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Walgreens overhaul seeks ‘More From the Core’

BY Jim Frederick

CHICAGO —For Walgreens, fundamental change is at hand.

In their first full meeting with Wall Street analysts in nearly a decade, Walgreens’ top executives laid out a broad series of big steps Oct. 30 to transform and rejuvenate the company’s flagging brand in the face of today’s economic maelstrom. Taken together, those steps represent a striking break from the past for a company that—until recently—earned the envy of Wall Street and chain drug retailing with its 34-year string of record sales and earnings.

Company officials are calling their strategy “More from the Core.” What that means, said newly elected interim chairman and chief executive officer Al McNally, is leveraging the company’s assets and exploiting untapped synergies to bring new solutions to a healthcare system “in crisis.”

Battered by a decline in consumer confidence, rising operating costs and slowing sales and profits, Walgreens has embarked on a dramatic shake-up of its entire business structure, McNally said. Henceforth, the chain will “create value for our shareholders by being part of the healthcare solution in America.”

The goal, McNally and other company leaders told analysts, is to unlock the massive potential within the company’s core businesses by leveraging and tying together its powerful and growing assets in drug store market penetration, ambulatory clinical care, specialty pharmacy, health services and on-site workplace pharmacy and health care. The plan involves a top-to-bottom analysis of how the 107-year-old retailer goes to market and reaches its customers—and a dramatic shift in its long-term strategy.

“Going forward, we intend to be quicker and more aggressive with our strategy,” McNally asserted. Equally important, he said, “our cost structure needs to be fundamentally reduced.”

Some of those changes already are under way. Among them: the rise of McNally himself to interim chief executive officer, following the abrupt retirement of former chairman and chief executive Jeff Rein Oct. 10. A search is underway for a successor, who could come from either inside or outside the company, McNally said.

Walgreens’ renewal will be based on a transformation of its long-held strategy. One key facet: a significant scaling back of its industry-leading growth strategy, from an average of 8 percent a year to roughly 5 percent.

“We opened 529 stores in the past year,” noted Mark Wagner, executive vice president of store operations. “By the year 2011, we will only open 365 stores at a 5 percent growth rate.”

Along with other cost-saving initiatives, the slowdown will shrink the company’s capital spending program to $1.8 billion from $2.2 billion in fiscal 2008.

“Walgreens’ 6,500 retail drug stores remain the centerpiece of our strategy for growth and value creation,” said president and chief operating officer Greg Wasson. “Our intent is to transform Walgreens into a more efficient and customer-focused company serving the needs of shoppers for consumer goods and services and for patients and payers seeking quality pharmacy, health-and-wellness services that are accessible and affordable.”

Long-term, added Wade Miquelon, Walgreens’ new senior vice president and chief financial officer, “We are targeting $1 billion in annual cost reductions.” To accomplish those savings, he said, Walgreens is focusing on labor-saving initiatives like POWERx, a new workload balancing system that will offload more prescription dispensing activities to centralized fill sites.

But cost-cutting is only part of the picture. One of the company’s primary areas of focus will be rejuvenating store demand with new merchandising techniques aimed at boosting per-customer transactions and making the shopping experience easier—an effort that will lead eventually to a completely redesigned store prototype, company officials indicated.

Indeed, said Miquelon, improving the customer shopping experience will yield more in gross profit dollar growth than any of the other levers Walgreens can work to build value.

“Just one more item per basket will add $1 in…growth,” he told analysts.

Walgreens already has taken some steps to improve its performance. Its recently introduced prescription savings card program has signed up more than 1 million customers. Its work site pharmacy and healthcare initiatives are growing rapidly through the Take Care Health division. And, Walgreens is building up a national presence in such fast-growing areas as specialty pharmacy and home infusion.

Now, company executives said, it’s time to tie all those capabilities together—6,479 drug stores, its specialty pharmacies and health services and more than 600 in-store clinics and its work site clinics into a comprehensive, national system of “points of care.”

