LAS VEGAS — Appearing at the National Association of Chain Drug Stores’ Total Store Expo last month, Jim Collins, the noted business consultant and author of such books as "Good to Great," "Built to Last" and "How the Mighty Fall," talked about what is required to make a business into a preeminent company over the long term, a period of several decades or more. Picking up on themes explored in his latest book, "Great by Choice: Uncertainty, Chaos and Luck — Why Some Thrive Despite All," cowritten by Morten Hansen, Collins emphasized the need for any business with such lofty aspirations to define its core values and enduring purpose; maintain a high level of passion and focus; execute consistently; set an overriding goal; and strike the right balance between continuity and change. By most of those measures, Walgreen Co., a leader in chain drug retailing for more than a century, appears to be on course to extend its record of excellence for the foreseeable future.
Greg Wasson, who was named chief executive officer of the company four and a half years ago, has recast its strategy to meet the exigencies of a changing marketplace, expanding its traditional emphasis on filling prescriptions to deliver a broader “Well Experience” that encompasses essential daily living products; advancing the practice of community pharmacy; and developing an international footprint.
The most dramatic development at Walgreens during Wasson’s tenure is the partnership it forged with Alliance Boots, a health and beauty retailing and pharmaceutical distribution group with a presence in 25 nations. Announced in June 2012, the deal paved the way for Walgreens to assume a 45% stake in Alliance Boots and gives it the option to purchase the remaining 55% in 2015.
“The good news is that we’re on track with everything we committed to and thought the partnership would deliver,” Wasson said during an interview at Total Store Expo. “We have a lot of confidence in what we’re doing.
“Culturally, I couldn’t be more pleased with the way the two organizations are coming together and working together, starting with [Alliance Boots executive chairman] Stefano [Pessina] and me. That’s probably the most important area to stay focused on as we build the first truly global pharmacy-led health and beauty company.”
The initial steps toward that objective have proceeded according to plan, none of them more important than the establishment last October of a joint buying operation for pharmaceutical products. Based in Bern, Switzerland, Walgreens Boots Alliance Development GmbH is the engine that will enable the partners to realize their aggressive synergy targets. Between $125 million and $150 million in synergies are expected in the first year, with a goal of $1 billion in synergies achieved by 2016.
“The team that we set up in Bern, which is led by Jeff Berkowitz on our side and John Donovan on theirs, continues to grow — both in the size and caliber of the team as well as its accomplishments.
“Berkowitz, who comes out of the pharmaceutical industry, is an incredible executive. We recruited him three years ago when we decided strategically that we wanted to have a much different relationship with pharma going forward. He helped us do that, and his going to Europe to run the joint venture is a big deal.”
The buying operation gained added clout in March, when Walgreens and Alliance Boots established a long-term relationship with AmerisourceBergen Corp., one of the top three pharmaceutical wholesalers in the United States. The agreement, which facilitates the purchase of a minority position in AmerisourceBergen’s stock by Walgreens and Alliance Boots, and allows Wasson to take a seat on the drug distributor’s board if certain ownership thresholds are achieved, is designed to let the companies capitalize on economies of scale and improve service levels, while cutting costs and increasing patient access to prescription drugs.
“Culturally, I couldn’t be more pleased with the way the two organizations are coming together and working together."
“While AmerisourceBergen doesn’t have ownership in the joint venture, we’re bringing its volume into that group to procure together,” explained Wasson. “So, in essence, the joint venture also will be able to secure commercial terms for generics on behalf of AmerisourceBergen.”
Another milestone in the relationship was reached on September 1, when distribution of pharmaceuticals to Walgreens stores began to be transferred from Cardinal Health Inc., the drug chain’s previous pharmaceutical wholesaler, to AmerisourceBergen.
Asked why, in addition to the opportunity to obtain an ownership stake, Walgreens chose to move its business to AmerisourceBergen, Wasson said, “It goes back to the time when we decided that we wanted to change and deepen our relationship with the pharma companies. We recognized that they were changing their strategy as a result of challenges with their pipeline of traditional medications. They’re now looking to drive growth through things like biotech and improving patient adherence, so we thought that in many ways we could be a real partner with them.
“As part of that, Jeff Berkowitz took on the task of examining our wholesale arrangement. At the time he came in we had another couple years left on our Cardinal contract. We needed to determine strategically what the best path forward was.
“Our options fell into three buckets: Go out into the marketplace and try to get a good agreement and stay with the type of wholesale arrangement we had; build the infrastructure to handle 100% of our drug distribution at a time when we were already doing 75% to 80% of it ourselves; or pick a strategic partner and change the game a little.”
