Following Alliance Boots model, Walgreens will focus on front-end profitability

As expected, Walgreens this month pulled the trigger on the second step of its Alliance Boots acquisition. The combined operations will create the first global pharmacy retailer with more than 11,000 stores in 10 countries. And despite all the speculation, it will remain a U.S.-based company, with its headquarters in Deerfield, Ill.



So, what’s next for Walgreens?



Look for Walgreens to continue to try to create a kind of retail theater, focused very sharply on the front end of the store. Walgreens will continue to invest in enhanced service in its stores, with more than 26,000 beauty advisors, and a relatively new position, health guides, who assist customers in health and wellness now in 80 stores. That service element is critical to driving front-end sales growth and to larger market baskets.



But it’s also a front end designed to grow margins, much as Boots has done in the United Kingdom. Walgreens, of course, will continue the rollout of its Boots No7 beauty department, which is now doing a brisk business in the Phoenix — and more recently, New York — markets. Baskets with Boots items are bigger than the average beauty basket, according to the company.



“There’s real opportunity in the front of our store,” said Greg Wasson, Walgreens Alliance Boots president and CEO. “[Boots’] operating margins are significantly higher than what ours are, and that’s primarily as a result of that front-end business. If we look across the pond to the Boots model, we have some similar opportunities at the front end of our store.”



Focusing on improving front-end performance is a smart play. Walgreens Boots Alliance may have just become one of the largest generics buyers in the world, but that business is becoming more commoditized. Many of the medicines treating chronic conditions have crested the generic wave, and with the recent increased cost of generics prices, that has pressured pharmacy margins.



“The pressure on the pharmacy is a global issue,” Stefano Pessina, executive vice chairman of Walgreens Boots Alliance, told analysts in early August. “Twenty years ago, Boots was making its money on the pharmacy — so 75% of the profit of Boots was coming from the pharmacy. Today, 75% comes from the front of the store. Are the pharmacies losing money? Not at all. They are still very profitable in Boots, [though] the margin has suffered.”



Does that mean Walgreens will de-emphasize pharmacy? Absolutely not.



But creating a must-shop experience across the front end while maintaining a market leading position in health care is something that Boots has done particularly well. “This is what will happen in the United States,” Pessina said. “I can assure you that after the merger, we will have a step up in the margins of the front of the store. ... We have clear plans for it.”