“It’s all about surrounding the patients and the payers with cost-effective, convenient, coordinated care,” said Stan Blaylock, president of Walgreens Health Services.

Some analysts who attended remain skeptical that Walgreens can quickly turn itself around. “Since we see Walgreens playing ‘catch-up’ with other retailers in certain areas, programs like strategic sourcing should be easy to execute,” noted Meredith Adler, now of Barclays Capital. “Yet stemming the loss of market share will be more challenging in our view, even with the help of fresh ideas from experienced marketers and merchants”

One analyst taking a more positive view was Mark Miller of William Blair & Co. “With half of the top executives new to the company in the last two years, Walgreens has strengthened its organization. Certainly, from a financial standpoint, we see greater urgency…to improve profitability.”

The “largest positive surprise,” he added, “was the identification of an additional $1 billion of cost savings targeted from the current $14.6 billion SG&A base.”

The good news, Miller noted, is that “management has been testing SKU rationalization” and is working to pare non-essential items and gain more insights from its vendors. He also expressed encouragement that Walgreens is working to better communicate its “relevance in the marketplace” under its new chief marketing officer, Kim Feil.

“Over the past 10 years, the number of items in Walgreens’ basic assortment grew by 19 percent, while the average basket size only increased by 2 percent,” Miuller said. “Not only has this SKU proliferation failed to entice consumers to buy more items, but it likely has had a negative impact on the company’s expense rate, working capital and return on invested capital.”

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Alimentary Health signs licensing agreement with P&G Pet Care

BY DSN STAFF

CORK, Ireland Alimentary Health on Wednesday announced that it has signed a worldwide licensing agreement with P&G Pet Care, makers of two of the worlds leading companion animal pet care products, Iams and Eukanuba.

Under the licensing agreement, Alimentary Health’s and P&G’s proprietary pet care probiotics will be used in P&G Pet Care’s nutritional supplement products. The global market for companion animal pet care products was estimated to be over $40 billion in 2007. Alimentary Health will receive an undisclosed royalty on sales of all products containing the pet care probiotics.

In 2001, Alimentary Health partnered with P&G to develop safe and effective probiotic products for gastrointestinal indications. In 2007, P&G Health Care started using Alimentary Health’s natural probiotic strain Bifidobacterium Infantis 35624, in Align in the US. Align is a daily probiotic supplement that helps build and maintain a strong and healthy digestive system.

“Today’s announcement comes as a result of our continued successful collaboration with P&G,” Barry Kiely, chief executive officer of Alimentary Health, said. “We are please that our ongoing efforts have once again resulted in Alimentary Health’s technology making it to the marketplace. This agreement is a result of a successful research and development program between the two companies and it brings us closer to fulfilling our vision of becoming the worldwide leader in the research, discovery and clinical development of probiotics. We are proud of our long standing association with such a leading multi-national company.”

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Kmart holds GoldK Day health services, screening day for seniors

BY Antoinette Alexander

HOFFMAN ESTATES, Ill. Kmart, a wholly owned subsidiary of Sears Holding Corp., has announced that its pharmacy division will hold the annual GoldK Day on Nov. 18 for seniors.

“Kmart wants to remind seniors that we care about their health and GoldK Day is a way for our pharmacists to give back to these important customers by not only offering free screenings, but assistance with Medicare health plan selection and information about disease states, which can help seniors make better decisions about their healthcare,” Mark Doerr, vice president of Kmart pharmacy, said.

The activities planned for the event, to be held from 9 a.m. to 1 p.m. at all 1,100 Kmart pharmacy locations, include free blood pressure screenings, free memory screenings, Medicare health plan selection assistance and more.

No appointments are necessary. For more information, customers can all 800-866-0086 or visit www.kmart.com/pharmacy.

The initiatives are tied to the efforts of the Alzheimer’s Foundation of America’s National Alzheimer’s Disease Awareness Month, the annual initiative aimed at promoting early detection of memory problems and appropriate intervention.

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