Walgreens was well along the road toward self-distribution when Wasson and his colleagues became more deeply engaged with their counterparts at Alliance Boots and got a detailed look at its strategy. The experience altered their thinking.
"We’re doing some bigger, more visible things, but our emphasis hasn’t changed. We have crystallized our three key strategies and are dead focused on executing them."
“As I learned more about the integrated wholesale/retail model at Alliance Boots, and all the value and efficiencies that can be created through the supply chain, I began to think that it made sense for us to consider a similar arrangement,” recalled Wasson. “The agreement we reached with AmerisourceBergen involves three components of value. One, we received a fair market arrangement, and AmerisourceBergen got our $20 billion a year in business. Two, we included them in the Bern buying group, and there is value in that for both of us. And, three, we were able to ensure that our interests and objectives were completely aligned.
“So, to sum that up, whereas Alliance Boots is a wholly owned and fully integrated wholesale/retail model, what we’ve created here in the States is a collaborative integrated wholesale/retail model.”
Other aspects of Walgreens’ operations — especially its front-end business, which for a variety of reasons has not performed as well as usual of late — are realizing substantial benefits from its combination with Alliance Boots.
In the surest sign yet of the cross-pollination between the two companies, Alex Gourlay, chief executive of Alliance Boots’ health and beauty division, was named president of customer experience and daily living at Walgreens. In that role, which he officially assumes October 1, Gourlay will be responsible for merchandising, marketing, shopper insights and promotions.
“This represents another important step forward and is a key part of our cultural integration,” Wasson said when Gourlay’s appointment was announced the day after the close of Total Store Expo in mid-August. “As he gains more experience in the U.S. market, we will be better positioned than ever to accelerate our daily living journey by combining the best practices of both Walgreens and Alliance Boots.”
For the past six years, Gourlay has led Boots, the dominant drug chain in the United Kingdom, where nonpharmacy products account for roughly two-thirds of overall sales. One area where his know-how should be of particular use to Walgreens is beauty care. Boots controls some 50% of the color cosmetics market in Great Britain and almost 40% of skin care.
“Alex’s new position is a clear testament to the positive progress we are making in bringing our two organizations together,” noted Wasson. “In the future, you can expect to hear about additional moves by both organizations to further support the combination of our two iconic brands.”
Amid all the activity, some observers might question whether Walgreens is in danger of violating Collins’ tenet against too much change, which he warned can erode a company’s core. For an organization that for decades billed itself as a crawl, walk, run company, Walgreens has struck out in bold new directions, but Wasson asserted that, if examined carefully, it is evident that all of the innovations are designed to support the mission that has always guided the drug chain.
“We’re doing some bigger, more visible things, but our emphasis hasn’t changed,” he said during Total Store Expo. “We have crystallized our three key strategies and are dead focused on executing them.
“Creating a Well Experience is really akin to the years before Walgreens started opening stores on every corner in America. We had a format, we were remodeling stores, investing in stores and driving productivity. Then, as now, it’s really about driving productivity on an existing base.
“We’re extending our services in pharmacy to include immunizations, diagnostic testing and beyond. When we talk about our in-store clinics, I’m often asked, ‘Is that a new business?’ The answer is, ‘Not really.’ It’s a matter of co-locating an additional health care professional within our existing service model. So that’s not a big leap of faith, it’s just an attempt to leverage the convenience of our stores and to expand the services we provide. Years ago we did that same thing when we got into one-hour photo processing.”
On the surface, the partnerships with Alliance Boots and AmerisoureBergen represent a more radical departure. But Wasson sees continuity there as well.
“I felt that at some point in time we needed to go international, because that’s where the pharmaceutical supply chain was headed,” he explained. “As the pharmaceutical industry became more global it would be looking for a global retail partner.
“The best, most logical way to do that in a crawl, walk, run style was to take a partnership stake in a strong, very respected company with a similar heritage to Walgreens’, and that was Alliance Boots. That way we could learn our way into this and minimize the risks involved with a two-step process.”
A 33-year Walgreens veteran, Wasson is steeped in the corporate culture, but he recognizes that Walgreens must evolve if it is to remain relevant to consumers. The core principles and objectives are the same, even if the path to attaining them is different.
“I would argue that we have taken a similar approach to growing the company that Walgreens has used in the past,” he said. “It’s not easy to go from a strategy that has been in place for many, many years to something new that we think will drive sustainable value. The one thing that we want to do when it’s all said and done is to make sure that our team has positioned this company for solid growth for the next couple of decades, just like my predecessors did for us.”