Now comes the hard part for Walgreens' CEO

A year into her tenure, Walgreens Boots Alliance CEO Roz Brewer leads a different company than the one she took over.

Since Brewer joined the pharmacy chain from Starbucks in March 2021, Walgreens has started unraveling a trans-Atlantic merger that reshaped the company. It’s also transforming from a vertically integrated drugstore and pharmaceutical distribution company into a healthcare provider with doctor’s offices attached to its stores.

At the same time, business has surged as COVID-19 sends droves of customers in for vaccinations, booster shots and hard-to-find test kits, bolstering Walgreens' bottom line. Net earnings rose to $3.5 billion last quarter, compared with a $300 million loss during the same period in 2020. Retail comparable store sales—a closely watched growth metric—jumped 10.6%, the fastest rate in more than 20 years.

Still, between COVID effects and predecessor Stefano Pessina’s retention of power—as executive chairman and the company’s largest shareholder—it’s hard to discern Brewer’s impact on the company. Her influence could become clearer in the year ahead, as early indications of the success or failure of the healthcare push reveal themselves.

She’ll also have to manage the potential divestiture of Boots, a British drugstore chain acquired in the 2014 merger of Walgreens and Pessina’s Alliance Boots, a $16 billion deal that gave Pessina 16.9% of the combined company’s stock. Brewer announced last month that Walgreens would seek bids for Boots, which is expected to generate interest from private-equity firms willing to pay as much as $9 billion. Walgreens unloaded another big piece of Alliance Boots in a deal struck shortly before Brewer arrived last year, selling drug wholesaling operations mostly in Europe to AmerisourceBergen for $6.5 billion.

“What now happens over the next year will be fascinating,” says Harry Kraemer, clinical professor at Northwestern University’s Kellogg School of Management and former CEO of healthcare company Baxter International. “Are they really doing what they said they’re going to do? Are they capable of getting (Boots) spun out at the right price?”

Depending on COVID’s twists and turns, challenges that dogged the company pre-pandemic—like pressure on drug pricing and competition from online retailers—may dominate its story again.

No pharmacy operator has figured out how to deal with profit pressures caused by pharmacy benefit managers that dictate drug prices, says Dylan Finley, equity analyst at Morningstar. The strategy has been to grow in other areas. In Walgreens' case, that comes in the form of its investment in primary care provider VillageMD and other newly acquired healthcare businesses.

The company bought into VillageMD before Brewer came in, but she made a $5.2 billion investment in October that upped Walgreens’ stake to 63% from 30% and accelerated plans to put medical clinics in stores. The company now plans to open VillageMD clinics in 160 of its nearly 9,000 stores this year, with a goal of 1,000 clinics by 2027. Walgreens added more healthcare capabilities last fall, when it invested $330 million in home care provider CareCentrix and $970 million in specialty pharmacy company Shields Health Solutions.

At an investor conference in October, Brewer issued unprecedented growth goals that hinge on the success of its healthcare push, targeting 11% to 13% long-term growth in earnings per share. To hit those targets, she’ll have to weave Walgreens' pharmacy operations and its new healthcare businesses into a synergistic whole.

She grouped the healthcare units into a new business segment called Walgreens Health, the finances of which will be disclosed in earnings reports. Some analysts laud Brewer for her clear vision and transparency surrounding the company’s healthcare push but say it’s too early to know if the strategy is working.

“We don’t know the long-term economics, and it’s hard to truly value what Walgreens Health will contribute to the company and if it will be enough to mitigate the margins concern,” Finley says, “but she’s been as transparent as she can be and she’s made all the right moves from a strategic point of view.”

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Primary care can be a hard business, says Joel Shalowitz, a healthcare consultant and adjunct professor at Northwestern University’s Feinberg School of Medicine. The costs of maintaining a practice have risen, and unlike specialty doctors who make money off high-cost procedures or treatments, there are few ways for primary care practices to increase revenues.

