DEERFIELD, Ill. — Walgreen Co. has obtained much more than market share with its acquisition of Duane Reade.

The metropolitan New York drug store chain’s recent initiatives in beauty merchandising, customer loyalty and store brands all promise to add luster to Walgreens’ efforts to transform its own store experience.

The agreement to acquire Duane Reade Holdings Inc. from affiliates of Oak Hill Capital Partners for $1.08 billion in cash includes the assumption of about $457 million in debt. The transaction is expected to close by the end of Walgreens’ fiscal year on August 31.

“Duane Reade is a compelling strategic acquisition that will immediately provide Walgreens with a leading position in the largest drug store market in the United States,” Walgreens president and chief executive officer Greg Wasson says. “In addition, Duane Reade’s recent initiatives in urban retailing, customer loyalty and private brand products support and accelerate Walgreens’ strategy to enhance the customer experience in our network of more than 7,100 stores across the country.”

The deal will give Walgreens — which currently operates 70 stores in New York City — 257 Duane Reade locations, 60% of which are in Manhattan, where Walgreens has 13 stores. It will also lift Walgreens’ total store count above 7,400.

The acquisition continues Walgreens’ recent tendency to supplement its organic store growth through acquisitions.

Based on Duane Reade’s 2009 sales, the added stores will deliver about $1.8 billion to Walgreens’ top line. Moreover, Duane Reade boasts the highest sales per square foot in the drug store industry.

During the conference call Wasson elaborated on the benefits of the acquisition.
First, the expanded store base and market share will give Walgreens the critical mass to drive further growth in the highly attractive markets of the Northeast, he said.

Second, Wasson pointed to a number of Duane Reade programs that tie in well with Walgreens’ Customer-Centric Retailing (CCR) initiative. “They’ve implemented dramatic new store designs with wider aisles and contemporary decor,” he said. “To date, more than 30 stores have been opened or remodeled with the new format, and we look forward to continuing their transformation.”

Wasson noted that Duane Reade’s recent customer loyalty initiatives are another strong point, since they provide valuable insights for Walgreens to tap into as that chain develops its own loyalty program.

Moreover, Duane Reade’s impressive private label program will complement and accelerate Walgreens’ own store brand strategy.

Wasson credits Duane Reade chairman and chief executive officer John Led­erer and his team with Duane Reade’s private label strength, citing Lederer’s prior experience and achievements at Loblaw Cos., the leading supermarket chain in Canada and a pioneer of modern private label development.

Finally, Wasson praised Duane Reade’s Look Boutique in-store upscale beauty concept, adding that he did not think that luxury beauty offerings require a separate brick-and-mortar outlet.

“It elevates the merchandising of cosmetics and skin care products, and many prestige brands, and is in line with where we think we can take the beauty experience in our own stores over time,” he said. “These products are merchandised much more on a par with what we would see in a department store.”

Where Walgreens can particularly boost the performance of the Duane Reade stores, Wasson added, is in the pharmacy, where Walgreens’ powerful systems and extensive expertise have made it an industry leader.

“We are very pleased that Walgreens shares our commitment to finding new and innovative ways to serve local communities, and we look forward to seeing our customers benefit from Walgreens’ unparalleled pharmacy and operational expertise as we continue with our ongoing transformation,” Lederer says. “We will continue to be the drug store New Yorkers turn to, just as Walgreens has been a trusted community pharmacy in other markets for more than 100 years.”

In fact, the Duane Reade stores will continue to operate under that banner for an unspecified period, while decisions will be made over time regarding the best way to harmonize the two retail brands.

“Duane Reade is an iconic brand in New York,” Wasson says. “Its management team has done a great job of transforming the chain, and we want to continue to support that.”
In addition to retaining Duane Reade’s store and distribution center employees, Walgreens says it expects to keep several members of the company’s senior management team.
Led­erer, for example, will continue to direct operations in New York, reporting directly to Wasson.

Walgreens, which will fund the deal solely with existing cash, expects the acquisition to be dilutive to its earnings per share for the first 12 months after closing. It is expected to become accretive in the following 12 months and beyond.

The company says it also expect to achieve synergies between $120 million and $130 million in the third year after the deal closes.

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