By Neil Saunders
Walgreens has ended its fiscal year with solid overall numbers, helped by the Rite Aid stores it has added to its portfolio. These boosted overall quarterly sales, which rose by 10.9% over the prior year. On the bottom line, net earnings increased by 88.5%.
While Walgreens’ headline figures are satisfactory, they mask a weaker performance in the retail part of the business. Across retail pharmacy as a whole, comparable sales rose by a modest 0.3%; front-of-store sales, which exclude pharmacy, dropped by 1.9% off the back of a 2.1% decline in the same period last year. This underscores that Walgreens is still falling short of creating a compelling retail offer.
Both Walgreens and CVS suffer from a bias toward healthcare and health services. While we applaud the efforts the companies make in that important arena, there is no reason why they cannot make the same effort in the retail parts of their business. This is especially true for Walgreens, which has the expertise of Boots—unlike US drugstores, there is strong expertise in retail.
We believe retail holds the future key to success for the whole group. The drug and prescription market could become disrupted over the medium term, making traditional drugstores far more reliant on drawing people to their locations with compelling propositions. As it stands, although Walgreens is in a much better position to do this than CVS, it still falls short in a number of areas.
However, Walgreens is starting to make long overdue changes. Trials of a new collection service in partnership with Kroger, which plays to Walgreens’ strength of having a large number of convenient locations, should help drive extra footfall into shops. And the addition of some Kroger convenience food lines to Walgreens should help elevate the food offer.
The rollout of 11 shop-in-shops with Birchbox, in which Walgreens has taken a minority stake, is another example of experimentation. Clearly, the small number of stores mean that this initiative will have no real tangible impact on sales in the near term, but it is a progressive move that, should Walgreens extend it, help the chain elevate its positioning and potential in beauty.
The partnership approach is revealing. It underscores Walgreens’ continued reticence and weakness in beauty. In reality, with the strong brands it has available via the Boots side of the business, Walgreens should be developing its own elevated beauty offer or its own version of a subscription type service. That it isn’t is a major lost opportunity and is one of the reasons why Walgreens continues to lose market share to players like Ulta and Sephora.
One thing we welcome on the retail side is the ongoing review and test of pricing and assortments. The company is trying to localize these with a view to providing an optimized range tailored to the needs of particular catchments. This should help increase relevance and gently improve sales and profit, but it will not, of itself, make Walgreens the destination it needs to become if it is to thrive in retail.
Neil Saunders is managing director of research firm GlobalData Retail.