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Table of Contents
TABLE OF CONTENTS 1
TABLE OF FIGURES 2
THE RETAIL DRUGSTORE INDUSTRY 3
BUSINESS ACTIVITIES 7
INDUSTRY OVERVIEW 7
MODERN DRUGSTORES 8
CURRENT ORGANIZATION AND STRUCTURE 9
CURRENT CONDITIONS 10
FUTURE INDUSTRY PERFORMANCE 13
HISTORY OF WALGREENS 16
COMPETITIVE ANALYSIS 20
RITE AID CORPORATION 20
CVS CORPORATION 25
CUSTOMER PROFILE 32
EXTERNAL OPPORTUNITY ANALYSIS 34
EXTERNAL THREAT ANALYSIS 39
SUMMARY OF EXTERNAL OPPORTUNITIES AND THREATS 41
INTERNAL STRENGTH ANALYSIS 42
FINANCIAL STRENGTH 43
PRODUCT INNOVATION 44
GROWTH RATE OF STORES 46
MANAGEMENT TEAM 48
INTERNAL WEAKNESS ANALYSIS 48
SUPPLY OF PHARMACISTS 48
LACK OF EMPLOYEES 48
LEGAL LIABILITY 49
SUMMARY OF INTERNAL STRENGTHS AND WEAKNESSES 49
FINANCIAL ANALYSIS 50
Inventory Turnover 51
Current Ratio 53
LONG-TERM DEBT-PAYING ABILITY 54
Debt / Equity Ratio 55
Net Profit Margin 56
Return on Assets 57
ANALYSIS OF THE MISSION STATEMENT 58
ANALYSIS OF WALGREENS’ OBJECTIVES 61
STRATEGIC ALTERNATIVES 64
Advantages (growth concentration): 65
Disadvantages (growth concentration): 66
Advantages (growth diversification): 67
Disadvantages (growth diversification): 68
STABILITY STRATEGY 70
COMPETITIVE STRATEGIES 70
Table of Figures
FIGURE 1 - INVENTORY TURNOVER 52
FIGURE 2 - CURRENT RATIO 53
FIGURE 3 - DEBT / EQUITY RATIO 55
FIGURE 4 - NET PROFIT MARGIN 57
FIGURE 5 - RETURN ON ASSETS 58
The Retail Drugstore Industry
Knowing the importance of a strategic vision, every company undertakes a complete analysis periodically. In order to create a strategic plan the parties involved must know every aspect of the industry and the company at hand. The purpose of this paper is to describe and analyze the retail drugstore industry and then focus on Walgreens, the industry leader in terms of sales. As part of the in-depth analysis of Walgreens, its major competitors will also be described and analyzed. The retail drugstore industry consists of all those stores that contain a pharmacy and sell prescription drugs. It also includes businesses that sell prescription drugs online and through the mail. Most retail drugstores also offer other consumer goods and services to augment the low margin earned on prescription sales. To be considered a member of the retail drugstore industry requires sales of prescription pharmaceuticals to the end consumer. Many convenience, food and discount stores sell over-the-counter medicines, but these stores would not be considered retail drugstores because they do not also sell prescription medicines.
Competition: The relevant environment, which consists or interactions between the task environment and task environment, has been changing over the past 25 years. As competition has increased among grocery, discount and mass merchandising chains, blurring of channels has occurred. This is due to stores selling an increasing variety of goods to try to broaden their customer base and provide “one-stop” shopping. Many of these stores have added pharmacies as a source of convenience for their customers, and to increase store traffic, usually positioning the pharmacy in the back of the store. In response to this pressure, both independent and chain drugstores have greatly increased the variety of their retail product offerings. The sale of cosmetics, along with health and beauty aids, has become an important profit generator for retail drugstores. Many are now also positioning themselves to compete with convenience stores by offering snack food items, beverages, and staple items. The move to stand-alone stores located on major roads with ample, close-in parking has been an important factor contributing to convenience.
Customers: As indicated by the type of competition seen in the retail drugstore industry, the target market is very broad. The target market for prescription drugs includes almost nearly all peoples. Currently, the most frequent users are children under 10 and seniors over the age of 65. The buyers of health and beauty aids also consist of a wide range of users. Younger users tend to buy hair care and hygiene products initially, then add cosmetics and skin care items as they mature. The addition of a wide range of household items, including kitchenware, toys, pet care items, and lawn care items has enhanced the appeal of the drugstore as a one-stop shopping destination, where frequently used items can be picked up while a prescription is being filled. The development of a strategy that focuses on convenience items will further broaden the target market.
The sale of pharmaceuticals is considered to be a recession-proof industry, as medications are a necessity. However, drugstores are impacted by factors such as payment rates offered by third-party providers, prices charged by drug manufacturers, and legislation impacting the extension of drug patents. Obviously, the sale of non-drug items is not recession-proof.
Suppliers: Drugstores obtain their prescription drug products from the drug manufacturers. Drug manufacturers have been accused of discriminatory pricing due to a practice of selling products to HMOs and mail-order houses at prices 40% to 60% under the price charged to community drugstores. The community drugstores have filed a class-action lawsuit in response to this practice. Many drugstores use large wholesalers as suppliers, obtaining everything from prescription drugs to health and beauty aids from the same supplier. Another supply source includes wholesalers who supply convenience and grocery stores.
Employees: The central employee in the pharmacy is the pharmacist. In 1996, pharmacists made up 17 percent of the 605,000 people employed in the drugstore industry. The other 83 percent of the employees worked as store managers, inventory specialists, stock clerks, and cashiers. The industry also employs buyers, merchandising managers, and inventory replenishers at store headquarters.
Political/Societal Forces: There are a number of political and societal forces impacting the retail drugstore industry. Lobbying by drug manufacturers for favorable legislation regarding patent extensions has an impact on the profit margins of drugstores by restricting the availability of the more profitable generic drugs. Currently, the state of Maine is attempting to pass legislation to impose price controls on drugs at community pharmacies (Drug Store News, 5/12/2000). Technology is a factor that will be critical to competition and cost control in the drugstore industry. The continual upgrading of technology that contributes to efficiency will be necessary to remain competitive. Systems are being developed that will enable physicians to send prescriptions on-line to a pharmacy, and software has been developed to manage everything from inventory control to insurance filing. Pharmacies are also impacted by a number of socio-cultural forces, as indicated by the attempted legislation in Maine. Another emerging issue is the use of drugs for practices that have moral implications, such as pregnancy prevention or termination, and assisted suicide. Wal-Mart has refused to carry the new emergency contraceptive called Preven, because it fears boycotts by right-to-life groups. Some pharmacists may refuse to fill certain prescriptions, such as ones for contraceptives, because of moral beliefs. K-Mart’s policy is to fire any pharmacist who refuses to dispense any FDA-approved drug (P. Miller, Betty Dodson.com).
The industry analysis will describe the background of the industry, the major business activities, economic forces that impact the drugstore industry and the organization and structure of the industry. There is also a discussion of current conditions that affect the drugstore industry as well as a discussion of factors which will influence future industry performance.
Companies in the retail drugstore industry are engaged in the retail sale of prescription drugs, proprietary drugs, and nonprescription medications. Most also sell medical devices, as well as a variety of cosmetics, toiletries, tobacco, novelty items, and snack foods and beverages (Encyclopedia of American Industry). As competition increases, many businesses in this industry are adding more goods and services to the basic activity of filling prescriptions. Some of these services include photo processing, drive-through prescription windows, and 24-hour service. Drugstores are now offering more snack-food and impulse-buy items as well.
The drugstore industry has moved from being a fragmented industry, prior to the mid-eighties, to one undergoing rapid consolidation driven by several factors. The sales volume of the drugstore industry more than doubled from approximately $40 billion in 1983 to over $93.6 billion in 1995. This growth led large supermarkets and mass-merchandisers to enter the drugstore market, putting more competitive pressure on the smaller independent stores. Profit margins are narrowing, due to attempts to reduce health care costs. In response to these pressures, there has been a wave of consolidation, with regional chains buying out one another out. Other responses to the pressure of competition and decreasing profit margins include: an effort by drugstores to concentrate on customer service, expansion into niche markets, forming partnerships with suppliers and health-care providers, and the use of technology to increase cost-efficiency (Encyclopedia of American Industry). The drugstore industry is considered to be a recession-resistant growth industry, due to the increasing number of aging baby boomers (Fool on the Hill, 5/18/99).
The drugstore industry had its beginning in the mid-1800s. At that time, Americans began using more “patent medicines”, reducing dependence on home remedies. Early pharmacists worked in village apothecaries, purchasing chemicals in bulk and mixing them on the premises to fill prescriptions. After the Great Depression, the science of pharmacology developed and pharmaceutical companies grew rapidly, opening sophisticated research facilities. Drug patent issues grew from fewer than 100 before 1940, to over 4,000 by the 1950s. Medications began to be distributed under the manufacturer’s brand name in a final-dosage form, instead of in bulk as generic ingredients that were then combined by the pharmacist. The number of drugstores increased and pharmacists took a more service-oriented role when dispensing prescriptions (Encyclopedia of American Industry).
The early drugstore tended to be a small store, from 1,000 to 2,000 square feet, located near grocery stores and other high-traffic areas. The bulk of the stores’ sales were from pharmacy items. Many of these small stores had a variety of “sundries and notions” available in the front of the store, where shoppers could browse while waiting for their prescription to be filled. The addition of the soda fountain came about early on when bottled soda water, and charged water were originally considered to be a health items (Walgreen’s.com ). Up until the advent of “fast food” restaurants in the late 50’s and early 60’s, the soda fountains were significant generators of revenue, expanding their offerings to meals as well as beverages.
Current Organization and Structure
Competitive forces caused the drugstore industry to vary their store formats in order to differentiate themselves from competitors and strengthen their image as health care providers. This has resulted in the emergence of five main store formats: independents, chain drugstores, mass merchandisers, supermarkets, and mail order. A decline in use of conventional drugstores began as early as the late eighties as other competitors, especially the supermarket drugstore, were developed. In 1988, 69 percent of prescription purchases were made in conventional drugstores. This dropped to 57 percent in 1990. In 1992, sales of over-the-counter (OTC) medications were $9.45 billion, or 16.8 percent of drugstore sales. By 1995, sales of OTCs were only 13.8 percent of sales at drugstores, due to increased competition from discount retailers and supermarkets.
In 1994, there were 53,216 drugstores in the five categories. Of these, 24,862 (46%) were independently owned, 17,270 (32%) were chain drugstores, 4,837 (9%) were mass merchandisers, and 6,247 (12%) were supermarkets. The mass merchandisers were the fastest growing segment. In 1995, independents made 34 percent of all prescription and OTC drug sales, chain stores made 41 percent of prescription and OTC sales, mass marketers made 11 percent of the prescription and OTC sales, and 4percent of these sales were made through mail order outlets. By 1996 there were 58,333 drugstores in the United States. Of these, 35,000 (60%) were independently owned. The deep discounting outlets, a segment of the mass merchandisers, had begun to lose market share due to other stores’ adaptation of their low price strategy (Encyclopedia of American Industry). By 1998, sales of prescription drugs through all channels rose to $103 billion. Drug chains and independents made 66percent of those sales, down from 75percent in 1995. Mail order outlet sales rose to 13percent, supermarkets sold 11percent, and mass merchandisers sold 10percent (Standard & Poors Industry Survey).
