Walgreens' own Rx alters drugstore theme

A hair salon. Salad bar. Vitamin deficiency testing.

Sounds like an eclectic mix for a retailer to have inside one store, especially Walgreen Co. Yet that's part of some upcoming plans, including the hair salon now being tested in a New York store, to help boost the Deerfield-based drugstore chain.

“We're moving from being just a drugstore to a health and daily living destination,” said Joe Magnacca, Walgreen president of daily living products and services.

Building that destination has been in the works for nearly two years, said Magnacca, although the initiatives have been rolling out nearly on a monthly basis during 2012.

Already, Walgreen has established flagship stores in Chicago and Los Angeles that feature multi-levels filled with expanded beauty and health offerings, gourmet and ready-made foods, wines and spirits, backlit shelves, more windows and newly designed checkouts. They continue to tweak the concept and plan to remodel many suburban stores, including one in Wheeling.

And what goes on the shelves and outside the store are just as important. The company launched several initiatives last year, including the Balance Rewards customer loyalty card program, Taylor Swift merchandise, Happy and Health magazine, Ology products free of harmful chemicals, and charging stations for electric cars.

Despite the new look, new products and services, Walgreen sales and net earnings have been slipping, according to reports filed with the U.S. Securities and Exchange Commission.

The most recent filing shows adjusted fiscal 2013 first-quarter net earnings of $553 million, or 58 cents per diluted share, compared with $619 million, or 71 cents per diluted share, in the year-ago same quarter, documents said.

Also, the last available monthly sales report showed November sales of $5.85 billion, a decrease of 3.9 percent from $6.09 billion for the same month the year before.

Walgreen admits it lagged behind what the consumer wanted, including a “missed opportunity” with a loyalty card program, which was introduced later than its competitors.

Customers started in September to enroll in Balance Rewards with a mobile device through the Walgreens app or by scanning the program QR code found on signs in the stores. All 7,900 Walgreens and Duane Reade stores nationwide are participating in Balance Rewards.

“We want to create a very positive experience with a one-on-one relationship with the consumer,” said Magnacca. “We want to connect to the consumer and understand what he or she is looking for.”

That's why Walgreen is pulling out all the stops with new technology with the new loyalty card and for consumers to get more information on products.

And some of those products will include the new Ology brand that boasts of being free of harmful chemicals for baby and personal care as well as household cleaners. About 25 products are in the line now and about 25 more are expected to be launched during 2013, said Magnacca.

The company also is reaching out to popular stars to bring in business as well. In October, Walgreen launched the “Taylor Swift Store at Walgreens,” offering various products from six-time Grammy winner Swift's branded music and merchandise line.

Consumers also will find fewer seasonal items in the aisles while the company tweaks its offerings and provides these newer products, Magnacca said.

“We want the right mix for tomorrow,” he said.

The strategy of launching new products and services isn't new. And Walgreens may have an advantage since its board chairman, James A. Skinner, is McDonald's former CEO.

Years ago, Oak Brook-based McDonald's went through what Walgreens is now experiencing with decreasing sales. After out-of-the-box thinking did not reverse its slowdown, McDonald's shifted its approach. McDonald's went back to basics, concentrating on its strengths rather than on out-of-the-box ideas, and achieved an impressive turnaround followed by years of success, said Phyllis Ezop, president of Ezop and Associates in La Grange Park.

“Perhaps, the chairman's experience can serve as a reminder that tempers tendencies to overdo revolutionary, out-of-the-box innovation at Walgreens,” said Ezop.

As for its newly designed flagship locations, Walgreens is trying many ideas not associated with drugstores and doing them in a big way, proclaiming that the approach is revolutionary, not evolutionary, said Ezop.

“Yet, my 25-plus years of research, as well as research by other experts, finds that the greatest success comes from a more stepwise, evolutionary approach, that builds upon strengths, not from highly revolutionary change,” Ezop said.

Although it may appear to be revolutionary, much of what Walgreens is doing may entail strength-based innovation, which is more evolutionary and more likely to succeed, she said.

“Several of Walgreens recent pursuits are actually in areas where it has previously done business and, thus, may be able to build upon prior expertise and success,” said Ezop. “Years ago, Walgreens stores had soda fountains and lunch counters, a precedent for serving food, smoothies, and malts in its flagship downtown locations. And, although there may still be much to learn about chemical free, Walgreens newly introduced store brands do reflect prior experience selling some related products. Thus, Walgreens may actually be building upon past foundations, which is much more likely to succeed than wildly out-of-the-box revolutionary ideas.”

Walgreens is in a competitive environment where a competitor is as good as, or better than, Walgreens on any given attribute, said David Aron, associate professor of marketing and chairman of the Undergraduate Business Programs at the Brennan School of Business, Dominican University in River Forest.

For example, in terms of convenience, gas stations and station owners are increasingly reliant on revenue from their convenience stores, and these might be even more convenient than Walgreens in areas where most people drive wherever they go. And in our area, of course, Walgreens direct rival CVS is growing quickly, too, said Aron.

In terms of price and selection, add Wal-Mart into this arena. In a radio ad Wal-Mart attacked Walgreens prices directly, to go along with Wal-Mart's TV ad attacks on grocery stores like Jewel. Even prescriptions and basic health care are available just about everywhere, Wal-Mart, Meijer, Target, and grocery stores, many offer things like antibiotics as loss leaders, giving the medicine away or charging very little just to help get shoppers into the store. And Walgreens has a reputation as being high-priced, said Aron.

“They seem to have lost their competitive advantage in many areas, price, convenience, exclusivity, and they need to find a way to get it back before all of their prime brick-and-mortar locations become expensive burdens,” said Aron.