Inside This Issue - Opinion
Nature of industry changing drastically
April 8th, 2013
by David Pinto
These are stunning times for chain drug retailing in America. Events are tumbling willy-nilly one atop another, with the result that the nature of the entire industry is changing as dramatically and quickly as it has ever changed. More significantly, it will never again be what it once was.
Two weeks ago Walgreens and Alliance Boots announced that they had reached an agreement to acquire an 8% share of AmerisourceBergen, America’s No. 3 drug wholesaler, an $80 billion company that provides pharmaceuticals and other drug store products to a sizable segment of the nation’s retail drug store community.
The implications of this transaction are potentially staggering. Put in its simplest terms, the agreement carries the potential to directly link Alliance’s extensive and impressively innovative wholesaling business with a U.S. retail drug store community that has thus far survived without such wholesaling innovation.
Equally important, the retailer-wholesaler alliance will dramatically simplify the process of providing Walgreens’ drug stores with the extensive Alliance Boots line of generic drugs and related drug store items.
Finally, it will likely open opportunities to roll out Alliance Boots’ much-touted management, marketing and branding package to independent and small-chain drug retailers in the U.S., retailers that have thus far been denied the advantages of such a program.
Other potential advantages abound. But the overarching meaning of this transaction is that it will bring the intelligence, talent, experience, wisdom and leverage of one of the world’s largest and most impressive drug wholesale/retail organizations to the U.S. — and, along with it, the very real opportunity to transform, streamline and professionalize the practice of community pharmacy in America.
This will not happen overnight — if, indeed, it ever materializes. But the potential is there. And behind it is one of the brightest business minds yet to focus his talent and his vision on the retail and wholesale drug business here or anywhere else on the planet: Stefano Pessina.
Anyone doubting his ability to exert an impact need only look outside the U.S. to Europe and Asia, where Alliance Boots dominates in both drug wholesaling and retailing. The model for dominance is wholesale-based, unlike any comparable model yet seen in the U.S. In other words, Alliance Boots has successfully launched often-innovative drug wholesaling programs throughout Europe and Asia and layered retail drug store businesses atop them, to the point where Alliance Boots is today the leading practitioner of drug wholesaling and retailing in the world.
This is the formula that Walgreens and Alliance Boots, with their agreement to purchase a stake in AmerisourceBergen, can now bring to America — with two advantages. The corporation includes in its portfolio a drug chain, Walgreens, that is already a leader in the U.S., and a wholesaler, AmerisourceBergen, that is among this country’s premier distributors of pharmaceuticals and other drug store products.
So it can be said with some degree of certainty that the day will come when many of Alliance Boots’ world-class products and programs — and much of its innovative thinking — will find their way into Walgreens drug stores more easily and economically than has yet been the case in the annals of drug distribution in the U.S.
Not coincidentally, the transaction has already woken up a financial community that largely slept through the first year of Walgreens’ partnership arrangement with Alliance Boots. On the day of the AmerisourceBergen announcement Walgreens stock responded enthusiastically, while the shares of Cardinal Health, the current provider of drug store products to Walgreens, took a serious plunge, a decline that could worsen if the wholesaler’s current talks with CVS Caremark concerning the renewal of its contract with the wholesaler fall apart. Cardinal, it need not be added, will shortly cease to supply product to Walgreens.
So the landscape will soon be rearranged — and Walgreens initially stands to benefit with sharply lower distribution costs for its drug stores that will, in theory, enable it to price its goods more competitively at retail.
Other possible beneficiaries include that portion of the retail drug store community that now does business with AmerisourceBergen — as well as those retailers who might choose to do so in the future.
Conversely, it is not unreasonable to assume that Cardinal and McKesson, the other two major U.S. drug wholesalers, will suddenly find themselves at a disadvantage — unless, of course, they choose to go out and buy a major U.S. retailer. Which is, after all, a possibility — given the fact that nothing in the U.S. retail drug store community is today as it was as recently as a year ago.