Walgreen Co. is making big strides in its efforts to transform the company and position it at the intersection of retailing and health care, executives said at Walgreens' Annual Shareholders Meeting in Chicago.

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Wasson: Plan to 'innovate, reinvent Walgreens' moves ahead

January 8th, 2014

CHICAGO – Walgreen Co. is making big strides in its efforts to transform the company and position it at the intersection of retailing and health care, executives said at Walgreens' Annual Shareholders Meeting in Chicago.

Greg Wasson

President and chief executive officer Greg Wasson, chairman James Skinner, and chief financial officer Wade Miquelon, who is also international president, on Wednesday outlined Walgreens' growth strategy before about 2,000 shareholders gathered at Chicago's Navy Pier. They also cited the progress that the nation's largest drug chain has made since unveiling its "plan to win" strategy in 2009.

"Our 'plan to win' was a journey to innovate and reinvent Walgreens for a new era of growth and value creation," Wasson told shareholders. "Toward that end, we slowed new store growth to invest more in our existing store base. We looked at new, innovative retail concepts both in the U.S. and around the world. We made major acquisitions such as Duane Reade in New York City and drugstore.com, forged a strategic partnership with Alliance Boots and began a long-term strategic relationship with AmerisourceBergen. All of this culminated in a year of solid progress in fiscal 2013 and a five-year total shareholder return for our stock of 145%."

For its 2013 fiscal year ended Aug. 31, Walgreens reached record sales of $72.2 billion and saw adjusted net earnings rise 16.3% to $3 billion, with GAAP net income up 15.2% to $2.5 billion. Operating cash flow was $4.3 billion for the year, and free cash flow climbed to a record $3.1 billion. The company noted that it also paid shareholders $1 billion in dividends and provided a total shareholder return of 53% in the last 12 months.

As of Dec. 31, Walgreens operated 8,200 drug stores, 139 more than a year ago.

Explaining the rationale behind Walgreens' transformation, Wasson said, "We are in two dynamic industries — retail and health care — that are converging as consumers become more involved in shopping for their health care solutions."

Walgreens noted that U.S. health care spending is slated to grow from 17% of gross domestic product to 20% by 2020, driven by an aging population and health care reform, which is expected to bring 30 million more people into the system. At the same time, health care is starting to see a shift in payment models from fee-for-service to pay-for-performance. As a result, the company is working to play a greater role in emerging models of care and to expand its role beyond the pharmacy market to the much bigger $2.6 trillion health care market.

Meanwhile, on the retail side of the business, consumers continue to seek value and a high level of service in the wake of the recession, executives pointed out. To that end, Walgreens introduced 2,000 new private-brand items last year. In addition, they noted that more opportunity in categories such as beauty and fresh foods is opening up to Walgreens as consumers shop across all retail channels, including digital.

The Well Experience stores feature an enhanced pharmacy department that puts the pharmacist out front.

In its stores, Walgreens continues to roll out its "Well Experience" concept, which brings an enhanced pharmacy and front end, along with highly engaged customer service and more health care services. Notable features include a pharmacy department that positions the pharmacist up front, expanded offerings of fresh food and grab-and-go items, and an enhanced beauty presentation.

The retailer has expanded the number of stores incorporating the format from 400 at the start of fiscal 2013 to 600 currently.

Last year's launch of the Balance Rewards loyalty program has helped boost Walgreens' stores. The program now has 74 million active members, which the company said makes it one of the most successful launches of a loyalty program in retail history.

"Our front-end comparable-store sales have improved steadily over the last three quarters, and we have outperformed our largest drug store competitors," Miquelon told shareholders.

Along with its innovative store concepts, Walgreens is pushing for a broader role for community pharmacy to offer convenient access to high-quality, affordable health and wellness services. The company said pharmacists and nurse practitioners can help fill the gap in primary care, expand health and well-being, and lower overall health care costs.

Walgreens noted that it's well positioned to serve the rising demand for pharmacy-led health services by delivering comprehensive care to customers via its presence in all 50 states; providing a differentiated experience that competitors can't easily match; and building partnerships with physicians, health insurers, hospital systems and large employers.

In particular, Walgreens is focused on serving customers with such chronic conditions as asthma, high blood pressure, high cholesterol and diabetes, according to Miquelon. 

"These four chronic disease states alone drive a high percentage of health care costs in the country, and we now offer a cost effective solution to patients and payers," he explained. Last year, Walgreens Healthcare Clinics began offering diagnosis and treatment of these disease states, in addition to acute care, prevention and wellness, and monitoring and disease management services.

Executives also pointed out that Walgreens' strategic partnership with Alliance Boots and long-term relationship with AmerisourceBergen Corp. helping further its growth strategies across the United States and beyond as the global market for health care expands.

"The greater scale and global reach of all three companies will create new global opportunities," Wasson noted. "We can streamline the world's pharmaceutical supply and distribution, reduce costs and increase access to pharmaceuticals, make it easier for manufacturers to bring new products to the market, and bring the benefits of global sourcing and best practices to serve community pharmacies across the U.S. and around the world."

The company said Walgreens and Alliance Boots already are sharing best practices and capabilities, including executive talent and products such as Boots No7. Walgreens and Alliance Boots also are creating synergies through their joint venture and a platform for growth beyond the U.S. and Europe to serve new and emerging markets, executives said.

"In fiscal year 2013, our combined synergies with Alliance Boots totaled $154 million, ahead of our initial expectation of $100 million to $150 million in synergies," Miquelon said at the meeting.

Skinner added, "I’d like to thank our shareholders and owners for believing in Walgreens today and our limitless promise for tomorrow. We look forward to moving ahead together as we redefine Walgreens for a new generation as a place, in your community, that always strives to help people get, stay and live well."