Walgreen's prescription for world domination of the drugstore industry relies on acquisitions at home and abroad. The nation's #1 drugstore chain operates more than 8,600 mostly freestanding Walgreens stores in all 50 US states, the District of Columbia, and Puerto Rico. Prescription drugs account for about two-thirds of sales; the rest comes from general merchandise, over-the-counter medications, cosmetics, and groceries. Most Walgreens stores offer drive-through pharmacies and one-hour photo processing. In a strategic shift, Walgreen has become increasingly acquisitive. Having blanketed the US with its drugstores, ubiquitous Walgreen is now looking to Europe and fill-in acquisitions at home for growth.
While Walgreen currently rings up 100% of its sales in the US, it has turned its sights abroad (and to the online world) for growth opportunities. To that end, in late 2012 it established a new jointly-owned company, Walgreens Boots Alliance Development GmbH, based in Bern, Switzerland.
Fiscal 2012 (ends August) was a rare miss for Walgreen, which historically has grown sales and profits pretty consistently. Sales declined by less than 1% in fiscal 2012 vs. the prior year and net income fell 22% over the same period. While the acquisition of BioScrip assets and drugstore.com boosted sales, the increase was more than offset by the steep drop-off in prescriptions filled as a result of Walgreen's decision to leave the Express Scripts network. (Walgreen was not part of the pharmacy benefit manager's network for more than eight months in fiscal 2012. The two companies have since reconciled, with Walgreen rejoining the network in July 2012.)
The decline in sales and higher operating expenses, as well as costs related to the purchase of drugstore.com and Walgreen's investment in Alliance Boots, among other investments, took a toll of profits in fiscal 2012.
In a move that appears to be more unusual than significant, Walgreen has announced plans to close 76 unprofitable stores (less than 1% of its store base) in the second half of 2014 as part of a plan to save $40 million to $50 million annually beginning in fiscal 2015 (ends August). Indeed, over the past decade Walgreen has added thousands of stores, new product lines (fresh foods and alcoholic beverages), health and wellness services (flu shots and condition management), and more to grow its business. With the suburban US blanketed with its drugstores, Walgreen is looking to cities, and now Europe, as well as the online world for growth opportunities. It's also locked in a battle with archrival CVS for bragging rights in the US and is recovering from a recent tiff with pharmacy-benefit management firm Express Scripts, which led to a steep drop off in prescriptions filled in 2012.
The drugstore chain is looking to health care services as a significant avenue for growth. The company's Take Care Health Systems subsidiary manages worksite health and wellness centers and operates in-store care clinics at more than 700 Walgreens stores. It is partnering with regional providers, such as Community Health Network in Central Indiana, to expand its menu of health care services at its clinics. In 2014 Walgreen sold a majority stake in its Take Care Employer Solutions (TCES) subsidiary, which manages more than 360 worksite health centers, to a healthcare-focused investment group Water Street Healthcare Partners. Water Street plans to merge TCES with CHS Health Services. which operates more than 130 worksite health centers, to form a new company that will serve more than 200 corporations.
In 2013 Walgreens and Alliance Boots formed a partnership with pharmaceutical wholesaler AmerisourceBergen to buy branded and generic prescription drugs from the supplier for the next 10 years. Walgreen and Alliance Boots also gained rights to purchase a minority stake in AmerisourceBergen and the three partners will collaborate on supply chain opportunities.
Mergers and Acquisitions
Looking to strengthen its presence in the fast-growing North Carolina market, Walgreen in late 2013 acquired regional chain drug operator Kerr Drug. The transaction, which included Kerr Drug's 76 retail drugstores, its specialty pharmacy business, and a distribution center, excluded Kerr Drug's long-term care pharmacy business.
In its biggest acquisition ever, the pharmacy chain in 2012 bought a 45% stake in Swiss-based drugstore-chain company Alliance Boots for $6.7 billion. Walgreen paid $4 billion in cash and the remainder in stock, along with securing the option of total ownership in about three years. Alliance Boots has more than 3,330 health and beauty retail stores in 11 countries; its pharmaceutical wholesale businesses cater to pharmacies, doctors, and hospitals from some 370 distribution centers in 21 countries. As a result, the deal is likely to launch Walgreen into emerging markets, such as China and Egypt. For both Walgreen and Alliance Boots, the transaction is calculated to drive revenue of $100 million and to $150 million in the first year and up to $1 billion by the end of 2016.
Closer to home, Walgreen in September 2012 acquired $825-million-in-sales Stephen L. LaFrance Holdings, a regional drugstore operator with 144 stores under the USA Drug, Super D Drug, May's Drug, and Drug Warehouse banners, among others, in the about a half a dozen states mostly in the mid-south. Since announcing the deal in July, Walgreen has said it will close more than half of the acquired stores. Earlier in the year the company bought BioScrip's community specialty pharmacies and centralized specialty and mail service pharmacy businesses. The approximately $225 million deal is in line with Walgreen's objectives to consolidate and grow its health care and retail services. Part of the effort, its Health and Wellness division has aggressively opened in-store clinics (more than 700 to date, operated by Take Care Health Systems) and worksite health centers, as well as offers in-store health screenings, immunizations, and patient counseling for conditions such as diabetes. BioScrip's community specialty pharmacies add a nationwide network with 30 locations in 16 states; its specialty pharmacy business and traditional mail service pharmacy business already dispense prescriptions for Walgreen's e-tailer drugstore.com, among several customers. These recent purchases follow a spate of acquisitions, including drugstore.com in 2011 and Duane Reade in 2010.
To strengthen its online business Walgreen purchased drugstore.com, adding drugstore.com's eponymous site, as well as its beauty.com, skinstore.com, and visiondirect.com properties to its existing Walgreens.com. drugstore.com, with its 60,000 products, is a revenue leader, logging $456 million in 2010 to make it the #8 retail destination on the Internet.
The purchase of Duane Reade made Walgreen the instant market leader in New York City, adding its 250-plus stores in the metro area to Walgreen's 70 locations. Duane Reade was founded in lower Manhattan and purchased from private equity firm Oak Hill Capital Partners. The purchase was a strategically expands Walgreen's urban footprint. Indeed, 15 months after buying Duane Reade the chain opened a 22,000-square-foot flagship store at 40 Wall Street, the heart of New York's financial district. The store is open 24 hours a day and boasts and in-store sushi bar and chef, a juice bar, and stock ticker. It also offers salon and shoeshine service, an in-house doctor ($158 a visit for self-payers), a large newsstand, and plenty of other amenities. The Wall Street location serves as a lab where the company can innovate and transfer successful elements to other Duane Reade and Walgreen stores.