Walgreens well positioned to seize opportunities created by convergence of retail, healthcare

CHICAGO — Walgreens is not only completely transforming its drug store business from a prescription medicine dispensary to healthcare provider, they're continuing to deliver shareholder value. Since the chain implemented its "Plan to Win" strategy five years ago, kicking off Walgreens journey to reinvent and innovate the storied drug store chain for a new era of growth and value creation, Walgreens has delivered 145% in shareholder returns vs. the 118% return realized by the S&P 500 in the same period. 

And the next five years ought to be even better, suggested Greg Wasson, Walgreens president and CEO, in addressing nearly 2,000 attendees of Walgreens annual shareholder meeting at the Navy Pier here Wednesday afternoon. “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,” he said.

U.S. health care spending is expected 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 34 million more people into the system, Wasson said. At the same time, health care is beginning to see a shift in payment models from fee-for-service to pay-for-performance. "That’s good for Walgreens and community pharmacy, as the company is well positioned to play a greater role in these emerging models and expand its role beyond the pharmacy market to the much larger $2.6 trillion health care market," Wasson said.

Walgreens is seizing the opportunity created by these trends to lead the market for the next five years by focusing on its three strategic growth drivers: creating a Well Experience, advancing community pharmacy and establishing an efficient global platform on behalf of its customers and shareholders.

Specifically, at the store level Walgreens will be looking to redefine convenience. "We're enhancing our assortment of daily convenience items such as fresh foods and making it easier for shoppers to get in and get out with what they need," Wasson said. 

And Walgreens plans on going bigger in beauty. "We have an 11% share of the mass market in the U.S. today while our partners at Boots have nearly a 50% market share in the total beauty category in the U.S.," he said. "A key part of our success in beauty … has been our renewed emphasis on our beauty advisors. We're expanding training and a greater presence in the stores."

Those are both key elements to Walgreens' Well Experience format. "Our goal was to step out of the drug store format and create something completely new and unique," Wasson said. The chain now fields more than 600 Well Experience stores across the country. In addition, Walgreens has 13 flagship stores across nine markets, opened the first zero-energy store in Evanston, Ill. and clinical store in affiliation with Johns Hopkins Medical in Baltimore. "Fifteen stores in and of themselves won't move the needle on a 8,200 store base," Wasson acknowledged. "What they do accomplish are two very important things — they allow us to push the needle on innovations … and they really help us elevate our brand awareness in these markets and across the entire country."

Behind the pharmacy bench, Walgreens is advocating a greater role for community pharmacy. The company believes its pharmacists and nurse practitioners can help fill the gap in primary care, expand health and wellness and lower overall health care costs by practicing at the top of their professions.

Walgreens is well positioned to serve the growing demand for pharmacy-led health and well-being services by advancing community pharmacy through three main goals: delivering comprehensive care for its customers by leveraging its community presence in all 50 states; providing a differentiated experience that competitors can’t easily match; and building strategic partnerships with physicians, health insurance companies, hospital systems and large employers.

Walgreens' CFO and president, international Wade Miquelon noted Walgreens is focused on serving customers with asthma, high blood pressure, high cholesterol and diabetes. “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 said. Earlier last year, Walgreens Healthcare Clinics began offering diagnosis and treatment of these four disease states, in addition to acute care, prevention and wellness, and monitoring and disease management services.

Walgreens global supply chain efforts are expected to yield plenty of growth opportunity. Through its strategic partnership with Alliance Boots and its strategic, long-term relationship with AmerisourceBergen, Walgreens is elevating its growth strategies across the United States and beyond as the global market for health care solutions grows.

“The greater scale and global reach of all three companies will create new global opportunities,” Wasson said. “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.”

To build this global platform, Walgreens and Alliance Boots already are sharing best practices and capabilities, including executive talent and products like Boots No7. Walgreens and Alliance Boots also are creating substantial synergies through their joint venture and a platform for growth beyond the U.S. and Europe to serve new and emerging markets.

“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. 

Looking back, Walgreens has had a spectacular fiscal 2013. In the last fiscal year, Walgreens reached record sales of $72.2 billion with an adjusted net earnings increase of 16.3% to $3 billion, while GAAP net earnings increased 15.2% to $2.5 billion. Operating cash flow was $4.3 billion for the year, and free cash flow reached a record $3.1 billion. The company continued to return significant cash to shareholders with $1 billion paid in dividends, and provided a total shareholder return in the last 12 months of 53%.

Wasson identified several of the fiscal 2013 milestones that has helped Walgreens reach where it is today. For example, the chain launched a robust loyalty program, Balance Rewards. "In just little over a year, we now have 92 million enrollees with 74 million actives, making Balance Rewards one of the most successful loyalty launches in retail," Wasson said. But more than the sheer volume of loyal Walgreens patrons is the insights that program is delivering. Walgreens is presently within three miles of 63% of American consumers, within three miles of 78% of Hispanic consumers and within three miles of 75% of African-American consumers. Balance Rewards is enabling Walgreens to better enhance its product mix to meet the needs of its customers at the local level. 

Fielding more than 14 million online visits per week, Walgreens' omnichannel investment is helping to create the kind of seamless shopping experience today's consumers are demanding. 

And Walgreens prominence in delivering vaccinations is another milestone, Wasson said. "Five years ago, hardly anyone went to a drug store to get a flu shot," he said. "In fiscal 2013 alone we administered nearly 9 million vaccines in America," Wasson said. "Folks, that tells us tha