The sales of prescription drugs jumped 7.95 percent in 1998, for an increase of $2.73 billion. The average prescription price rose by 8 percent from $35.72 in 1997 to $38.43 in 1998. The drugstore industry as a whole had a 3.3 percent increase in sales in 1998, for a total of $134.4 billion. Due to a 15 percent increase in pharmacy volume, chain drugstores did better than the average. Their sales grew 8.2 percent to $96.7 billion, which was 72 percent of the industry total. Chain drugstores filled 60percent of all prescriptions. Sales at independent stores dropped by 7.6 percent, for a total of $37.7 billion. Much of this is due to the chain drugstores receiving a greater share of business from third-party payment plans.
The strong growth seen in the drugstore industry is due to several factors. The two demographic groups using the greatest amount of medication are adults over 65 and children under 10. These two groups are the fastest growing segment of the American population. The 65-and-older age group uses an average of 12 prescriptions per person, at any given time. The increased availability of generic substitutes for expensive, brand name drugs has increased the overall market for pharmaceutical products. Another important factor is the trend toward self-medication, which is increasing purchases of OTC medications (Encyclopedia of American Industry). Other factors that had an impact on prescription sales are drug price inflation, the introduction of new drugs, and an increase in the number of individuals participating in third-party insurance programs. The increased traffic in drugstores has also resulted in increased sales of higher margin products such as OTC medications and non-pharmacy items (front-end merchandise)(Standard & Poors Industry Survey).
An increasingly important contributor to the profit margin of chain and independent drugstores is the sale of “front-end” items. These items are non-pharmacy goods ranging from snacks to hardware to gift items and greeting cards. The margins on this merchandise run at least ten percent higher than those carried on third-party prescription sales (Standard & Poors). As increased drug prices and the emphasis on lowering health care costs continue to cut into profit margins on prescription sales (currently averaging 2 percent), sales of front-end items will be an increasingly important contributor to drugstore profits. Accordingly, many drugstores, especially those occupying their own building with convenient parking, are positioning themselves to compete with convenience stores. The convenient parking and easy-in, easy-out features, when compared to a typical grocery store, provide a shopping experience almost as hassle-free as stopping at a corner convenience store. The larger store size allows the drugstore to carry a wider variety of convenience products and many plan to add more easy-to-prepare food items to allow a quick, easy one-stop shopping experience for people on their way home from work (Drug Store News, 8/2/99).
A significant event in the drugstore industry has been the move toward consolidation which took place throughout the 1990s. In order to generate economies of scale in distribution, buying power, corporate overhead, and the technology needed to compete for third-party prescription drug business, it has been necessary for chain drugstores to increase their numbers. This is achieved by rapidly building new stores or by buying smaller independent stores or regional chains. Their increased size results in greater bargaining power with suppliers and the ability to negotiate for better prices with third-party providers (US Business Reporter). In 1998, the top four drugstore chains, ranked by sales, were Walgreens, CVS, Rite Aid, and Eckerds. All but Walgreens significantly increased their presence by acquiring other chains during the 1990s. Walgreens accomplished this through an aggressive program of store building. These four chains account for over 50 percent of the total market share. In 1998, the ten largest drugstore chains made about 75 percent of all chain store sales and nearly 50 percent of all drugstore sales, while independent drugstores made 28 percent of all drugstore sales.
The drugstore industry is facing several other problems that may have a negative impact on earnings. A shortage of pharmacists, combined with efforts to cut costs, have increased the number of hours pharmacists must work. This, combined with an increasing paperwork load has led to dissatisfaction among pharmacists. One result of this has been increased salary and benefit demands to offset the increased workload. This situation is also perceived to the cause of increased errors in filling prescriptions. The state of North Carolina has recently passed legislation to hold drugstores liable if overworked pharmacists make mistakes (The News & Observer, 8/3/97). Another significant issue under legislation is a consideration that would extend the life of the patents on some very popular drugs, whose patents are due to expire in the year 2000. The pharmacy industry has been anticipating increased profits that will become available when the generic versions of these patented drugs hit the market. This situation highlights the vulnerability of the drugstore industry when their interests conflict with those of the much more powerful drug manufacturers (Drug Store News, 8/30/99).
Future Industry Performance
The prospects for continued industry growth are strong due to a number of factors. These include:
An increased interest in health and personal care
An aging population and longer life span
A high number of popular drugs coming off of patent protection to the generic drug and over-the-counter market
An increasing use of drug therapies versus hospitalization
There are issues that will continue to keep profit margins low. More retail segments are recognizing the customer draw of pharmacy services, therefore increasing competition. Price-cutting, lower drug price inflation, and restrictive third-party payment plans will also reduce profit margins. Furthermore, supermarkets and discount retailers have increased their offerings of the health and beauty aids that generated front-end revenue for drugstores (Standard & Poors Monthly Investment Review).
There are a number of strategies contributing to the success in the competitive drugstore market. Differentiation and service are strategies critical to the success of independent drugstores. Many independent stores emphasize personal service and counseling provided by a familiar pharmacist. They also strive to provide a product range that reflects the preferences of the demographics in their location. Being small allows the flexibility to needed to rapidly adapt to the changes in consumer demands. Smaller stores exploit the niches and business areas that don’t meet the criteria of the larger chains (Drug Store News, 2/17/97).
Use of technology to streamline inventory management, ordering, insurance claims and many other processes is critical to the survival for all stores, large or small. The use of point-of-sale systems, merchandise and accounting software, and sophisticated systems, which predict precise inventory levels needed at any given time, all reduce operating costs. This technology allows pharmacists to provide more time for personal service with customers (Drug Store News, 4/24/2000).
Drugstore design has changed to provide greater convenience and accessibility. The aging of the population has caused storeowners to design stores with easy access, and no large, crowded parking lots and long lines at the checkout. This is part of the reason many stores are relocating to their own individual property with their own parking spaces (Las Vegas Review-Journal, 9/8/98). Convenience and a good selection of frequently purchased necessities will allow the drugstore to compete with convenience stores.
Efficient management of the front-end offerings and auxiliary services will provide a higher profit margin than that of the pharmacy alone. There are numerous cosmetic and beauty fads throughout a year that require constant changing of products and displays to remain up-to-date. The total performance of each stock-keeping unit is critical and should be assessed using activity-based costing, with low performing items being eliminated (Retailing 2005). There currently exists an under-served market for ethnic cosmetics in many parts of the US. Prominent displays providing a variety of products meeting those of the surrounding demographics have the potential to draw customers to a store, boosting sales in all categories (Women’s Wear Daily, 4/2000)
The large chains stand to benefit from their size by creating virtual vertical integration partnerships with their suppliers. Joint planning, product development, and demand forecasting will benefit both suppliers and retailers. Functions can be shared according to who can perform them at the lowest cost. As partners change their business processes, organizational structures, and information systems for the benefit of the partnership, barriers to exit will be created. Barriers to other companies who have not made such investments will also be created. This will lead to more exclusive supply chain relationships (Retailing 2005).
The chain drugstores will depend a great deal on the sale of private label items. The private label can provide differentiation based on both quality and price. They provide the retailer with a greater markup as well. Discount programs which encourage purchase of private label items provide value to both the customer and the retailer.
Another critical means for gaining market share will be the utilization of the Internet to supplement sales from existing stores. CVS purchased Soma.com in order to take advantage of its existing structure and expertise to enter the online market. Walgreens has created its own site. Rite Aid bought into drugstore.com and will provide the fulfillment of drugstore.com’s retail prescriptions. The online drugstores that are not affiliated in any way with an existing store are not viewed as major threat (Community Practice, 5/5/2000)
History Of Walgreens
Walgreen Company prides itself on being consumer friendly. This large drugstore chain has made its mark on the map by following a simple strategy—focus on convenience. By convenience they include: how fast people get into the store or are served in the drive-through pharmacy, how fast they get out, how easily they find what they came to buy, and how well they are reminded of what they are forgetting to buy (http://www.walgreens.com/about/press/facts2.jhtr). This kind of company is not just formed overnight- it takes many years of hard work. The following section details the beginning of Walgreen Company and how it became the number one drugstore chain it is today.
In the small town of Dixon, Illinois a man by the name of Charles R. Walgreen Sr. began a dream that soon turned into a reality. Charles R. Walgreen Sr. was born near Galesburg, Illinois and relocated to Dixon when he was a young boy. At the age of sixteen, he was in an accident and cut off the top joint of his middle finger. This unfortunate incident caused Walgreen to quit athletics and begin working. He worked in a local pharmacy where he began his dream to become a pharmacist. If not for the accident, there may never have been the Walgreens that we know today (http://www.walgreens.com/about/press/facts2.jhtr). Charles R. Walgreen Sr. knew that this dream would only be realized in a larger city, therefore he moved to Chicago. In 1893 he began to study the ways of a pharmacist, and was not satisfied with what he found. The old fashioned way of running a drugstore left Walgreen with many unanswered questions. Where was the desire to provide superb customer service? Where were the innovations in merchandising and store displays? Where was the selection of goods that customers really wanted and could afford? Where was the sense of trying to understand, please and serve the many needs of drugstore customers? And, most of all, where was the commitment to providing genuine value to the customer? (http://www.walgreens.com/about/history/hist2.jhtr) Because of these questions, Walgreen decided to open his own drugstore and implement all of his new ideas. In 1901, Walgreen created a neighborhood drugstore measuring just 50 feet by 20 feet. Little did he know that his strategic plan for this small business would become Walgreens, the number one drugstore chain.
