Rein Took Walgreens on Unfamiliar Path
Last week’s announcement that Jeffrey Rein had suddenly resigned as chairman
and chief executive officer at Walgreens has led to speculation that the new
path he had charted for the company – using acquisitions to grow the company
– had been rejected by the company’s board.
Walgreens has long been known for its commitment to organic growth and maintaining
low debt levels as it grew as fast as company profits would take it.
“Jeff went off in much different direction,” Scott Mushkin, managing director
for Jefferies & Co., told Crain’s Chicago Business. “Clearly, there
was concern about the strategy Jeff was following,” he added.
In the just over two years that Mr. Rein led Walgreens, the company took a
different path acquiring businesses, including the specialty pharmacy Option
Care and Take Care, the in-store clinic operator. He also led an unsuccessful
bid for Longs Drug Stores following an offer by rival CVS Caremark.
While Mr. Rein is seen as having departed from the traditional Walgreens’
script, he has supporters.
“He’s played an integral part in making Walgreen a successful drugstore chain,” said
Love Goel, chairman and CEO of growth Ventures Group, told Crain’s.
Discussion Questions: What is your assessment of Walgreens’ direction under
the leadership of Jeffrey Rein the past couple of years? Where do you think
the company has to go now? Should it be searching for a new leader that is
part of the Walgreens’ culture or someone from the outside?
My overall impression of Walgreens and Mr. Rein’s tenure is positive, but I agree with their decision to let him go on his way. Instead of looking into acquisitions and clothing lines, he forgot the fundamental question to ask current and potential Walgreens shoppers, “What do we have now that we can do better?”
Walgreens’ long and profitable history provides a strong platform for the future. With the tremendous strength in Pharma and many convenient store locations, there’s plenty of room for organic growth.
Walgreens would benefit from a sharper shopper marketing focus–eliminating the clutter and mixed-up merchandising, making it easy to locate products, particularly OTC items. Also, a more coherent selection of cosmetics for the in store beauty consultants could support new growth. There are many opportunities here, but execution critical.
There are plenty of pros and cons in this situation, and I think Jeff Rein did some good things. I would point out that in the year ended August 31, Walgreens’ sales climbed 10% and profits 6%, which seems to me to be performance even though the gains were under predictions and lower than what Walgreen has typically generated.
To espouse in-store clinics with a major acquisition appears to me to be a sound move, given the powerful healthcare image that Walgreens has built over the past several decades. Walgreens is a leading factor in this market. On the face of it, OptionCare certainly seems to fit Walgreens’ healthcare franchise by providing a new dimension in pharmacy and healthcare. To say the stores lack excitement or a customer service culture is strictly anecdotal; many people react differently, especially on customer service.
Moreover, the chain drug store industry as a whole has not changed the basic format of its stores for some time. Operationally, Walgreens continues to perform well. However, the Longs initiative, you might say, was a setback. It wasn’t particularly well managed. The Chicago chain put itself in the loser’s corner. If it acquired the stores, it would face regulatory issues, as well as huge costs in adapting the Longs stores to the Walgreens format (and the Longs footprint is completely different). There is a real question relative to how long (and how painful) it would have taken to digest Longs. On the other hand, not getting the stores means some negative (for Walgreens) shifts in market share and ability to dominate markets on the West Coast. And, the move did appear (and probably was) defensive in nature. If Longs was right for Walgreens, the move should have been made right up front, not after the major competitor made and more or less sealed its bid.
It’s reasonable to argue that the Jeffrey Rein era produced mostly positive results at Walgreens. I like the home-grown approach very much because more than any other drug chain, Walgreens offers reasonable in-store consistency in size, appearance, and product mix.
However, the issue I am raising in chain drug overall remains the same: The real cost to do business with Walgreens, CVS, and Rite Aid, is cost prohibitive to most innovative smaller businesses that offer the most innovative new products that would otherwise drive originality, category expansion, and in-store points of differentiation. It goes without saying that this stunts the growth of new companies, however, it also prevents real growth at chain drug, consumer advancement trends, and even competition for the big guns.
Chain Drug needs to find a way to earn profits more on the “sell” rather than relying so heavily on the “buy.” It can be done. I would love to see a new leader step forward in chain drug, in any given entity, who will help to lay out a plan to make that happen.
Needless to say, Walgreens has pursued an expansion strategy for several years that depends on opening a massive number of locations in its markets. These locations may be literally a couple of miles from each other, thus cannibalizing their own business. The acquisition plan by itself continues to have merit as long as the company doesn’t wind up overbuilt.
My bigger issue with Walgreens’ direction has to do with merchandise assortments. Walgreens is trying to be a neighborhood convenience store, not just a pharmacy. It’s increasingly difficult to walk into a Walgreens store and to navigate through all of the “stuff” that distracts from its core mission of pharmacy, health care and HBA. Walgreens’ announced strategy to expand its apparel offering is a perfect example. Does the world really need another purveyor of the kinds of goods you can buy at Old Navy? And what part of Walgreens’ core business needs to shrink in order to make room for cheap t-shirts?
