It’s a good time to be in the pharmacy business — just ask Walgreen Co. Despite the recession, the $59 billion drugstore chain is on pace to grow its revenues by 7% in fiscal 2009 (down from 9.8% growth a year ago). While other companies were cutting their dividends, Walgreen raised its own in July, for the 34th consecutive year. In spite of reports of people being forced to economize on their medications, it seems the prescription business retains a recession-proof quality.
But Walgreen isn’t standing pat. The company is giving the general-merchandise part of its nearly 7,000 drugstores a makeover, featuring shopper-friendlier shelves and broader selection. More audaciously, Walgreen is setting up walk-in health-care clinics in its drugstores and in companies across the country. More than 700 have been launched so far, and, in the long term, hundreds more are anticipated. (Recently, the company launched a direct pharmacy-benefit purchasing arrangement with Caterpillar.)
Walgreen has also dramatically revamped its management ranks. Since naming Wade D. Miquelon as CFO in May 2008, the company has hired a new CEO, chief marketing officer, chief merchant, and head of health-care services. A veteran of Tyson Foods and Procter & Gamble, the 44-year-old Miquelon recently discussed Walgreen’s ever-expanding presence in the nation’s health-care system.
Your results suggest that times aren’t so bad in the pharmacy world.
We’re not recession-proof, but we have recession resistance. Our prescription business is still pretty strong. We see the economic impact much more in the front of the store — everything but the pharmacy, about a third of our business. People are buying a lot fewer discretionary items and a lot more staples. They’re buying more private-label and less branded merchandise. And they’re using cash and debit cards more and credit cards much less.
Despite your solid sales, Walgreen intends to slow its annual new-store growth to about 3% in 2010. Why?
For a long time we were growing our store base at about 9%, which is about one store every 17 hours. And we were taxing the organization. We were spending so much time trying to open new stores that we weren’t spending enough time on our single greatest value-creation lever: the ability to make our current stores more productive. We can build 7,000 more stores, or we can make our 7,000 [existing] stores more productive. I would argue that with less capital, the place to start is building on these great assets that we have.
How will demographic and health-care trends affect your business?
The population is aging, and as people age they need not only more prescriptions but also more over-the-counter products. So that’s a very good trend for us. There are about 40 million baby boomers entering the senior market over the next decade. Another trend is toward more affordable and accessible health care. We’re well positioned there.
A third trend is toward better outcomes — how to get the best outcome at the best cost. For every dollar spent on health care today, about 13 cents is spent on pharmaceuticals in total. A penny to a penny-and-a-half is gross profit for pharmacy. The [net] profit is significantly less than that. Then you have maybe a penny for managed care and PBMs [pharmacy benefit managers] to take their cut, 2 cents for generic-drug costs, and 7 or 8 cents for branded drugs. All told, this 13 cents represents the biggest opportunity to reduce the other 87 cents of the health-care dollar, because there’s widespread acknowledgment that the cheapest way to lower overall health-care costs is better compliance [with prescription medications].