“It’s a very tough business, and you have to watch it very, very carefully,” said Shalowitz, who ran a primary care group for more than 30 years. “All kinds of costs are continuing (to rise).”

Though Brewer’s growth goals are aggressive, they’re tied to the strategy Pessina set before she joined Walgreens. Her predecessor’s presence still looms in other ways, too.

Before Pessina stepped aside as CEO, a company spokesperson said he would “continue to play a key role in developing the strategy of the company, along with the new CEO, his or her leadership team and the board of directors.”

Brewer has named a handful of top executives, some from Walmart and Starbucks. They include Danielle Gray as global chief legal officer, Tracey Brown as president of retail products and chief customer officer, and Holly May as global chief human resources officer.

Pessina appointees still hold high-ranking posts, too, including his life partner, Ornella Barra, as international chief operating officer; James Kehoe as global chief financial officer and John Standley as president of Walgreens. One of his longtime lieutenants, Alex Gourlay, stepped down as co-chief operating officer last May.

Walgreens says in a statement that “Roz is working closely with our executive chairman, Stefano Pessina, board of directors and leaders across the company to ensure Walgreens Boots Alliance is gaining momentum by the day and well positioned for sustainable, long-term value creation.”

The statement also said Walgreens “has performed very well across many key metrics” since Brewer took over, pointing to 7.8% sales growth and 53% earnings-per-share growth in the quarter that ended Nov. 30.

Walgreens has completed three quarters since Brewer took the helm March 15. Total sales increased 5.9% during those quarters to $102.2 billion, compared with the same period the prior year. Walgreens booked $5.3 billion in profit during those quarters, reversing a loss of $1.6 billion the year before. Of course, COVID closures hurt 2020 performance, and vaccinations and testing boosted 2021 results.

Despite the strong numbers, Walgreens’ new strategy is still waiting for Wall Street buy-in. The company’s stock is down 12.3% since Brewer took over, while shares of archrival CVS Health are up 37.3% and the S&P 500 is up 12.7%.

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Brewer declined an interview request, but she told investors in October, “We have an overall plan that will deliver sustained growth and profit based on robust, prudent and perhaps, most importantly, integrated healthcare, pharmacy and retail strategies. We've been actively working on our new healthcare initiative and we are well on our way to delivering on our ambitions for this new business area.”

The youngest of five children, Brewer grew up in Detroit, where her parents worked at General Motors. After graduating from Cass Technical High School, she earned a chemistry degree from Spelman College.

The Walgreens move isn’t Brewer’s first shift between industries. Her career began at paper-products giant Kimberly-Clark, where she started out as a scientist before switching to business operations and working her way up to a global group president role. After 22 years, she joined Wal-Mart as a regional vice president, later rising to CEO of the company’s Sam’s Club warehouse stores. In 2017, she became chief operating officer at Starbucks, where she helped transform the coffee chain’s cold beverage program and figured out which stores should be sit-down and which should cater to grab and go.

Analysts said last year that Brewer brought tech savvy to Walgreens, based on experience with Starbucks’ renowned loyalty program and her launch of scan-and-go payments at Sam’s Club, which drove consumer traffic and spending. Indeed, Walgreens reported last quarter that digital sales rose 88% in the U.S., driven by 3.6 million same-day pickup orders.

Brewer came to Walgreens with a reputation for attentive leadership. She makes a point of putting her phone away when she visits stores to talk with workers. Brewer also has emphasized investing in workers, including Walgreens’ recent announcement that it would spend $120 million on labor this year. Although such investments seem obvious amid a tight labor market, analysts say they are vital for Walgreens to maintain momentum on its vaccine campaign and grow retail sales.

While Brewer said in October that she sees “tremendous underlying momentum” at Walgreens, she acknowledged the challenges facing the company as it tries to transform itself into a healthcare provider: “To survive and thrive, we need to be able to show we are more and more relevant. And we must be able to deliver what our customers and our patients need, how and when they need it. We have already achieved a lot recently . . . but we have a lot more work to do.”

This story first appeared in our sister publication, Crain's Chicago Business.