the United States, is positioned to gain an even greater share of the new business, Walgreens executives believe, as payers look for ever more creative ways to lower costs and still expand access to care. “It will [facilitate] deeper and deeper relationships [for us] with payers,” Miquelon said.
Another component of health reform that will benefit Walgreens will be the rise of accountable care organizations, as payers demand better outcomes data as a means of measuring cost versus quality of patient care. The combination of its pharmacies, clinics and employer-based health centers — and all of the healthcare providers in them — is “the glue needed to make [the ACO model] stick,” Miquelon said. In a healthcare system where all providers are encouraged to practice at the top of their respective professions, 70% to 80% of all primary care services could potentially be provided in a Walgreens community pharmacy — particularly, one that has a retail clinic.
Critical to community pharmacy’s ability to play an integral role in the ACO model will be the ability to connect providers at every end of the patient care team. “They also need the information to be integrated so they can manage the entire patient’s health profile [at every point in the continuum of care]. Where we’ve gone with our systems and are going, we’ll be able to do that,” Miquelon noted of Walgreens’ recent announcement that it will roll a common electronic health record platform into all 8,000 stores, on-site hospital pharmacies and worksite clinics.
Its Well Experience stores are built to take advantage of it all. The rollout of the new store concept — which it had been testing in several stores — began in earnest last year in Indianapolis, and while it has been tight-lipped on which markets will come next and when, it will continue to open more stores with various levels of the Well Experience model. In true hedgehog fashion, Walgreens plans to go slow, tweak where it needs to and allow the stores to pay for themselves along the way.
Part of the Well Experience format is the ability to co-locate a Take Care Clinic, and while the company also has been reluctant to share its plans to add more clinics, as payers look to get more creative with plan design, it will become more important to have a national footprint for its retail and worksite clinics. “We’d like to become the third place you go for health care,” Miquelon noted. “You go to your doctor, your hospital, but you also go to Walgreens.”
So Walgreens’ future looks bright, Miquelon said, and so does the present. As of Sept. 15, Walgreens is once again part of the Express Scripts pharmacy network.
There is no denying the impact the feud had on Walgreens quarterly comps. In its most recent earnings call with analysts, Miquelon noted that comparable prescription sales were down more than 9%. Still, when you back out the impact of Express Scripts — a negative 0.7% hit, by Walgreens estimates — it works out to an adjusted prescription growth rate of 1.6%, “which compares favorably to the industry, including Walgreens, which decreased 0.3% over the same period, per IMS,” Miquelon explained, during the June 19 call.
And although the temporary loss of ESI customers had some impact on its front-end as well, where comps were down 0.9%, during the company’s recently reported third quarter, the fact that average basket sizes increased by 1.7% despite the fact that traffic in its stores was down 2.6%, was another strong indication that when you peel back the impact of ESI, Walgreens’ underlying business is quite healthy. It is also a strong indication that its transformation is working, and resonating with customers.
And with all of the ESI noise behind, Walgreens executives are quite confident in the company’s ability to get a great number of its patients to come back to Walgreens. “We have been out of networks before,” Miquelon said. “So we have some experience when we’re out of a network [and] what happens when we get back in.”
Walgreens expects a significant surge of pharmacy patients to come back immediately, he said. Others patients will take more coaxing, but the launch of its new loyalty program will help bring many more back over the next six to 12 months. “The No. 1 reason you get them back is because they came to you in the first place,” he said.
Next for Miquelon: Walgreens begins the first step of its two-step strategic partnership with Alliance Boots, looking for synergies and learning from the two businesses. “If you actually look under the hood, their business is very strong and very resilient to tough economies,” Miquelon said. On the wholesale side of the Alliance Boots business, business is brisk. European economies are looking for savings drivers, and in the healthcare space, that means generic conversion. “In the United States, generic penetration is about 80%. In southern Europe it’s only 25% and in northern Europe it’s 60%,” Miquelon said. Clearly, this is an area where the two companies believe they can move the needle.