Walgreen began this great venture by a purchasing local drugstore for $6,000. He soon added bright lights to create a cheerful, warm ambiance in the store. The aisles were widened for convenience, and the selection of merchandise was improved and broadened. Walgreen always kept prices fair and reasonable, and offered a service that was like no other drugstore around. (http://www.walgreens.com/about/history/hist2.jhtr) One of the many additions to the new and improved drugstore was the addition of the “Two Minute Drill.” This strategy worked by keeping the call-in customer on the phone with casual conversation, while the prescription was filled. The merchandise was then delivered to the home of the customer while they were still on the phone with Walgreen. The customer was amazed at the fast and friendly service. This became the “Two Minute Drill.” This drill created customer loyalty and a positive image. (http://www.walgreens.com/about/history/hist3.jhtr)
By the year 1910, Walgreens had expanded to two stores. Walgreen continued to take advantage of new opportunities and enhance a growing customer base. With this in mind, Walgreen decided to add hot food to the wide variety of items available in the stores. This was the addition of the soda fountain. (http://www.walgreens.com/about/history/hist3.jhtr)
In 1913, Walgreens had four stores in the Chicago area. By 1919, there were 20 stores—Walgreens was growing fast. The customer friendly chain store was continually looking for new and innovative ways to please the consumer. Noting this, in 1920 a man by the name of Coulson added ice cream to a popular milk mixture. This was the beginning of the milk shake. (http://www.walgreens.com/about/history/hist4.jhtr) Walgreen was so impressed with this new sweet drink that he added it to the menu of all of his stores. The wonderful creation was written about in newspapers and talked about in every city that housed a Walgreens store. Customers were suddenly standing in line for this cool new drink. Walgreens was becoming popular. By 1930, the fast growing chain had well over 500 stores. With this newfound fame, Charles Walgreen incorporated philanthropy in the corporate mission. After leading a full life and accomplishing so much, Charles R. Walgreen Sr. died in the year 1939. The Walgreen Company was left to his son Charles Walgreen Jr. With a disciplined management team, Walgreen Jr. would lead the company that has continued to exponential growth. (http://www.walgreens.com/about/history/hist5.jhtr).
Walgreens continued to prosper through the years, even during the depression. By 1975, Walgreens had 633 stores and employed over 1500 pharmacists. Moving through the century the growing chain store now had a third Charles Walgreen continuing the family tradition. With the help of Charles Walgreen III, Walgreen Company hit a milestone when they opened the 1,000th store in 1984. (http://www.walgreens.com/about/history/hist6.jhtr)
As Walgreen Company proceeds into the future, great things are expected to happen. In the year 2000, Walgreens opened its 3,000th store. Walgreens is currently in 43 states and Puerto Rico. The strong, solid drugstore chain plans to open 450 stores in 2000, one new store every 19 hours. Their goal is to have 6000 stores by the year 2010. With all the growth and advancement in technology, Walgreen Company plans to hold the market as the number one drugstore chain indefinitely. (http://www.walgreens.com/about/history/hist7.jhtr)
When evaluating any business, it is important to look not only at the company, but at other companies in the market to determine their market position, their strengths, and their weaknesses. The more information you have on your competitors, the more likely you are able to succeed in creating a successful strategy against them. Knowing this, the following paragraphs will analyze Walgreens competitors, Rite Aid, CVS, and drugstore.com.
Rite Aid Corporation
Rite Aid, America’s Neighborhood Drugstore, is the number one pharmacy leader and for the first time was named one of the 1998 “Business Week’s 50”- the magazine's annual ranking of the nation’s best performing companies. Rite-Aid was ranked 48th, and the only drugstore chain to make a list topped by Microsoft and dominated by financial and high-tech firms. Rite Aid’s success according the Mr. Grass, chairman and CEO, was due to a combination of factors including an ongoing expansion/acquisition strategy, development of state-of-the art technology, marketing and brand differentiating initiatives and the creation of a top-notch senior management team.
Between 1996 and 1998, Rite Aid acquired three of the country’s leading regional drug chains: Thrifty Payless, the largest drugstore chain on the West Coast with 1,007 stores and $4.4 billion in sales, and Harco and K&B in the South. Capitalizing on these acquisitions, Rite Aid continued to develop hundreds of new freestanding prototype stores in the targeted markets already served by these chains. Currently, Rite Aid operates approximately 4,000 stores in 31 states and the District of Columbia, pushing this corporation up the ladder to becoming one of the nation’s largest drugstore chains.
The brisk pace with which Rite Aid has and continues to proceed in its expansion and acquisitions is not taking place without some setbacks and inherently large complications. In 1999, Rite Aid experienced a tough year with lawsuits, investigations and falling stock prices. Rite Aid was faced with the worst performing stocks on the S&P 500, because an auditing firm that has been with Rite Aid since 1968 resigned their account with them in 1999 due to a lack in trust in Rite Aid’s management. Since January 2000, Rite Aid’s shares have lost more than 45percent of their market value. Adding to this, in October of 1999, Rite Aid announced the completion of its extension and restructuring of its $2.7 billion outstanding banking debt, and its consummated sale of $300 million of its 8 percent convertible pay-in-kind preferred stock to an affiliate of Leonard Green and Partners. As a result of the reorganization of debt, two things have occurred: 1.) The $1.3 billion bank debt which was scheduled to mature and the $300 million which was due on demand at the time of maturity on October 29,1999, has been extended to November 1, 2000 2.) Rite Aid will be free of almost all loan payments until mid-2002. Investigations have plagued Rite Aid in the areas concerning past operating practices and the reorganization and reconstructing of debt has not helped to lessen suspicion. As a result of investigations due to suspicions, Rite Aid’s safety rank was lowered to a four, which is below average.
In addition to the financial restructuring and the needed aid of banking facility extensions, Rite Aid will pay $2.8 million in a lawsuit settlement to 12 counties in the city of San Diego. These counties alleged that Rite Aid used misleading advertising and engaged in unfair competition. All things taken into consideration and tallied, Rite Aid is approximately $3 billion in debt. A $1 billion boost from lenders has helped ease the concern and financial straps at Rite Aid, and will be used to repay debt and fix up stores.
To strengthen the company’s rank, and with a new management team intact in many key departments, Rite Aid intends to debut 300 locations in the year 2000. It will take time for the new operating procedures to filter through the system, but significant parts of Rite Aid’s infrastructure, including its retail stores and distribution network are up to date and should be well-positioned to produce improved operating result in time (Standard & Poors).
The year 1999 opened with GNC, General Nutrition Companies, and Rite Aid announcing the construction of a significant strategic alliance in vitamins and nutritional supplements. Outside the pharmacy, nutritional supplements are Rite Aid’s fastest growing category, and retail is the fastest growing channel for selling nutritional supplements. Rite Aid will open 1500 full-line GNC stores within Rite Aid locations across the country over a three-year period. GNC will manufacture the nutritional supplements and together they will market a new line of vitamins and nutritional supplements to be called PharmAssure. In addition, GNC will become the exclusive manufacturer of Rite Aid’s private label vitamins and nutritional supplements and together they will construct a co-branded Internet e-commerce and nutritional information site.
This strategic alliance is another step to Rite Aid becoming a broader health services company. The ability to link nutrition with the credibility of Rite Aid’s pharmacists in the growing area of e-commerce excites Rite Aid and creates an unique competitive edge that is expected to be favorably received by consumers, according to Mr. Grass, CEO. In support of this alliance, Beth Kaplan, executive vice-president of marketing at Rite Aid, says, “Americans are increasingly concerned about their long-term well-being. Our exclusive PharmAssure products and GNC ‘stores within stores’ will help Rite Aid differentiate itself from the competition while meeting the health needs of our customer base-the key to our success.”
The strategic alliance with GNC and expected future success sparked Rite Aid’s expansion and reconstruction of its pharmacy division. At the beginning of the year 2000, Rite Aid announced its expansion and reconstruction of its corporate pharmacy to provide a more integrated approach to pharmacy purchasing. Mary Sammons, president and chief operating officer, said, “The new structure will make a very strong part of our business even stronger.” She also explains that bringing all the areas of pharmacy together under one direction will able them to develop a more focused pharmacy strategy that should improve all aspects of their pharmacy operations.
To ensure success in the newly restructured pharmacy operations, Rite Aid has constructed a team of key top-notch experienced executives. These top executives, Sorkin, Wolfe, and Podguski, have a combined 79 years of experience in the field of pharmaceuticals that ranges from purchasing to managed care, marketing, human resources, and clinical services. These executives are highly educated and respected in their field of specialization and combine to form a strong and powerful team for Rite Aid’s pharmacy operations.
GNC was not the only supplement to Rite Aid’s drugstore business. In January 1999, Rite Aid acquired PCS Health Systems, Inc. for $1.5 billion with the belief that this acquisition will enhance their ability to offer a better array of pharmaceutical services. PCS is the leader in pharmacy benefits and other managed health care systems. PCS’s pharmacy benefit management services focus on the systematic management of prescription drug usage designed to foster high quality, cost-effective pharmaceutical care through the application of managed care principles and information technologies. PCS also provides pharmacy benefit management services that involve the application of clinical expertise and management information systems to provide formulary management, chronic disease management and mail order services (Standard and Poors).
Another contribution to the pharmacy division is a twenty-two percent acquired interest in drugstore.com, the leading online retailer of health, beauty, and wellness products with an online pharmacy. Rite Aid customers are able to order their prescriptions online at drugstore.com with the same pharmacy benefits provided to them by their insurance management companies, as if they were doing business with Rite Aid. These prescriptions may be picked up at the nearest Rite Aid store or delivered directly to the customer’s home. Both companies are planning to undertake co-promotion and co-branding activities.
Despite a tough year in 1999 of financial investigations, falling stock prices and lawsuits, Rite Aid has weathered the storm and its position is on an upward course. A newly formed corporate structure combined with smart and capable leaders has guided Rite Aid up from beneath its financial, corporate and legal difficulties. First quarter sales beginning February 27, 2000 and ending May 27, 2000 revealed a 6.2 percent increase for same-store sales, consisting of 9.6 percent pharmacy same-store sales increase and a 1.4 percent increase in front-end same-store sales.
Ranked ninety-three in the Fortune 500 and the nation’s No. 1 leader in the pharmacy market with 11.9 percent market share, CVS Corporation fills more prescriptions than any other drugstore chain and has 4,100 locations east of the Mississippi. Sixty percent of their sales come from filling prescriptions, while the rest comes from front-store sections offering additional medications, cosmetics, food, film processing and other general merchandise.
CVS was founded under the name Melville in 1892, selling only shoes. It was not until 1964 that the name CVS was first used and not until the early seventies that CVS bought the Clinton Drug and Discount to enter the pharmacy and drugstore industry. By 1981, CVS had acquired more than 400 drugstores and by 1985 their sales had hit $1 billion. CVS was outperforming its Melville counterparts and thus a decision was made to concentrate on the drugstore chain.
By this time, Melville’s holdings had grown to include the department chain store Marshalls and the furniture chain This End Up (sold in 1995), the footwear chain, Footaction (spun off in 1996), along with Linens-n-Things, Kay-Bee Toys and Bob’s Stores (apparel and footwear), which were all sold or spun off by 1997. After this, Melville was renamed CVS and a major consolidation took place in the drugstore industry, merging these two entities and forming what is now the CVS Corporation.
CVS was not finished with building its empire and in 1997 acquired Revco D.S., which had nearly 2600 stores in 17 states, mainly the Midwest and Southeast. The next year, bought Arbor Drugs with 200 stores in Michigan. CVS paid a combined total of $5.2 billion to acquire these stores and add them to their already 1,425 stores in operation.
In acquiring Arbor Stores, CVS got nearly fifty percent of the market share in the lucrative metro Detroit market and a strategic network of store locations. This move bumped Chicago-based Walgreen Co. from the No.1 ranking in the drugstore industry and upstaged Walgreen’s recent debut in the metro Detroit. The metro Detroit area spends about $2 billion a year in drugstores - the fourth highest spending level nationwide. CVS is still not in the 48 out of the 100 drugstore markets and new markets such as Chicago, Tampa, Orlando, Fort Lauderdale and Grand Rapids help to get them there (Merrill Lynch).