Walgreens should take a page from Best Buy: Be the best retailer in your niche that you can be, and don’t be distracted by irrelevant business even though it may appear to offer higher margins. Enhance your customer service, product knowledge and front-of-store experience…you are in the wellness business, not the variety store business after all.
Walgreens has always been a strong player in the OTC business. Execution at the store level is strong and image and service are consistent among units. But where do we go from here? The only way for pharmacies to thrive is to innovate. Taking a cue from Shoppers Drug Mart, the focus needs to be on high margin high demand items combined with efficient layouts.
As much as I love shopping Walgreens, I must say that the stores and merchandise mix seem a little stale. If I were to rank priorities for Walgreens, I would say internal focus on renovating existing stores needs to be the primary direction for the company, expanding and updating the merchandise is a close second and acquisitions is a distant third. A strong push for healthy living, organics and higher-end cosmetics for the SKU list.
Also, ongoing customer service training should be mandatory for all employees. I asked a clerk in a South Florida location how he felt about working for the company and the response I received was surprising. He mentioned that the only training he received was on his first day almost 2 years ago. That could be a unique situation but it’s still something to consider.
Walgreens has done a nice job of updating the stores that I have seen. Maybe they could have changed their product mix to make it more trendy, but all in all, they have done a nice job. Companies that want to grow have to make bold moves. Mr. Rein tried that. Unfortunately for him, he came in at a bad time for all businesses. His first year, the stock price went up. Over the past year, it has taken a dive like everyone else. The risk he took was taken at the wrong time.
Over the past 5 years, I have seen first-hand the changes that came once Jeff Rein became CEO. So far, I have worked in 5 stores (in 3 cities, in 2 states) and now work at a satellite branch of the corporate offices. Although I never met him personally, I feel I have been with the company long enough and seen it from enough vantage points to have a well-informed opinion of my former co-worker.
Jeff Rein was not afraid of innovation or of saying “yes” to a good idea. Under his leadership, we opened the first of many cutting-edge distribution centers designed to hire mentally and physically disabled folks. We streamlined internal processes that had focused on the wrong things. We implemented initiatives to catch employees “doing things right” and award them prizes, such as free cars for excellent customer service. We enlarged our retail footprint & alleviated some strained health care infrastructure by opening TakeCare clinics in stores and in traveling wellness buses. We advanced green initiatives internally and offered several new environmental alternatives to our customers. I don’t want to divulge all of the things I know (and thus give our competition an edge on our forthcoming rollouts), but let me just say that our company was definately going in the right direction under Mr. Rein.
I fear that Mr. Rein may have been asked to leave the company because people in high places are punishing him for a low short-term output (or stock price) and not giving him a chance to see his longer-term improvements come to fruition. Which is really too bad, because retail pharmacy, like all business, is cyclical and tends to have stronger profits when brand-name prescriptions are introduced and tends to have weaker profits when the general economy goes down (or has added costs related to natural disasters). And considering that Walgreens was outpacing other drugstores and kept debt to a bare minimum even during a down economy, we are in a solid position to take some short-term risks for long-term gain.
And I liked Jeff Rein’s personal management style. He always saw employees as human beings, capable of both brilliance and common sense. While CEO, he made a concerted effort to change the internal dynamic and improve the way supervisors and staff related to each other.
I realize that we are not a perfect company and that we have a lot of work to do to earn and re-earn our customer’s loyalty. I want us take bold steps (instead of follow the status-quo that was laid out for us 30 years ago) to differentiate us. Quite frankly, I believe most customers don’t find any difference between us and our competition. We have a small window of opportunity to do something about that, or we risk being left behind when our competition out-innovates us. I hope our next CEO is as pro-innovation as Jeff Rein was. For that and so many other things, he will be missed.
Mr. Rein did a fairly good job as far as I could tell, but Walgreens needs a better idea of which direction it is headed. The focus should be on the pharmacy since this is the core of its business. It seems that the company is going in way too many directions. The best direction and way to differentiate itself from other companies appears to be that of the specialty pharmacy. CVS is just a successful combination of many different companies. Walgreens edge is that it grows internally. Nevertheless, Walgreens needs to acquire some more businesses in the specialty pharmacy area. The company needs to put the pedal to the metal as far as its take-care clinics go. 400 were supposed to be in operation by the end of this year, but it does not seem that this goal will be met. Why not? 400 worksite health centers were supposed to be in operation as well. That number has not moved in six months. Why not open the new stores with a take care clinic already inside the store instead of retrofitting the old stores? Wouldn’t this be more efficient. Understandably, some of the busier, older stores need to have a clinic added, but why not have them inside some of the newer stores when they’re opened? CVS has 300 more clinics and a huge PBM. Perhaps Walgreens should consider acquiring Medco or Express Scripts? Why would this not help the company? Especially with Walmart’s $4 prescription? Perhaps Walgreens could at least acquire either Medco’s or Express Scripts’ specialty pharmacy? Instead of DHL shipping, how about fax machines and copy machines in the photo department, FedEx/Kinko’s style? Rein was an innovative CEO and one hired within the company. The next CEO should definitely be hired from WITHIN the company as has been done with all prior CEOs. This strategy is what made Walgreens successful.