Walgreens Thinking Smaller to Grow
Walgreens’ CEO Jeffrey Rein says the company is thinking smaller.
Speaking before an audience at the Goldman Sachs’ retail conference last week,
Mr. Rein said the company is considering opening stores smaller than its current
10,000 to 14,000 square-foot units.
“I think you will see in future years more stores that are less sized than
the current prototype,” said Mr. Rein.
The retailer is also looking to reduce the amount of inventory it carries,
with fewer line extensions of analgesics, for example.
We don’t necessarily need to carry everything we carry,” he said. “In many
cases, we have too many products. The customer is confused. We are working on
narrowing that.”
Walgreen, according to a Bloomberg News report, is looking to operate
12,000 stores in the U.S. Mr. Rein said the company is focusing on the Northeast,
the Carolinas, the Southwest and the western U.S. to expand.
Discussion Questions: What does Walgreens’ CEO Jeffrey
Rein’s announcement the company may look to build smaller stores while reducing
inventory in all stores mean in practical terms for the business? Are smaller
stores necessary in areas where space may be limited, such as urban locations
in the Northeast, for example? Will the focus on inventory reduction adversely
affect the retailer’s relationship with vendors?
With about 50% of the prescription sales, or about 35% of total store sales, being done through the drive-thru, it only makes sense that a smaller box will be needed if this trend continues. Fast food restaurants have been moving towards smaller boxes as well, as the drive-thru sales increase. My question is, are inside sales trending down? Perhaps Walgreens can trim back their sales area and co-brand themselves with some in-store clinics.
It’s hard to make money as a low-end variety store. Chain drug stores, like Walgreens, have replaced five and dime stores. The five and dimes were great businesses when they picked up leases for almost nothing during the Great Depression. I doubt Walgreens, CVS, Rite-Aid or anyone else is picking up decent leases lately for almost nothing. Too much of their general merchandise assortment is ultra-low margin (brand-name soda pop and bread, milk, etc.) No one needs this headline: Drug stores need to make money. No one needs this sub-headline: To make money, some margin is needed, not just traffic builders.
The last time I was in Walgreens, they were selling blue jeans for back to school. Meanwhile, I tried to find refill razors and had to go to the grocery store, because they didn’t carry that brand. Somehow that seems wrong to me. So yes, it is smart to adapt a smaller floor plan to expand the business, but I think if they need to cut back on assortment to fit into a smaller locations, there are items they can cut back rather than those relating to their core business.
Smaller is good, and less inventory is good. Most stores carry way too many SKUs. But it is really not about size and inventory, per se. It is about creating a better shopping environment – wider, more open aisles, less confusing/frustrating merchandising choices, etc.
Great retailers are more concerned with relationships with customers and employees than they are with relationships with vendors. Great merchants are always “culling” their inventory and editing their selection to help customers focus and get in and out of their stores, and to make their selection more manageable and understandable for both employees and customers. This also leads to more stock turns and more $ per sq foot. Also, smaller stores that churn out high volume make sense everywhere, not just the crowded Northeast. If Kmart/Sears had this kind of management with their “eye on the ball”, maybe, just maybe, they would have a chance.
I fail to see the danger inherent in acknowledging that expansion plans call for a smaller format. If location analysis determines that insufficient traffic exists to support a larger footprint, what’s the big deal here?
The issue, as I see it, is the methodology employed in determining which product categories to eliminate, in which to limit the breadth of assortment, and in which to limit the depth of the assortment. Those decisions require a complex analysis, for which some very good tools do exist. In addition, the issue of strategic relevance, brand differentiation, and consumer segmentation must be brought into the equation.
As to reducing inventory in existing stores: I’ve not seen their data. As an observer, there are a huge number of choices in almost every major product offering, in terms of both brands and package sizes and delivery modalities. Are all of these really needed? Well, if they contribute effectively to profit, meet turnover or GMROI goals, or are necessary for strategic marketing reasons….yes, they need them all. Intuition says that there are probably a bunch they don’t.
This sounds like a very logical extension of the “convenience store for women” strategy the drug chains are moving toward. Reduce the traditionally HUGE OTC assortment, not to C-store sizes, but less than the 14,000 ft footprint. Handle Rx through either drive-up (but this may not fit urban locations well) or, better yet, a “pick-up service” with fulfillment being done by a central commissary. And stock the front-end with the combination of immediate consumption items and a convenience assortment of traditional grocery that the urban consumer might find very appealing. Sounds like a winner to me.
Walgreens should be commended for their foresight in understanding the affects of aging and the shifting of the population. Knowing their customers and understanding them, along with acknowledging the need for reducing inventories in their existing stores, shows why Walgreens has been so successful.