The key to the company’s continued growth has been a subsidiary called PharmaCare Management Services, which provides prescription benefit management services. In addition, CVS has recently begun the operation of CVS ProCare pharmacies that cater to customers that require complex drug therapies such as treatments for HIV and infertility. This taps into the $11 billion “specialty prescription market.” ProCare will establish apothecaries separate from CVS stores and staff them with qualified personnel who can dispense the prescriptions and devote time to answering questions (Trantum).
CVS continues to move its core CVS stores from strip malls to the more profitable freestanding locations. Only thirty-five percent of CVS’s stores are freestanding units, in comparison to Walgreens with over eighty percent. CVS is striving to catch Walgreens and has accelerated relocations as a percent of new store openings programs because the return on capital employed is more attractive as a result (Merrill Lynch). These locations are typically bought, not leased, with the store resembling the corner location proto-type of approximately 10,300 square feet. CVS has also increased their private label offerings to 1500 items, which account for 11 percent of its front store sales.
Expansion plans have included the acquisition of Soma.com in 1999, which was then renamed CVS.com. This enabled CVS to provide an on-line pharmacy where customers can order prescriptions online for delivery or pick-up. CVS uses this website to bring their store into customers’ homes and businesses with information available to educate customers about medicines and diseases. In addition, current expansion plans include 440 new or relocated stores nationwide and entry into two new markets by 2000. CVS has not specified which new markets, but has confirmed relationships with two developers in the Chicago area who are scouting a minimum of fifty sites. In Chicago, there are no independent drugstore chains for CVS to overtake, thus they will be building from the ground up.
Overall, CVS had been producing consistent earnings for gains for its shareholders and the three to five year outlook appears just as favorable (CVS Corp. NYSE). Successful acquisitions and continued operation of CVS.com, ProCare and PharmaCare Management Services have placed this corporation in a leading position with potential to overtake the market leader, Walgreens. In addition, CVS has confirmed that company sales growth should continue at ten percent or more for 2000.
The leading on-line retailer of health, beauty, and wellness products, drugstore.com was the first on-line drugstore to earn the distinction of their one-millionth customer just thirteen months after the launch of their site. Peter Neupert, president and CEO of drugstore.com, comments, “ We have a rock solid financial base and we are growing by the minute.” Supporting this notion and that of a strong customer base, drugstore.com announced at the end of its fourth quarter 1999 that 44 percent of its orders are for repeat purchases. This growth and the strong financial base have stemmed from drugstore.com’s efforts to broaden its customer base and product offerings, along with the formation of partnerships with Amazon.com, Rite Aid, and GNC, as well as its recent acquisition of Beauty.com.
In the winter of 1999, Gomez Advisors, a provider of e-commerce research and analysis for consumers, ranked drugstore.com No.1 overall ranking and first in four of the eight categories including “Customer Confidence, “Relationship Services,” “First-time Buyers,” and “Time Saving.” These high performance rankings can be attributed to the fact that, “Since our inception, drugstore.com has focused on creating a friendly, informative, and secure Internet shopping experience for today’s customers,” (Neupert, Peter). In addition, Forrester PowerRankings, an unbiased expert analysis that provides objective rankings of the leading e-commerce sites, ranked drugstore.com at the top in the health category and it received top scores in “Customer Service, “ Site Usability,” and “Features” categories.
Drugstore.com offers “thousands of brand name personal healthcare products at competitive prices, a full-service, licensed pharmacy, along with a wealth of health-related information, buying guides and other tools designed to make purchasing decisions,” (drugstore.com achieves one million online shoppers). Customers have the option to personalize their shopping experiences with a shopping list, e-mail reminders to replenish regularly used products, and private e-mail access to pharmacist and beauty experts for questions.
The pharmacy division at drugstore.com has been awarded the Verified Internet Pharmacy Practice Sites (VIPPS) certification by the National Association of Boards of Pharmacy as a fully licensed facility exercising the best safe pharmacy practices in compliance with federal and state laws. The RxML program, which enables participating Physician Connectivity Companies (PCCs) to transmit electronic prescriptions securely on-line to pharmacies via their electric prescribing applications, was completed by drugstore.com in May 2000. Incorporating the RxML standard provides physicians and other health care providers the capability to transmit accurate electronic prescriptions securely, thereby reducing the potential for prescribing errors, increasing overall efficiencies, and helping physicians better help their patients. Lee Ann C. Stember, NCPDP president, states, “The adoption standard will unify a rapidly-changing industry and deliver more efficient and effective communication between physicians and pharmacies—and ultimately their mutual patients.”
The acquisition of Beauty.com, a leading on-line retailer of prestige beauty products including specialty lines exclusive to the site, has expanded drugstore.com’s product base and provides the benefits of an ongoing relationship with a team of industry experts. In addition, a strategic alliance with Rite Aid in 1999 allows customers to order prescription drugs on-line for same day pick-up at a conveniently located Rite Aid drugstore. Potential benefits perceived from this alliance include increased traffic at the website with Rite Aid customers using their services, pharmacy benefits coverage provided by the insurance companies and management companies with which Rite Aid has relationships, and the co-promotion and co-branding activities that both companies plan to undertake. The relationship with GNC includes the exclusive right to sell and be the online provider of GNC-branded products and the reciprocal co-promotion of drugstore.com and GNC products in traditional and online marketing efforts.
Drugstore.com’s objective is to “become one of the world’s leading retailers of health, beauty, wellness, personal care and pharmacy products,” and they are well on their way, with the launch of a new Health and Beauty Store on the website of the leading retailer Amazon.com. This store provides a direct gateway to drugstore.com. When customers go to the Amazon.com home page they can click on the Health and Beauty tab and enter into the drugstore.com online storefront. Jeff Bezos, founder and CEO of Amazon.com, states, “ We are always looking for ways top improve the Amazon.com shopping experience. We want our customers to come to us and find anything and everything they might want to buy online.” This alliance provides tremendous opportunity for drugstore.com to expand its customer base and continue its exceptional growth. Peter Neupert remarks that this “launch of the Health and Beauty Store on Amazon.com is a big win for our customers. By opening our store on the Amazon.com site, we’re making it easier and more convenient for customers to shop for health and beauty products while they’re shopping at Amazon.com.”
Being new to the online drugstore industry and showing a loss for 1998 and 1999 does not equate a weak or disappearing drugstore.com. Drugstore.com has negotiated mutually beneficial strategic alliances and capitalized on windows of opportunities. First quarter sales for 2000 are $22,738,000, following the trend of quarterly increases since its inception in 1999.
Walgreens, unlike other retail drugstore chains, does not tailor its offerings to any specific consumer or market segment. Walgreens provides a diverse array of product lines so that each consumer and market segment may fulfill their shopping needs whether it is beauty, prescription, over the counter medications, toys, photography development, greeting cards, gifts or convenient store items at any local Walgreens. Therefore, the market segment as defined for Walgreens consists of any consumer who seeks the everyday necessities that may be found at a super store such as Wal-Mart or K-Mart, but without the hassle and inconvenience of large crowds and the challenge of a difficult search to locate desired products.
Walgreen's research of customers in Chicago and San Antonio reveals two specific types of customer; browsers and lasers. Browsers are customers that come to Walgreens for the shopping experience. Lasers are customers who come to Walgreens for one or two specific items with an emphasis on time and convenience. According to the American Demographics Magazine, customer on a constrained time budget will likely favor small shops over large ones, spend less time comparing prices, use technology to reduce transportation time, and patronize businesses that make life easier. Walgreens' strategy is directed toward the time-starved laser shopper. The average Walgreens' transaction time from car door open to car door close, is 13.5 minutes with the average being 3.3 items (Walgreens 1999 Annual Report).
The “Baby Boom” generation born between 1946-1964, a time in which 3.8 million to 4.3 million babies were born annually, is an unusually large generation that started turning fifty in January 1996 (The Market for Boomers Turning 50, 1999). This generation is a large and important market segment in the area of vitamins and health, including prescription and over the counter medications. The population of America is aging and Walgreens' main focus on prescriptions, vitamins and over-the-counter medication recognizes this aging market segment as one to be served efficiently and adequately. This market segment will continue to grow and become more important as age related health problems and concerns for overall health begin to rise.
The “kids and teen” market segments are two other important and influential market segments that require special attention. Children ages five to fourteen currently number thirty-nine million, while the “teen” population ages twelve to fourteen will be one of the largest and wealthiest in American History (The Teens Market, 1999). The child population has not grown substantially, but their income has grown at a steady 20 percent for at least the last half decade, with their purchasing power growing at an even more astonishing rate (The Kids Market, 1999). Capturing the loyalty of these two market segments will present difficulties due to their need for instant gratification and the rapid pace with which they change attitudes, but the perceived future benefits far outweigh the cost.
External Opportunity Analysis
Identifying a company’s external opportunities is part of a greater plan to begin to mold a company’s strategy. There is, however, a distinct difference between industry opportunity and a company’s opportunity. Every company is not equipped with the resources to take advantage of an industry opportunity. Obviously, companies in the same industry are of different sizes and have different strengths. Knowing its own strengths and what market opportunities to pursue can better able a company to grow and prosper.
When analyzing Walgreen Company in aggregate, certain strengths came out leading to promising industry opportunities. According to the National Association of Chain Drug Stores, prescription drugs account for $85 billion of the $150 billion spent on health care products each year (Katz-Stone 2). All over the United States drugstores are growing exponentially. This increase has encouraged Walgreens to take on a growth strategy. Walgreens’ strengths lie in the fact that they are able to expand and serve additional customer markets. In the year 2000, Walgreens plans to spend over $1 billion on new and renovated stores, technology, distribution enhancements, and other improvements (Frederick 3). This expansion will increase Walgreens’ store count by 450 stores. Forty-three states will be covered with the addition of three new states in the year 2000. Also, with the addition of 16 new markets the total comes to 56 markets since the year 1991. These markets have the potential to serve 80 percent of the United States customers (Frederick 3). This growth is a good indication that Walgreens plans to profit from the increase in prescription drug sales by expanding into new markets and increasing its accessibility.
