Walgreens Takes Unfamiliar Route to Growth
By George Anderson
Walgreen Co. has always been proud that it has become the largest drugstore chain in the country through organic growth. It is just that philosophy that makes the announcement Walgreens has acquired Happy Harry’s, a 72 store regional chain with pharmacies in Delaware, Maryland, New Jersey and Pennsylvania, so unusual.
The last major acquisition for Walgreens was 1986, according to a company press release.
“Retail acquisitions are rare for us, but Happy Harry’s presented a unique opportunity and is a solid strategic fit,” said Dave Bernauer, chairman and chief executive officer, Walgreen Co.
Walgreens is not looking to make any major changes at Happy Harry’s, according to its vice president of store operations Frank Grilli.
“We plan to keep the name and look of the stores the same, while over time evaluating the benefits of incorporating or substituting the Walgreens name,” said Mr. Grilli. “The only exceptions to this are the eight stores in Pennsylvania, where the decision has already been made to convert the stores to the Walgreens name because of our stronger branding there.”
Moderator’s Comment: Do you see Walgreen Co.’s purchase of Happy Harry’s as a departure from its organic growth focus and a shift to a more merger and
acquisition approach? Considering its lack of experience in this area, what will Walgreens need to do to successfully integrate Happy Harry’s? –
George Anderson – Moderator
Growing by acquisition always makes sense if the price is right. It isn’t clear from the announcement whether Walgreens got a bargain. Walgreens’ decision on keeping the stores’ identity has enough wiggle room for them to make any change they’d like, anytime.
Any growth plan, if not wisely chosen, can choke a company. Obviously, Walgreens looked into what Happy Harry’s offered them, how the store experience was structured and considered whether or not this fit within the Walgreens prototype, then proceeded based on all information available. Buying out a small chain is much more manageable; you can deal more directly with your new employees, introduce any concept changes to the local market and slowly earn the trust of your loyal customers. Too often, acquisitions involve massive groups of stores in which the take-over cannot be explained or negative situations responded to.
Walgreens’ organic growth strategy is sound so long as it keeps Walgreens ahead of the pace of key competitors. CVS’s market share growth has gotten Walgreens’ attention and thus acquiring Happy Harry’s 72 stores was fortuitous if not organic.
While this may be a different route to growth, is it the new route? That is the true question. Perhaps this was a one time fit or maybe Walgreens is looking at what CVS is doing and saying, lookout…two can play this game.
It will be interesting to look at the future and see if Walgreens has an appetite for further acquisitions.
When you examine Walgreens’ growth and their sales distribution within the stores, you could easily determine that they have become the ‘convenience’ store of choice for many of their customers. That is to say that their ‘center store’ sales and ‘perimeter store’ sales have grown equally as fast if not surpassed prescription sales growth. It would seem to me that this pattern has fueled their growth and has fit into their model of organic growth. The reason for this is likely that through organic growth they have been able to grow stores into the changing demographics in each area.
Could growth through through acquisition have accomplished the same thing? I would presume that to be unlikely. Acquired locations are likely not up to the current demographics in most areas and thus, on the downside of the life cycle for those locations. That is, over time, population and business traffic shifts. Newer locations are strategically placed into growth or into peak demographic and/or current business traffic areas. Acquired locations will never be as current as strategically located organic growth locations based on the most current demographics of each specific area.
A case study of proof of the theory might easily be based on 7-Eleven. One of their issues has been their inability to respond to shifting demographics and business traffic as communities change and shift. Thus, their business growth has not been as prolific as Walgreens or similar competitors. In fact, Walgreens themselves may experience the same issues in out years if there is not a well managed strategic plan that measures this type of activity and plans a means to maintain current. In fact, I believe we’ve discussed a similar topic with 7-Eleven some time ago here.
Store growth is one thing. However, if you aren’t carefully managing replacements and relocations where necessary in your existing base, you may be dragging an anchor and slowing the real potential gains. One might think that Happy Harry’s must have had some very well located stores to meet Walgreens’ requirements of value. If not, they are simply adding to a problem that could be heading off their growth in the future.
It would be very interesting to know the specific criteria used by a company like Walgreens in making a decision of this nature that is seemingly outside of their model. Knowing such would give great insight into why this made sense. Do you think they’d be willing to share? I doubt it! But it would make great conversation for us retail bloggers!
No company wants to be “predictable.” Otherwise, you become a sitting duck for your competition.
Walgreens has a great strategy of growing organically, yet no matter how good it is there will still be times when buying market share makes sense. Southwest Airlines is an example of a company with a very good strategy for organic growth yet even they acquired another airline, Morris Air which gave them market share in some western markets where they had limited presence. Let’s not forget Microsoft as even they have acquired other companies when it’s made sense as a complement to their organic growth strategy.
I agree with Mark; this provides Walgreens reach into a market that Happy Harry’s had a firm foothold within. I believe it complements their strategy and reinforces their goal of being at 7,000 pharmacies by 2007. It is also the second time within about six months that Walgreens has exercised this strategy – they acquired Ohio-based Medic Drug in late 2006.
They continue to be a much-admired drugstore retailer to watch and learn from!
The growth of organics in Walgreens stores is a landmark development. Respected industry observer, Rosanne Roseannadana, advised me that this move to “maxorg” (maximum organics) at Walgreens marks a sea change in green marketing (green, Walgreens, get it?). Given their influence in the pharmaceutical market, Walgreens is sure to pressure the top drug manufacturers to shift the sources of their top sellers to all-organic in the near future. Clandestine reports are now surfacing about the existence of plants that actually produce capsules instead of fruit.
One problem ahead, though, is the use of the term, “maxorg.” It seems that the adult entertainment industry has used it previously. Legal action is ongoing presently.
Even though the stock market hasn’t been kind to Walgreens, it is one of the best consumer researched, marketed, and
strategic minded corporations, with enormous upside.
Smart move to buy, vs. build, in such diverse and tough
markets. Here is where Brand Equity of a corporation can work, Macy’s; for the consumer base to remain. Hmmmmmmmmmm
I think you are seeing the results of multifaceted pressures. Walgreens has experienced a lack of pharmacists. There is a national shortage, according to the recent communication from both CVS and Walgreens.
This may also be a venture to experiment with acquisitions, and Happy Harry’s had strong presence in the market and was a good fit for Walgreens.
Time will tell if this is the beginning of a change in growth models, but I expect WG will always be looking at opportunistic ways to maintain its historical growth.