Walgreen Is Blurring Reality, Not Retail
Convenience store chain Walgreen says it wants to lead the "blurring of retail channels," expanding on a concept it began a few years ago by selling fresh foods in its stores. After a year of experimentation, it's now taking that idea even further, dubbing its "Well Experience" stores as the next stage in the company's evolution -- but I'm not sure it's any more than form over substance.
While there is a focus on service -- which a visit to my local Walgreen store would show it's in dire need of -- I don't think hand-rolled sushi and sashimi, baristas, or self-serve frozen yogurt will lead customers back. People primarily go to its stores for the pharmacy, and its very public spat with ExpressScripts , which drove customers to CVS and Rite-Aid, has been the real reason for its lackluster performance, not a lack of juice bars.
It said that net sales for the November quarter fell 4.6% primarily because it didn't participate in the ExpressScripts network all year long, but the pharmacy benefits manager was back in the fold for almost the entire quarter. This underscores what CVS said when its rival settled the dispute with the PBM: that it'll be able to keep at least half of the customers it gained from the split. If you had to transfer your prescriptions once, you're not readily going to go through the hassle of doing it a second time, even if you can buy a spicy California roll at the same time.
A wilting wallflower
The change began about a year ago with a new store format that emphasized a somewhat innovative pharmacy layout with expanded health care services. Included were more fresh produce and to-go foods, with beauty supplies, which have always had a large role in the store, gaining an even more prominent presentation. With more than 8,500 stores, it wants to bring those concepts national, going beyond the 400 or so it's already opened.
Yet Walgreen isn't willing to go so far as to bring the pharmacy to the front of the store, knowing all too well that by having the customer traipse to the back wall to pick up their prescriptions, they're also likely to pick up something else along the way. (Kroger, SUPERVALU, and all supermarkets worth their salt do the same thing with milk.) But they are bringing the pharmacist out from behind the counter and have him walking around with tablet PC in hand to discuss your pressing medical questions. There will also be a health care "concierge" who can help you find products, take you to the new in-store clinics, or track down that pharmacist who's gone mobile.
To me that is too reminiscent of CNN's romance with technology that has Wolf Blitzer walking around the news studios talking to holograms. It's sizzle over steak; flash but no fire.
While more choice is usually good news for consumers, investors might want to cast a wary eye. Shoppers already have the choice of everyday low prices at Wal-Mart Stores, higher-end organics offered by Whole Foods Market, or a broad-line crossover at Target, which for a while opted to delay store expansion for the chance to roll out more grocery space to capture those dollars. Seeing Walgreen try to edge its way in doesn't sound so much like a frontal assault on these chains, but rather a nibbling around the periphery.
A prescription for disaster
Prescription sales account for almost two-thirds of Walgreen's revenues, and had they not lost so many customers because of ExpressScripts, it would represent an even greater percentage. But despite the weight front-end sales must now carry, the fractional growth the segment achieved was due merely to more store openings -- no doubt many of them the Well Experience kind -- as same-store sales fell 2% in the quarter. That means expenses are likely to jump for the convenience chain as spoilage for its fresh food grows.
By selling sandwiches, salads, and produce, Walgreen may differentiate itself from CVS and other drugstore convenience centers, but it may be a difference without distinction. Should the idea actually gain traction, it doesn't seem as though it would be difficult for CVS or someone else to replicate it. But with most of your customers just wanting to get their prescriptions filled anyway, CVS might just end up being the one that's defined differently.
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Rich Duprey has no position in any stocks mentioned. The Motley Fool recommends Express Scripts and Whole Foods Market. The Motley Fool owns shares of Express Scripts, SUPERVALU, and Whole Foods Market. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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