Expansion of a product line helps keep a company one step ahead of the competition. The innovation of the new on-line pharmacy proves that Walgreens is planning to not only keep up with the new technology, but also use it to keep its standing in the market. For the new Internet pharmacy, Walgreens chose Mayo Clinic as its primary health information provider (Lehbar-Friedman 1). Mayo Clinic provides 100 major health topics to the many customers of Walgreen Company. The new Internet pharmacy is called Walgreens.com. Walgreens.com provides customers with a comprehensive list of key features at one online pharmacy site, including: full prescription service, access to your personal Walgreen prescription history, the ability to print prescription expense records, details on potential drug interactions, health and wellness information from Mayo Clinic Health Information, e-mail reminders, prescription order status checks, drug price information, and an Ask Your Pharmacist e-mail section (Lehbar-Friedman 1). Some patients do not like to go to the pharmacy because of privacy issues. Walgreens.com would provide this privacy, as well as quick and easy service. In the spring of 2000, Walgreen Company anticipates offering other non-pharmacy drugstore items for sale though its Web site (http://www.investor.walgreens.com/news/19991027-12222.htr). The future of the Internet may even include the utilization of on-line doctors. This is where technology is predicted to go. The patient would fill out a questionnaire on-line and a physician would review it and decide if a prescription is needed. There is, however, some serious concern for this next wave of growth. If a patient and the physician never have any direct contact, the patient may receive the wrong medication, or fraud may occur and the patient may not be sick at all (Ukens 2). Having said all of this, the Internet poses an opportunity for growth and increased market share.
Focusing on beauty products is yet another opportunity that Walgreen Company plans to pursue. Expansion of product lines and the addition of complementary and related products have proven to be beneficial. The plan is to take advantage of this opportunity by opening stores that feature a larger and more open beauty department. The beauty department currently accounts for eight percent of its drugstore sales (Brookman 1). Walgreen Company accumulated sales of $17.8 billion in 1999, therefore time spent improving on this expansion can prove to be profitable. Given this plan to increase the size of the beauty department, new Walgreens stores are now 1,500 square feet larger than the older stores. In the early 1990s the stores size averaged 13,000 square feet, but with the tremendous drugstore growth, the stores average 14,500 square feet (Bookman 1). With this added space, Walgreen Company has increased the size of the aisles to make a more comfortable environment. Renovating the beauty section of the store has also included repainting the walls with brighter colors and making the area more pleasant. The older store incorporated brown colors and had canopies overshadowing the department (Brookman 2). With all of the improvements, Walgreens is already beginning to notice an increase in sales. In fact, for the month of March (2000), its same-store sales increased eight percent, while total sales for the month rose 15.8 percent (Brookman 2). Walgreen Company calls the strategy implemented for these improvements “basic department management” (Brookman 2).
On the Internet, opportunities lie at every turn. On April 4, 2000, Walgreen Company is joining The WorldWide Retail Exchange. Along with eleven other large famous retail chains, The WorldWide Retail Exchange operates more than 30,000 stores, with combined sales of more than $300 billion. This new merger will be a web-based marketplace, enabling transactions between retailers operating in the food, general merchandise and drugstore sectors. It will be an open exchange and will provide an information highway for publicly available information about items with private price and promotion information between multiple buyers and sellers. The exchange also will provide the means for auctioning products. Walgreens is joining, as a founder, along with Albertson’s (US), Auchan (France), Casino (France), CVS (US), Kingfisher (UK), K-Mart (US), Marks & Spencer (UK), Royal Ahold (The Netherlands), Safeway, Inc. (US), Target (US) and Tesco (UK). This venture could bring a huge change to online purchasing. (http://www.walgreens.com/about/press/othernews/040400.jhtr)
With all of the many opportunities out in the industry today, Walgreen Company has remained constant with one solid strategy. This simplistic approach has helped them achieve the success they have today:
Enter new markets
“Dense up” existing markets
Invest heavily in high-tech store and distribution systems which drive service up and costs down
Provide the products that consumers want and need and get them in and out of the store quickly
Explore international opportunities
Offer an online drugstore web site totally integrated with our retail stores
In contrast to the industry and the competition, Walgreens focuses on growth by opening new, freestanding locations with drive-through pharmacies. By the year 2010, Walgreen Company plans to have 6,000 stores open. With this and the addition of the new online market, Walgreen Company continues to successfully take advantage of industry opportunities.
External Threat Analysis
A company can get wrapped up in the many opportunities that it may pursue and overlook the external threats bearing down upon them. This slight oversight may compromise a company’s profitability and market standing. Every company has its vulnerable components, but as long as these are known and guarded, a company’s future position is not compromised. Once these threats are analyzed, it is the management’s responsibility to build a strategic plan to remedy the situation.
Although there are many examples of external threats that may occur to a company, Walgreen Company stands on pretty secure ground. The management, though, must always be on the lookout for the entry of new competitors, rising sales of substitute products, slower market growth, adverse government policies, growing competitive pressure, vulnerability to recession and business cycles, the growing bargaining power of customers or suppliers, changing buyer needs and taste, and finally, adverse demographic changes. Walgreen Company has experienced some, but not many of these threats mentioned above.
On May 11, 2000, Walgreen announced that a lawsuit was going to be filed against the Arkansas Department of Human Services due to the fact that they failed to follow federal laws and regulations and acted arbitrarily in developing their new policy towards drugstores (http://www.walgreens.com/about/press/othernews/051100b.jhtr). Arkansas pays chain pharmacies less than independent pharmacies for providing the same services. The state appears to be trying to balance the state’s Medicaid budget through discriminatory pricing. With this discrimination in play, Walgreen receives less than three cents per dollar of sales in the pharmacy department. This large chain store incurs tremendous costs to provide the latest technology and convenient service with the drive through window. Three cents is not enough to cover all of the amenities offered by the chain store. If the court system does not remedy the situation, Walgreens’ pharmacies in Arkansas may be forced to drop out of the state’s Medicaid program. This example of adverse government policies can cause large problems for the Walgreen stores in Arkansas (http://www.walgreens.com/about/press/othernews/051100b.jhtr).
As mentioned earlier, growing competitive pressure can cause a significant external threat that must be watched carefully. An analyst at Cleveland’s Midwest Research, Eric Bosshard, claims, “Rite Aid is getting a little more aggressive about cleaning up and upgrading the acquired stores. Up to that point, the company has under performed.” In 1999, Rite Aid has built 578 new or relocated stores nationwide. The growth plan for this competitor is to construct 250 new stores each year (Roush 1). As Rite Aid fights for market share, Walgreens will become more aggressive to sustain its top position.
Although competitive, Rite Aid is not as much of a threat as Consumer Value Store (CVS). Nationally, CVS is close to overtaking Walgreen. CVS’s 4,100 stores nation- wide outnumber Walgreens’ 3,000 (Cohen 1). Even so, Walgreens’ sales are still larger than those of CVS, but not by much. Being that CVS is ranked the number two drugstore chain, it is hot on the heels of Walgreens. This source of competition is not to be taken lightly. CVS is positioned as a threat that could potentially steal the number one spot from Walgreen Company if they are not careful. Walgreen Company plans to overcome this threat by implementing their growth strategy. The number one drugstore chain is continually searching for new markets and opening new stores.
As far as the other possible threats out there, Walgreens is not worried at the moment. The economy is booming and there are no signs of a recession in the near future. Consumers will always need pharmacies to fill their prescriptions, so as long as the company keeps up with the technology of the Internet and remains customer oriented, they should be fine. The management seems to have done a good job thus far finding and overcoming the threats of the drugstore industry.
Summary of External Opportunities and Threats
The preceding paragraphs explained the opportunities and threats that Walgreen Company has encountered in the recent past and future. If not taken seriously the opportunities could be passed by and the threats could result in the loss of market position or market share. To reiterate:
The industry has a growing number of drugstores. Walgreen Company plans to use a growth strategy to increase the number of stores.
The new on-line pharmacy. Walgreens is keeping up with the technology and plans to provide services on-line for convenience.
The promotion of beauty products. This diversity in products has become very important to the sales revenue of Walgreen Company. Walgreen is taking advantage of that by remodeling the beauty department in all of the stores.
The merging of the eleven companies to form the WorldWide Retail Exchange. This merger will not only create more public awareness, but will also help increase the sales revenue of the company.
Adverse government policies in Arkansas. Walgreen Company is filing a lawsuit against the state to remedy the discriminatory pricing.
The competitive pressures from two strong competitors, Rite Aid and CVS. Focusing on growth and customer convenience, Walgreens plans to remain one step ahead of them.
Walgreen Company is in a good market position. This company keeps a watchful eye on the opportunities and the threats that the external environment can offer. For this reason and more, Walgreen Company remains ranked the number one in the largest drugstore chain, based on the previous 12-month sales.
Internal Strength Analysis
Determining a firm's internal strengths and weaknesses is key to determining where to focus the company's efforts and in determining strategy for the company. The key is to maximize the effects of the strengths of the company and work to fix the deficiencies or weaknesses in the company. A strength is something a company is very good at doing or a characteristic that gives it enhanced competitiveness. (Thompson 1998)
After analyzing Walgreens, following is a list of the key strengths the company has to offer (Charles Schwab, 2000).
Walgreens’ key asset is its financial strength. This is seen by looking at the key ratios that indicate a company's profitability. The managers at Walgreens are successfully converting shareholders' equity, assets, and invested capital into net earnings. This is evident when comparing Walgreens’ financial performance to the industry average. Following is a table outlining Walgreens’ financial performance over the last year compared to the industry.
Walgreens Industry Average
Return on Equity 17.9% (19.7) 12% (18.2)
Return on Assets 10.7% (11.5) 4.7% (9.1)
Return on Invested Capital 17.9% (17.2) 7.2% (14.5)
The key points to note from this graph are that Walgreens:
One year Return on Equity is 49 % higher than the industry average, which may indicate that Walgreens has turned shareholders' equity into profits much better than its competitors have.
One year Return on Assets is 128 % higher than the industry average, which may indicate that Walgreens has used its assets much better than its competitors have.
One year Return on Invested Capital is 148.61% higher than the industry average, which may indicate that Walgreens has made very good use of its debt and equity capital.
All of these points indicate that Walgreens is a strongly managed company with better than average return on invested funds (Market Guide 2000).
Walgreens has been able to take the drugstore concept well beyond only selling drugs. They learned that Americans are willing to pay for products or services that make their lives easier. This philosophy is evident in every aspect of their business: site location, building design, product inventory and point-of-sale technology that is focused on helping time-starved customers find what they want and need and get out.
In 1991 Walgreens pioneered the drive-thru pharmacy. Now more than fifty percent of the stores offer this convenience. They also led the way out of strip centers into freestanding stores and now operate 620 of these stores 24-hours per day (Walgreens 1999 Annual Report).
Walgreens has a long history of financial success. The company has gained prescription market share in all but one of its leading 50 markets within the last 5 years.
In August of 1999, the Chicago-based Walgreen, the largest U.S. retail drugstore chain in terms of revenues and profitability, posted its 26th consecutive year of record sales and earnings. Sales increased 17 percent in fiscal 1999, to $17.8 billion. Earnings before special items advanced 22 percent, to $624 million.
In 1909, the company’s founder, Charles Rudolph Walgreen Sr., purchased one of the busiest drugstores on Chicago’s South Side, and transformed it by constructing an ice cream fountain that featured his own brand of ice cream. The ice cream fountain was the forerunner of the famous Walgreen’s soda fountain, which became the main attraction for customers from the 1920s through the 1950s. People lined up to buy a product that Walgreen invented in the early 1920s: the milkshake. The company has long resisted the merger fever that has spread through the drugstore industry. Instead, Walgreen has stressed internal growth strategies: large-scale infiltration of new markets, relocation of units to freestanding stores, and convenience, including 24-hour operations and drive-through pharmacy service (Walgreens 1999 Annual Report).
