Walgreen Co.'s problems are now Stefano Pessina's problems.
With the pending retirement of CEO Greg Wasson and the earlier departure of much of his executive team, Pessina will take charge as acting CEO once Walgreen and Alliance Boots complete the second step of their merger in the first quarter. The 73-year-old executive chairman of Boots Alliance and world-class tycoon—he's Monaco's richest resident—will have no time to waste. His first and foremost task: how to make more money from the combined U.S. and European drugstore chain.
For decades, Deerfield-based Walgreen grew reliably by building stores. It was a kindergarten-simple strategy. But today, with 8,200 locations across the country, there are precious few street corners left to cover.
Meanwhile, the competitive landscape has shifted dramatically. New rivals, from grocers with in-store pharmacies to third-party pharmacy benefits managers that send prescriptions by mail, have proliferated. Amazon.com sells much of the non-prescription merchandise that Walgreen carries, often at cheaper prices. The economics of pill dispensing have changed as well, as insurance companies and pharmacy benefits managers slash the reimbursements they pay to drugstores.
With margins squeezed at its back-of-store pharmacies, which produce about two-thirds of profits, Walgreen has tried to glamorize the fronts of its stores in the hopes that high-end cosmetics and healthier snack foods will drive new profit.
It's introduced more than a dozen fancy flagship stores in the Loop and other big U.S. cities and has rolled out about 750 “Well Experience” stores with wider merchandise selections and a new layout. These stores also bring pharmacists out from behind the counter, iPads in hand, to interact with patients.
The goal is to combine the pharmacy, health care services and the rest of the store into a seamless, upscale experience that will proclaim to shoppers that they are, in fact, inside a Walgreens rather than a CVS—and keep them coming back.
“Being able to meld the front end and the back end is going to be key,” says Vishnu Lekraj, a senior analyst at Morningstar. “Walgreen hasn't done an effective job of this so far.” Though same-store sales and the size of customers' purchases have increased, foot traffic is down, he says, which means Walgreen is doing a lot of discounting to drive volume at the expense of margins.
New Walgreen management admits as much. “Frankly, we weren't getting the benefits that we expected from” the Well Experience format, Timothy McLevish, Walgreen's newly appointed chief financial officer, said at an industry conference last month. “And so we went back to the drawing board.”