Smaller stores will allow Walgreens to penetrate deeper into the geographical areas that do not lend themselves to their larger format, thus increasing market share while reducing overall costs.
In addition, reduction in inventory doesn’t have to lead to lost sales, or strain vendor relationships. By managing assortments and shelf facings to individual stores, they will still be successful. Walgreens is smart and is starting and refining a trend that will be followed by others.
Walgreens was among the first drug store chains to explore the idea of free-standing (versus mall-based) units. That was smart. Now, it’s looking at the idea of a smaller footprint that would fit nicely into urban areas — areas which, in a decade or so, will be populated by mobility-constrained seniors and lower income consumers. That’s even smarter.
The strategy of building smaller and in more places reminds me of the joke about the announcement that Starbucks has now opened a new kiosk operation inside a Starbucks.
There are multiple locations that can be served and take advantage of smaller locations and space issues, and the key for them, as it is with Starbucks, is establising the brand identity of these smaller locations so that their customer base is not confused as to expectations. Good strategy, if there is a way to create offerings in conjunction with medical parks, hospitals, recreation areas, real estate opportunities, like assisted living, and so forth. It’s not just an inventory play but an opportunity to fulfill demand before the customer has to make a decision as to where to go.
Smaller stores might be necessary for some areas but, as a strategy, it could be very flawed. If they move down the road of smaller stores and less selection, then they will wind up being no different than a grocery store which has a pharmacy. The strategy starts to shed light that as a company are they are starting to run out of locations. As a result, are they becoming fearful of finding a way to maintain the growth the financial community expects from them?
Another concern is this strategy appears as if they can make a sustainable profit from filling prescriptions and they are not reliant on the front-end to make their bottom-line number. This is a giant gamble, considering how volatile the whole drug market is with “Part D” mail-order, and the continual threat of Congress, to name just a few issues. If I had been a financial analyst at the meeting, I’d have come away from it with a “hold” recommendation on their stock based on what the company is saying.
The main danger here is that Walgreens has established itself as a hugely dominant convenience retailer, and its profits come from those high-margin convenience goods. It is true that in cough/cold and analgesics, to name two, the assortment is bewildering, but the company should be very careful in editing its assortment in other areas. If customers regularly fail to find the convenience items they expect, their rate of visits will drop sharply and average ticket will drop even further.
Found it interesting in the Bloomberg News piece that Jeffrey Rein specifically mentioned Tylenol skus as a example where reductions in inventory could be made. I wonder how McNeil Labs (J&J) feels about being singled out for sku reduction in public? Talk about making friends and influencing people, sheesh.
Walgreens, one of the best and most profitable strategic retailer, is advancing its ‘cluster’ location approach with the inclusion of smaller sized outlets. Makes sense…for all outlets in Walgreens’ ‘cluster’ location concept don’t have to be large sized units.
As for the inventory opportunity, like Wal-Mart, this mega drug and grocery store entity is the tech expert in its category. So, Walgreens is continuing to keep a sharp eye on inventory and turn, as it improves the per shopper profit margin on each trip.
Makes profitable sense to stockholders! Hmmmmmmmmmmmmm
Bigger is not always better. Smaller footprint stores my be the answer in many areas of the country where real estate may be expensive. Additionally, by limiting the brands, Walgreens may be the beneficiary of additional perks and enticements to carry a line of products. Perhaps they will begin making vendors buy shelf space. Do I hear bidding for shelf space? Moreover, it will make vendors work harder, if there are minimum sales dollars required, to remain on the Walgreens shelf.
I know I’m going to be in the minority here, but my experience with Walgreens is that they already have pretty tight constraints on inventory and seem to rotate enough of the store as perishable or seasonal, that they can’t cut much without risking out of stocks…or the perception of them, which is just as bad.
There’s also a much bigger thing to consider. Walgreens has become known for more than drugs and greeting cards. They’re the neighborhood c-store. In fact, I just left my local store and there were no less than 24 cars in the parking lot at 8:00 on a Tuesday night. If they’re smaller, with less variety or smaller departments, they’ll appear (again, perception is reality) to have less. They will no longer meet the….”they’ve got everything I need for a quick in/out trip.” Their proposition depends on it. Running a 9,000 sq ft store is a completely different animal than a 12,000 sq ft store….compare an old school IGA to a 7-Eleven.
Different size stores mean a different business model. It means a new set of skills in category management, staffing and retail management. Why break the model just for the little incremental growth that a set of small stores would bring? Not to mention the question of where that volume is going to come from. Who’s left for Walgreens to buy out or replace?
I just don’t see big things coming from this small move.
I think it’s a good strategy, if you consider the Drug-Convenience model that Walgreens is moving towards. Stocking an array of Categories is the key in this model. In order to achieve this, space management is absolutely important.