Growth Rate of Stores
Walgreens continues to grow faster than the industry or their competitors while maintaining profitability. Following is a chart of one year growth rates for Walgreens and the Drug Store Industry.
Revenue 19.03% 14.17% (18)
Net Income 17.73% (5.7) 2.35% (5.6)
Cash Flow 16.12% 7.09%
Even with their current size, Walgreens continues to outgrow the industry in every major category.
The drugstore market is one of the fastest growing and most consolidated markets in all of retailing. Walgreens has a significant advantage in economy of scale, in the quality and growth of their real estate, use of technology, and trusted brands. They have made use of the Internet and mail order distribution chains and the addition of huge new stores should enable them to steal share and continue to grow faster than the industry.
As of August 31, 1999, Walgreens operated 2,821 drugstores in 39 states and Puerto Rico, with large concentrations of stores in Florida, Illinois and Texas. Internally, the company is growing faster than any other drugstore chain. It opened 386 new or relocated drugstores during fiscal 1999, while closing 114 units. All new stores are freestanding buildings located at major intersections, as opposed to shopping centers and strip malls. Within the past five years, approximately 60 percent of Walgreens’ stores have been opened or remodeled, and more than 50 percent offer drive-through prescription service. Walgreens plans to open 450 units in fiscal 2000, with a goal of 6,000 stores by fiscal 2010. Pharmacy sales account for about 52 percent of total sales. The company, which was already a leading dispenser of prescriptions in the U.S., boosted pharmacy sales 23 percent in fiscal 1999 (with a gain of 19 percent for comparable drugs). Recent technological advances include satellite linkage to all stores and facilities, point-of-sale scanning and implementation of the Strategic Inventory Management System (SIMS), which unites all elements of the purchasing, distribution and sales cycle. This will reduce inventory, improve in-stock positions and provide quicker reaction to sales trends. The Intercom on-line pharmacy system links all stores with headquarters and one another. Healthcare Plus, Walgreens’ pharmacy mail-order subsidiary, offers sales, marketing and operational support for third-party retail and mail-order prescriptions through two facilities. The company has also formed a pharmacy benefits manager, WHP Health Initiatives, targeting small to medium-size employers and HMOs.
There is concern about saturation in the drug retailing industry, prompted by what appears to have been a ramp-up in store openings by the major players. With the exception of Walgreens, the large drug chains have been focusing more on relocation as they aim to get a majority of their store base to freestanding locations. Excluding acquisitions, they have barely increased the number of stores under operation in the last three years. In addition, Eckerds has started a large-scale store-closing program that will free up additional share for the taking (Walgreens 1999 Annual Report).
Walgreens has assembled an impressive array of top management officers. David Bernauer is now the President and Chief Operating Officer in the company. He started with Walgreens in 1967 as a pharmacist after graduation from North Dakota State University and has worked his way to the top of the corporation. His depth of experience in store operations, purchasing, finance and technology is unmatched in the chain drugstore industry and his leadership is imperative to maintaining the competitive edge as Walgreens grows to 6,000 stores by the year 2010.
Internal Weakness Analysis
An internal weakness is something the company lacks or does poorly. This will put them at a disadvantage in the marketplace. (Thompson 1998) After analyzing Walgreens, there were a few key weaknesses we found in the company and they are summarized below.
Supply of Pharmacists
Walgreens has a very aggressive growth strategy in the next decade with a goal of growing from 3000 stores in 2000 to 6000 stores in 2010. To attain this growth they will need to heavily recruit new pharmacists and develop programs to retain these people. This is especially true with the current tight labor market.
Lack of Employees
To meet their new store opening schedule, Walgreens will need 80 new district managers, 3000 store managers, 6500 executive assistant managers, 20,000 management trainees over the next five years, nationwide. At present, Walgreens does not have the management staff in place to fill this need.
In the United States, legal liability is a major threat to any business, especially one that is involved in dispensing drugs that may cause potentially negative reactions. Walgreens needs to keep abreast of the latest developments in liability laws and needs to adopt internal policies to minimize exposure to lawsuits.
Summary of Internal Strengths and Weaknesses
The preceding paragraphs explained the strengths and weakness of Walgreens. The key is to develop a strategy that will maximize the strengths of the company while minimizing the risks and losses caused by the weaknesses or to craft a strategy that will eliminate the weaknesses in the company. Following is a listing of the company's key attributes.
Walgreens is financially sound and has an excellent return on assets which will be used to fund future growth.
The company is a leader in innovation in the retail drugstore industry. This history of leadership will be the basis for future growth and market penetration.
Walgreens has a solid history in this industry with continued growth and financial success far above the industry average.
Most importantly, Walgreens has assembled a solid team of upper management to guide and direct the company in the future.
To continue growth, Walgreens will need to heavily recruit new pharmacists to fill new openings at the 3000 stores scheduled to open in the next 10 years.
At present, Walgreens does not have the management staff in place to fill personnel requirements for the new stores opening in the next 5 years.
The company will need to proactively purse policies and procedures that will limit the legal liability of the company.
Walgreens is in an excellent position with their current strengths and limited number of weaknesses. The weaknesses they experience are no different than those of their competitors, which should leave them in an excellent market position. The internal attributes should allow them to continue growth and profitability far above their competitors.
Without the financial analysis, the strategic breakdown of Walgreens would not be possible. It is important to analyze Walgreens, as well as the competition to properly gage their true standing. The following paragraphs will portray Walgreens, and where they stand in the drugstore market today.
The liquidity of a company portrays how quickly a company can convert its assets to cash. A firm’s liquidity is important to all users of financial statements because it indicates whether a firm can meet its short-term obligations. For the Walgreen's case, we analyzed the ratios of Inventory Turnover and Current Ratio.
Inventory turnover is another instrument used to measure the liquidity of the company’s inventory. It is calculated by dividing the cost of goods sold by the average inventory.
Inventory Turnover = Cost of Goods Sold
Inventory turnover is stated as the number of times per year a company turns over its inventory. Charles Gibson states that the figures can be misleading when using the beginning and ending inventory for the computation of the average inventory especially if the firm follows a natural business year or faces seasonal fluctuations. The problem, however, can be corrected if monthly balances of inventory are used. (Gibson 1998) For the calculation of this ratio, beginning and ending inventory figures were used.
The following graph shows the inventory turnover for the four companies we analyzed.
Figure 1 - Inventory Turnover
As noted in the bar graph, Walgreens is leading in this category throughout the four years when compared to the other retail drugstores; CVS and Rite Aid. The inventory turnover for drugstore.com was much higher due to their central fulfillment facility. This gives drugstore.com the ability to carry lower inventory levels and demand just-in-time delivery from their suppliers to meet their demands for prescriptions.
The current ratio is another instrument that measures the ability of a firm to pay its short-term debt. It is calculated by dividing the current assets by the current liabilities.
Current Ratio = Current Assets
The current ratio, unlike the working capital ratio, allows for comparisons among companies regardless of their size. As a general guideline, a current ratio of a 2.0 or better is a good indicator when measuring the success of a company. In some industries, a current ratio below the 2.0 guideline is appropriate whereas other industries may require a larger ratio. (Gibson 1998) The following figure illustrates the current ratio for the Walgreens, CVS, Rite Aid, and drugstore.com.
Figure 2 - Current Ratio
When comparing the retail drugstores, Rite Aid has been able to keep their ratio closer to 2 than any other company. This would indicate that Rite Aid has the best ability to pay short-term liabilities. While the current ratio for Walgreens is less than 2, they have demonstrated a better ability to manage financial assets and would easily meet their short-term debts. This low current ratio validates the point Charles Gibson made. “In general, the shorter the operating cycle, the lower the current ratio. The longer the operating cycle, the higher the current ratio.” (Gibson 1998) From the financial analysis (Appendix A), it is shown that Walgreens had the lowest operating cycle, whereas Rite Aid had the highest. CVS continually has the lowest ratio, ranging from 1.6 to 1.3. The value for drugstore.com is the highest, at 8.5 to 3.5, which reflects the high capitalization of their stock.
Long-Term Debt-Paying Ability
There are two essential ways to determine a company’s long-term debt-paying ability. One is to examine the income statement, and the other is to examine the balance sheet. These two statements hold the key to whether the company has the ability to carry long-term debt. The profitability of the firm as well as the amount of debt in relation to the size of the company is important to consider. A large proportion of debt increases the risk of not being able to meet financial obligations. The following ratios will illustrate the long-term debt-paying ability of the companies being analyzed.
Debt / Equity Ratio
The debt/equity ratio is another ratio that determines the company’s long-term debt-paying ability. This ratio also assists creditors in protecting themselves from insolvency. In terms of numbers, the lower the ratio, the better the company’s debt position. The debt/equity ratio can also be compared with other companies and with industry standards, and can be calculated by dividing the total liabilities by the shareholders’ equity.
Debt/Equity Ratio = Total Liabilities
The following figure represents the debt/equity ratio for the four companies analyzed. Four consecutive years have been calculated in order to detect a trend within the ratio.
Figure 3 - Debt / Equity Ratio
For this particular ratio, Walgreens had the best standing, with an average of 0.75. As stated above, the lower the ratio the better the debt position. CVS has been able to improve their position over the last four years while Rite Aid's debt position was the worst performer and showed a dramatic increase in 1999.
Profitability is the company’s ability to generate earnings. Stockholders are very concerned with profitability because they gain their revenues in the form of dividends. Measuring the amount of profit a company makes can also be of use to creditors because it allows them to better judge the ability of the company to repay its debt. Profitability ratios are calculated from values taken from the income statement and the balance sheet. These values should consider all acts of normal operation, excluding discontinued operations, extraordinary items, and cumulative effects of changes in accounting principles. The following ratios will help evaluate the profitability of Walgreens, CVS, Rite Aid, and drugstore.com.
Net Profit Margin
Net profit margin is a basic measure of return on sales. In other words, this ratio evaluates the measure of income dollars generated by every dollar of sales. When judging the four companies, a high net profit margin ratio is favorable. Outside forces may attribute to a lower ratio, but ultimately the higher the ratio the better. To calculate the net profit margin one must divide the net income before minority share of earnings and nonrecurring items by the net sales.
Net Income Before Minority Share of
Net Profit Margin = Earnings and Nonrecurring Items
The following figure compares the net profit margin of the companies analyzed.
Figure 4 - Net Profit Margin
In the last four years, Walgreens has led its competitors in net profit margin. In 1999, the net profit for drugstore.com was -332 percent which is typical for a dot com startup.
