Like a long-distance runner who sprints the last quarter-mile of a marathon, Walgreen Co. has steadily accelerated its expansion pace as it races to meet its goal of operating 3,000 stores by the year 2000. The nation's leading drug chain-which operated 2,667 drug stores in 36 states and Puerto Rico at the end of its second quarter Feb. 28-is churning out new stores across the country at a breakneck pace of one new store every day.
"We'll exceed our goal of opening 365 stores this fiscal year," said David Bernauer, the 31year Walgreens veteran who became president and chief operating officer in January. "Our push into new markets continues as we lay the groundwork for opening stores in Palm Springs and other Southern California markets later this year, and Atlanta, Baltimore and Salt Lake City in 2000."
Bernauer, who began at Walgreens as a store pharmacist in 1967, rose to the No. 2 spot after years in field and headquarters management in a variety of posts. In the three decades prior to his election as president under chief executive L. Daniel Jorndt, Bernauer played a key role in much of the chain's activity in store expansion, merchandising, finance and technology.
"There's nobody who's been in more spots in our company than our new president," Jorndt said. "He's the father of our Intercom Plus. He did a fantastic job as our chief information officer. Here's someone with store operations experience, purchasing experience, financial experience. I don't know of anybody more qualified at all the operations within our company than Dave Bernauer."
Plenty of potential left
With Bernauer's election, Jorndt as chief executive and Charles R. Walgreen III remaining board chairman, Walgreens is poised to extend its remarkable, sustained assault on the nation's most promising drug store markets.
"Can we get to 3,000 stores by year 2000? Absolutely," said Jorndt. "Sometime in early spring of 2000, we'll open our 3,000th store."
Beyond that, he said, "We will have 6,000 stores by the year 2010. We'll be rolling out 400 new stores starting next year, every year, until further notice."
Going from 6,000 to 10,000 units, however, will be a tougher challenge, Jorndt acknowledged earlier this year. That will force the chain to look outside the U.S. borders for longterm growth. "We'll be international in three years," he said in an interview, while divulging no details about which countries are on the chain's target list.
Walgreens first announced its "3,000 by 2000" target in 1991, when it had 1,700 stores. Since then, its new store construction, relocation and renovation program has not only created a net addition of nearly 1,000 units; it has essentially created a new chainwide store base. Said Jorndt, "Nearly 1,800 of our stores are new since 1994. Retailing is a very competitive business, and we base our whole business on two things: health care and convenience. If you're going to be convenient, you'd better have great locations. If you're going to serve health care, you'd better have fresh, clean, wholesome new stores.
"Over 70 percent of our store base has been opened since 1994," he added. "In 2001, when this company is 100 years old, the average age of a Walgreens store ... will only be 5.7 years. I don't know of any major retailer in America that can say that. This is why we keep plowing money back into this company: to keep it growing, to keep it strong."
This year, Walgreens invested $750 million back into new and relocated stores, new technology and new distribution centers. "We generate a lot of cash flow at this company," Jorndt said. "What do we do with it? Put it back into operations, instead of paying big dividends."
New stores get the lion's share of those capital expenditures, Jorndt noted, but the chain is also pumping hundreds of millions of dollars over the next few years into new and re 1 modeled distribution centers. The result will be a doubling of distribution capacity over the next five years.
"In Wisconsin, we just completed a $70 million remodeling," he reported. "It's now an 800,000-square-foot distribution center. But big isn't important; efficiency is important. We have 33 inbound receiving doors, so we can have 33 trucks unloading simultaneously. We have 25 outbound doors. And we have 14 miles of laser-sorted conveyors that can move merchandise quickly and get it out to our stores."
Besides Madison, Wisc., Walgreens is close to completing the renovation of its Mt. Vernon, Ill., DC. Both now have what he described as leading-edge materials-handling technology.
In addition, said Jorndt, major renovation is set for the chain's Lehigh Valley, Pa., DC, and new $135 million distribution facilities are slated for Florida and Texas.
Along with heavy spending on distribution capacity, said Jorndt, "We're going to spend $100 million-plus every year on technology, to keep improving how we run our stores."
Technology investments continue to pay big dividends for the chain. According to Jorndt, the chain's Strategic Inventory Management System saved nearly $200 million in inventory investment from late 1997 to late 1998. The system, which has undergone constant upgrades since its development nearly a decade ago, allows category managers and merchandise replenishment teams to react quickly to demand cycles. It also automates many reorder functions, speeding reaction to store inventory conditions and reducing out-of-stocks while eliminating the need for a lot of backup inventory in warehouses.
Technology advances at Waigreens also led to the rollout last year of Auto Prefill, which automatically generates prescription reorders for participating patients on maintenance medications. When patients register for the option, the system calculates usage rates and automatically issues a refill on doctor-authorized scripts before the pill bottle is empty. The system then calls to remind the customer to pick up the medication.
Auto Prefill is expected to further free up pharmacists whose time spent on phone calls has already been reduced by as much as 40 percent thanks to the chainwide rollout of Touch-Tone refills, according to the chain.
On the pharmacy care front, the company's pharmacy benefits management subsidiary, Walgreens Health Initiatives, is rolling out a new patient education effort for Chicago-area asthma sufferers in partnership with Glaxo Wellcome's Care Management division. The program, administered in part by clinically trained Walgreens pharmacists, includes classroom instruction, a home study course and even an interactive telephone program for patients.
Walgreens' PBM has also opened three pharmaceutical care centers, whose aim is to monitor patient compliance, refill conversion rates and drug substitution rates through the chain's Intercom Plus patient database.
Walgreens also continues the aggressive expansion of its drive-through pharmacy windows, which Jorndt said will be in place in 80 percent of stores by 2001. Walgreens also completed the rollout of one-hour photo labs chainwide in 1998.
Halting the margin slide
Walgreens' aggressive growth program is an outgrowth of its ability to generate continuing sales and earnings momentum from a steady stream of new, maturing and older stores--and its willingness to close and relocate stores that no longer fit its criteria for sales, profitability or location convenience. The past year has seen an uninterrupted string of record-breaking sales and earnings performances each quarter, with total sales up 14.5 percent in fiscal 1998, to $15.3 billion, and net earnings growing 17.2 percent to $511 million. Fully half the chain's sales, 50 percent, were generated by prescriptions in the fiscal year ended Aug. 31, 1998, compared with 47 percent of sales in fiscal '97.
Walgreens' steadily rising momentum continues in fiscal 1999. Sales for the first half rose 14.6 percent to $4.7 billion, with same-store sales up 9.4 percent. First-half profits jumped 17.6 percent to $304 million. Helping to strengthen the bottom line has been "spreading our headquarter expenses over a larger sales base," according to Jorndt, as well as new technology that lowers operating costs. Said the chief executive, "Expense control is benefiting from systems like Intercom Plus [Walgreens' enhanced pharmacy computer system, which further automates workflow and speeds prescription authorization and accuracy checks], which is steadily lowering our filling cost per prescription."
Thanks to Intercom Plus and a firm line with third party plan negotiators, pharmacy gross margins have also stabilized after years of decline at the hands of managed care payers, said Jorndt. Walgreens, he said, has walked away from at least a half-dozen pharmacy contract plans since the beginning of fiscal 1998 after plan negotiators refused to budge on reimbursement rates; since then, he said, some have come hack with a sweeter contract.
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