Return on Assets
The return on assets is also another means to measure profitability. With this ratio a creditor or an investor can measure how well a company utilizes its assets to create revenue. Since this ratio is based on an average of total assets, the value of the total assets for two consecutive years is needed to calculate this ratio. To calculate the return on assets ratio, the following formula must be used:
Net Income Before Minority Share of
Return on Assets = Earnings and Nonrecurring Items
Average Total Assets
A higher percentage indicates the company’s ability to create a profit by utilizing its assets.
The following figure illustrates the return on assets for the companies analyzed.
Figure 5 - Return on Assets
As seen in the above figure, Walgreens has the highest ratio between 1996 and 1999, with an average of 11.2 percent. In 1999, the return on assets for drugstore.com was -55 percent which is typical for a dot com startup.
Analysis of the Mission Statement
A mission statement is the single most important statement that a company can produce. Also called a strategic vision, this statement encompasses not only what a company is made of, but also forms a viable concept of the company’s future business. This statement should be highly personalized and unique. A company is guided by the strategic vision, therefore it is important not to use generic terminology. There are three simple components to the task of creating a mission statement:
Defining what business the company is presently in.
Deciding on a long-term strategic course for the company to pursue.
Communicating the vision in ways that are clear, exciting, and inspiring.
Only, and only if the mission statement includes these concepts above can the company have grasped the true meaning of a strategic vision. (Thompson, Strickland 28)
Walgreens has done an excellent job of creating their company’s mission statement. As seen below, the mission statement can be several words in length. It usually requires this so that all three concepts are covered. This lengthy statement defines what business the company currently is in; it illustrates what direction in the long run that the company plans to go, and it also uses clear descriptive words to describe the objective of the company.
“To optimize shareholder return on investment by being a growing, innovative, healthcare-oriented, convenient merchandiser; to provide consumer with basic goods and services at fair prices; and to offer employees challenging and rewarding opportunities in work environments where we treat each other with respect and dignity.”
Walgreens mission statement can be broken down into several important parts. As stated earlier, this strategic vision packs a lot of meaning into a few words. The analysis of this statement will help better understand the true vision of the company.
The goal of almost every company is to maximize shareholder return and to maximize profit. The shareholders are very important to the company because they are the ones investing in the ideas and people of the company. Shareholders want to make money. If they are not happy, they will pull their money out and the company will see a decline in their investment.
The next important concept that is seen in this mission statement is the need to be a growing, innovative, healthcare-oriented, convenient merchandiser. As seen throughout this paper, Walgreens is accomplishing each and every one of these tasks. Walgreens' goal is to become the neighborhood pharmacy of choice. Their stores service customers one to two mile radius and focus on the laser shoppers. In 2000, Walgreen Company opened up its 3000th store, and is expected to hit 6000 stores by 2010. Always thinking ahead, Walgreens is keeping up with technology and the times, and staying one step ahead of the competition. Pharmacy and health care sales represent the majority of the revenue coming out of this giant drugstore chain. Lastly, throughout the years, Walgreens has made an effort to revolve its business around convenience to the consumer. Widening the aisles, carrying a wide variety of products, and basically becoming a one-stop shop for customers have accomplished this. Everything is easy to find and time is not wasted in lines. This portion of the vision definitely describes the company Walgreens.
Walgreens targets consumers of all backgrounds. For this reason and more, this company prides itself on keeping services at fair prices. Of course Walgreens must pay for all of the extra amenities that they provide, but keeping that in mind, the company keeps prices fair. Again, Walgreens became successful by thinking of the needs of the consumer.
Employees are one of the most important pieces to the so-called puzzle called a company. If the employees are not happy the service will fall apart. For this reason, Walgreens provides loyalty to their employees, and offers challenging and rewarding opportunities. Respect and dignity will come if the work environment is a happy one.
Judging by the mission statement provided by Walgreens, the management is following these important words right down to the letter. It is so important to keep this strategic vision alive. Walgreens has accomplished, and continues to improve upon each and every one of the points listed in the mission statement. This statement suits the company of Walgreens quite well.
Analysis of Walgreens’ Objectives
As seen earlier, the strategic vision of a company is a very important statement to follow. In order to follow the mission statement, a company must set up objectives. These objectives give a distinct direction for the company to pursue. The experience of countless companies and managers teach that “companies whose managers set objectives for each key result area and then press forward with actions aimed directly at achieving these performance outcomes typically outperform companies whose managers exhibit good intentions, try hard, and hope for the best.” (Thompson and Strickland 36)
The key to setting good objectives involves much in-depth thought. First of all, the objectives must be obtainable. All those goals and objective that are out of a company’s reach are a waste of time. Second, the objectives must include both financial objectives and strategic performance objectives. Third, the objectives of a company can range from long-term to short-term, and from the top level of the company to the bottom level. These simple statements give guidance and help a company continue to push forward in the market.
Walgreen Company lists a set of objectives that it strives to achieve. These guide the mission statement and push the company into the future as the number one drugstore chain. Walgreen does a good job of following these, as you can see below. In these statements, one can find both financial objectives and strategic objectives.
Enter new markets
“Dense up” existing markets
Invest heavily in high-tech store and distribution systems which drive service up and cost down
Explore international opportunities
Offer an online drugstore web site totally integrated with our retail stores
Walgreens is continually opening new stores in new and existing markets. As stated before, this company is fueled by the growth that it exhibits. Walgreens is growing almost exponentially. This number one drugstore chain plans to open its 6000th “brick and mortar” store by the year 2010.
Walgreens is already relocating to corner stores with their own small parking lots. This adds to the convenience that Walgreens provides to the customer. Before, Walgreens were located in selected spaces in strip malls. The move has enabled Walgreens to increase its store size from 13,000 sq.ft. to 14,500 sq.ft. All in all, the objective to relocate is a good one.
Remodeling has become evident in the expansion of the width of the aisles. Also, Walgreens has changed the color scheme and the lighting in the stores. The once dreary store is now one that creates a new, comfortable/exciting ambiance. The aisles are now easier to maneuver in, and items are easier to locate in a short amount of time.
The next objective is one that is of vital importance. First of all, it is important to invest money in something that will produce results. Walgreens must keep up with technology. As stated in the objective, this will not only better service, but will also drive down cost. It is smart for a flourishing company to invest in itself for self-improvement.
Once conquering the existing national market, Walgreens plans to attack international opportunities. For every company that grows at this pace, international growth always comes into play. First, Walgreens must research to see if there is even a market for a drugstore chain internationally. This objective will require the use of major financial backing. A type of decision like this is not one to be taken lightly.
Lastly, Walgreens has jumped feet first into the Internet market. Currently, only the service of the pharmacy is offered on the web site Walgreens.com. Eventually, Walgreens would like to be able to offer other retail items found in their store on this web site. Due to the fact that the Internet is the wave of the future, Walgreens could not pass up an opportunity to ride on that wave. This objective is a smart one that warrants extra attention.
Analyzing the entire strategic vision and the objectives that support that vision, it is obvious that Walgreens has everything under control. Their massive growth proves that the management team is paying close attention to detail of the objectives. If this type of behavior continues, Walgreen has a good chance at remaining the number one drugstore chain indefinitely.
As Walgreens moves into the future, it is important to look at the current strategic direction as well as any alternative strategies. When the massive growth takes place, current strategies may not provide necessary structure for the vision of the future. However, this is not the case for Walgreens. As the number one drugstore chain, Walgreens must continue to expand to remain competitive. The following paragraphs will examine the current strategy, and also take a look at a few alternatives.
Currently, Walgreens is following a definite Growth Strategy. They have successfully implemented this strategy, and have been reaping the rewards based upon the company’s growth in volume of product, revenue, and profit. Walgreens expands into the growth strategy through concentration, rather than diversification. This company has already set the industry standard for a convenient one-stop shop for consumers, and plans to concentrate on the key factors that have landed them on top. As Walgreens continues to build new stores, the strategic vision as well as the concentrated growth strategy will be applied. As the future approaches, it is important to focus on core compenticies, and by concentrating on the current retail strategy Walgreens will benefit. Walgreens does however plan to improve upon the services and selection in the current convenient shopping area, but keep their main focus as a retail drugstore chain. Following are the key advantages in continuing this concentration growth strategy and potential disadvantages.
Advantages (growth concentration):
The main reason to continue with this strategy is momentum. Walgreens has assembled an experienced and educated upper management team to guide the company through a high growth mode. The company currently operates 3000 stores and has set a goal of 6000 stores in operation by 2010. The company's past records of growth and profitability demonstrate that this strategy is effective and deviation from that would be destructive. Additional reasons to continue this strategy include:
Growth will lead to increased market share, which leads to stability, and will make Walgreens a more powerful player in the retail drugstore industry.
As the volume of products expands, so does the economy of scale, which will contribute to higher profit margins.
Growth strategy capitalizes on the shift in the demographics in this country. As the baby boomers near retirement, the requirements for medical and pharmaceutical care increase dramatically.
Disadvantages (growth concentration):
While the future provides a positive outlook for Walgreens, the growth strategy also provides some disadvantages, these include:
Increasing debt to fund store openings. Currently, the company is funding expansion from current revenue and not incurring any additional debt. To reach the store count goal by 2010, however, might involve taking on some debt.
A shortage of employees, especially the pharmacists, is a vital weakness in the growth strategy. Walgreens will have to focus on recruiting and retaining key employees to continue their growth. This is especially important now, when there is a general labor shortage in every market.
An organization straying from set strategies that are based upon the strategic vision and objectives. As a company experiences rapid growth, there is a tendency to lose site of the mission and objectives due to new employees entering the business. The key is to maintain consistent control and train these new employees.
Loss of growth percentage as the company grows in size. The larger a company becomes, the harder it is to maintain a high growth percentage. Currently the company is growing in net income at a rate of 22%, 17%, and 17% for 1999, 1998, and 1997 respectively while growing the percentage of stores by 14%, 12%, and 10% for 1999, 1998, and 1997 respectively. As the company expands, it will be more difficult to maintain these higher percentages and expect growth.
Due to Walgreens past success, the growth concentration strategy discussed above has landed them the number one position in the retail drugstore industry. However, an alternative growth strategy, diversification, is an option, that needs to be analyzed carefully and thoroughly. In the past, Walgreens has prided its company by providing a convenient shopping experience for the consumer. Diversification would shift the focus from the key factors of their success toward that of the new expansion. The disadvantages of diversification outweigh the advantages. Realize that these advantages and disadvantages are specific to Walgreens, and are why Walgreens has chosen to avoid this strategy.
Advantages (growth diversification):
The advantages are as follows:
Due to a shift in the economy and customer demand—a form of protection. One of the main reasons for diversification is to operate in more than one industry. This is crucial if there is a slight chance of an industry failure or decline in the market. This provides protection for a company if concentration is in one market, and the market bottoms out. If a company operates in several different markets, and one should fail, the company has another source of generating revenue.
As a source of growth. If a company currently dominates their present market, sometimes the next step is to diversify and begin to conquer a new market. This can help a company gain recognition, power and create a larger brand name and image.
Disadvantages (growth diversification):
As stated before, there are many disadvantages in diversification. In the case of Walgreens, these disadvantages are the sole reason that they choose not to diversify. The following bullets will illustrate these points:
The large amount of capital required. When diversifying, an enormous amount of capital is required to begin operations in the new market. First research must be done to test the market and determine the feasibility of entrance. Research and development is very expensive, and can put a financial strain on the company. Second, the new product line must be created, manufactured and marketed along with the hiring of new employees. Launching a new product line can cause extensive financial difficulties, and Walgreens is currently operating under low debt. Diversification would require more long-term debt.
Loosing focus on current success. Launching into a new market takes extensive time and effort. Some companies become so engaged in expansion, they lose the focus of their core competencies. Remaining the number one drugstore chain requires consistent hard work. Walgreens’ position in the market is not to be taken as though it can and will not change. Diversification can cause a company to lose the market position for which they worked so hard to establish. With the competition hot on their heels, Walgreens can not afford to take this chance.
There are many areas of diversification from which Walgreens could choose. For example, they could purchase a drug manufacturing company, and begin production of drugs sold at Walgreens. The new growth plan to increase store count could be aided by the purchase of a construction company to begin building new stores. Another area of interest is the creation of a complete superstore, like Wal-Mart. Walgreens could begin selling a complete line of food items, as well as apparel and household items. There are numerous areas that present possibilities for the diversification strategy, but as stated before, Walgreens chooses to remain concentrated. For the many disadvantages listed above, this decision is wise.
A retrenchment strategy indicates that a company is in trouble, and needs a turnaround strategy, divestment strategy or a company liquidation. Poor performance is a possible result of tremendous losses that that have pulled the corporation’s overall financial performance down. Retrenchment strategies involve reducing the company to a smaller number of stores. At this time, Walgreens is flourishing and does not need a retrenchment or turnaround strategy. Since Walgreens is in the growth mode and has no financial strains, this strategy is not applicable.
A stability strategy indicates that a company’s position may be one or several of the following:
The company is not able to keep pace with current business operations
There is a need to improve profitability
The business is experiencing serious internal and external problems of various sorts
Walgreens is stable and profitable, thus there is no need to implement this strategy.
As previously explained, neither the retrenchment nor the stability strategy would provide the most benefit for Walgreens. After analyzing all of the alternatives, the most constructive strategy is the concentrated growth strategy. Walgreens plans to capitalize on the opportunity in the market, and implement the growth strategy. Recommendations to be discussed later in this analysis will help implement this growth strategy.
The core purpose of a competitive strategy is to obtain strategic advantage over the competition. This can be accomplished in several ways. The key to the competitive edge is to win customer loyalty, outshine the competitors and secure a steady position in the market. Walgreens uses a combination of several competitive strategies, because this approach allows them to cover all aspects of their business. The following paragraphs will discuss three competitive strategies used by Walgreens.
Differentiation involves setting a company apart from the competition, by providing an unique product or service combination. This type of strategy is efficient when:
There are many ways to differentiate
Buyer needs/uses are diverse
There are not many using the differentiation strategy (Dr. Ross 2000).
Walgreens differentiation strategy is accomplished through a combination of convenience, quality products and customer service. For example, Walgreens has created a drive-thru pharmacy. This supports the company’s desire to set itself apart from the competition, and serve customers wants and needs. In addition, Walgreens creates an easy one-stop shop so that the consumer may pick up everyday items while waiting for their prescription to be filled. In setting themselves apart, a company can differentiate product oriented research and development, raw materials, the manufacturing process, the distribution systems, and the marketing procedures (Dr. Ross 2000). The differentiation approach to a competitive strategy can cost a substancial amount of money, and the company runs the risk that the consumers will not notice the improvements.
The focus strategy consists of focusing in on one specific part of the entire market. This strategy enables a company to concentrate on a chosen segment of their business. This type of strategy works best when:
There are a distinct group of buyers
Others are not specializing in the market
There is a lack of resources
Some markets are more attractive than others (Dr. Ross 2000).
Walgreens focus is the pharmacy department. This segment of the store accounts for over fifty percent of the stores revenue. Because of this, Walgreens concentrates immensely upon the pharmacy. Factors a company should consider when determining a segment upon which to focus are the size of the department, the growth potential, the size of the competitors, and the markets that must be served (Dr. Ross 2000). Walgreens has taken steps to make sure all the components mentioned above are considered and satisfied.
The reasons mentioned above explain and support Walgreens decision to combine their competitive strategy with differentiation and focus. This combination creates a dangerous strategy for their competitors. After analyzing both strategies, a combination of the two is most beneficial.
The recommended implementations are in congruence with Walgreens continued procession of its current strategic objectives, and the growth concentration strategy. These recommendations are intended to assist Walgreens in meeting its already set objectives in a more efficient and timely manner. They can be easily intertwined into current expansion plans by adding to, not altering or suspending growth and anticipated positive changes.
Offer free makeovers once a month by a professional beauty consultant, and tailor their cosmetic product lines to meet the needs of the surrounding ethnic demographics. People from ethnic backgrounds such as those of African-Americans and Hispanics are an important part of the market segment with needs differing from that of the Caucasian population. Walgreens will use and advertise a specific beauty line each month in congruence with mutually beneficial alliances made with each individual cosmetic company. The cosmetic line used the most frequently will depend on the incentive provided to Walgreens by the cosmetic company. The cost to Walgreen's to hire a beauty consultant will range from $8.50 to $9.00 per hour. Walgreen's may also hire a beauty consultants based upon a flat contract rate of $200.00 to $250.00 per day. According to polled beauty consultants, each customer makeover will take on average 20 to 30 minutes depending upon the degree of makeover and the amount of client consultation provided to the customer. During a typical eight hour day, one beauty consultant will be able to advise 14 to 16 clients. Additionally, each of these customers opting to receive a free makeover from a Walgreens' beauty consultant is expected to generate any where from $15.00 to $150.00 in cosmetics purchases according to according to polled beauty consultants who have extensive customer service and cosmetic sales experience. The increased revenues generated from the sales of cosmetics to customers receiving makeovers will adequately cover the costs of hiring a beauty consultant for customer makeovers. Advertising combined with discount coupons is necessary to bring the female consumer into Walgreens for the makeover sessions. Word of mouth is the fastest and most effective channel of advertisement and the “bring a friend” female attitude will increase store traffic. Although the participants may not buy the advertised products, again this event pulls customers into the store, and often those that would not have entered under normal circumstances which can increase Walgreen's revenues through increased impulse purchases.
Consistently advertise and maintain the superior quality and service provided by the photography development center. Walgreens’ photography development center produces a high quality product, including a one-hour service that has not been advertised to the general public effectively and frequently enough to be recognized. Walgreen's photographic development centers develop approximately 80 to 100 roles of film per day. This is an average of one to two roles of film per customer per day according to information obtained from a neighborhood Walgreen's photographic development center manager. Approximately 40 to 100 customers are entering Walgreen's each day in order to have film developed. The amount of film developed at a given Walgreen's photographic development center corresponds to approximately 40 to 100 customers per day. This increased customer traffic flow through Walgreen's stores via the photography development center creates an increase in impulse purchases, as customers have to walk across the front of the store to reach the department. Also, in addition to the increased revenues obtained from impulse purchases, Walgreen's also recognizes increased revenues when customers elect to have their film developed in Walgreen's one hour photo processing center as opposed to having Walgreen's send the film to an off-site film processing center. On average, Walgreens recognizes 62% more revenue per role of film developed when customers elect to utilize Walgreen's one hour photo processing development center.
Capitalize on the stand-alone store to offer convenient shopping. Along with providing information to help build traffic and boost sales, Walgreens needs to capitalize on its stand-alone store concept. This can be achieved by building its image as a convenient place to stop on the way home from work, whether it is to grab a quick frozen dinner-type meal or a few necessities that are not available at the average convenience store. The customer may not desire to face large crowds and long checkout lines at a grocery store during the after-work rush; yet does not want to feed the family another fast-food type meal. Frozen dinner entrees can be available as part of the front-end merchandise, and extra clerks need to be available to open additional registers during the after-work high-traffic hours. Other impulse purchase items need to be stocked at the front of the store to further boost Walgreens’ image as a convenient place to stop for a quick snack or beverage. Walgreens can occupy a niche between the grocery store and the convenience store in terms of product offerings and quick check-out.
ADD JERRY’S BULLET
In concluding our analysis of Walgreen Company, some key factors warrant a final look. This company has created its 3,000 store empire in 99 years, focusing on customer satisfaction. A history of strong management has been the key component in this consistent expansion. Continuing this pattern of growth has led to the strategic vision of opening 6,000 stores by the year 2010. Current industry conditions make this vision an attainable one. The need for drugstores in this day and age is increasing due to the growing number of adults over 65 years of age. In a time of rapid industry consolidation, Walgreens has chosen to build from the ground up instead of buying out competitors. The idea is to grow faster and capture more market share by staying ahead of the competition.
Walgreens has a solid mission statement and suitable objectives, which are being reached through constant growth and financial and strategic adjustments. With this in mind, additional recommendations to aid continued growth and assist attainment of stated objectives has been provided. Walgreens sets the industry standard by satisfying the objectives listed in the above analysis. The recommendations provided will assist and not hinder the future success of this company. In conclusion, Walgreen Company appears to possess the traits necessary to remain the drugstore industry leader.
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Receives $300 Million Equity Investment.” October 27,1999.
www.riteaid.com. “Rite Aid Announces Restructuring of Corporate Pharmacy
Department.” February 16,2000.
www.riteaid.com. “Rite Aid Named to ‘Business Week 50’ Magazine’s Annual Ranking
of Nation’s Top Performing Companies.” March 24,1998.
www.riteaid.com. “Rite Aid Reports 6.6 Percent Same-Store Sales Increase For May.”
www.walgreens.com/about/history/default.jhtr, June 15, 2000. Walgreens/Page Through
www.walgreens.com/about/history/hist2.jhtr, June 15, 2000. Walgreens/Page Through
www.walgreens.com/about/history/hist3.jhtr, June 15, 2000. Walgreens/Page Through
www.walgreens.com/about/history/hist4.jhtr, June 15, 2000. Walgreens/Page Through
www.walgreens.com/about/history/hist5.jhtr, June 15, 2000. Walgreens/Page Through
www.walgreens.com/about/history/hist6.jhtr, June 15, 2000. Walgreens/Page Through
www.walgreens.com/about/history/hist7.jhtr, June 15, 2000. Walgreens/Page Through
www.walgreens.com/about/press/facts/fact2.jhtr, June 15, 2000. Walgreens/Company
www.walgreens.com/about/press/othernews/040400.jhtr, June 15, 2000.
Walgreens/Walgreens Joins Katie Couric in National Campaign.
www.walgreens.com/about/press/othernews/051100b.jhtr, June 15, 2000.
Walgreens/Walgreens Joins Katie Couric in National Campaign.
Word Count: 17229
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