A SWOT Analysis of Walgreens in the Competitive Pharmacy Marketplace

A SWOT Analysis of Walgreens in the
Competitive Pharmacy Marketplace

Katy Mullis

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Table of Contents

Page
Contact Information .............................................................................................................3
I. Walgreens Overview ........................................................................................................4
II. Strengths..........................................................................................................................5
III. Weaknesses ....................................................................................................................7
IV. Opportunities .................................................................................................................9
V. Threats...........................................................................................................................11
VI. Recommendations........................................................................................................13
VII. Sources .......................................................................................................................14



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Contact Information

Katy Mullis

29724 Main St.
Shedd, OR 97377

Phone: 541-231-4392
mullisk@onid.orst.edu





Dr. Minjeong Kim

College of Health and Human Sciences
Oregon State University
219 Milam Hall
Corvallis, OR 97331-5101

Phone: 541-737-3468
Minjeong.Kim@oregonstate.edu



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I. Overview

Established over a century ago, Walgreens has since grown into a national corporation
with over 5,000 stores (Walgreens Corporation, 2006d). America's top selling drugstore, ahead
of competitors CVS and Rite Aid, Walgreens serves 4 million customers daily and fills 490
million prescriptions every year (Walgreens Corporation, 2006a). Priding itself on innovation
and technology, Walgreens was the first drug store chain to use child resistant prescription
containers and the first drugstore chain to use satellite technology to connect its pharmacy
systems (Walgreens Corporation, 2006b).

Walgreens first began in Chicago in 1901 when pharmacist Charles R. Walgreen
purchased a drugstore where he had once worked. A second store opened in 1909, and seven
years later nine stores were incorporated to form Walgreens Corporation. Walgreens Co.
became a public corporation in 1927, and by 1953 it was the country's leading self-service
retailer (Walgreens Corporation, 2006b). Walgreens now operates in 47 states and Puerto Rico.
The company has long been committed to customer convenience, and in doing so Walgreens
offers items and services beyond those of a typical drugstore. These services include drive-thru
pharmacies and one-hour photo services, and many stores are open 24 hours a day.
Walgreens has traditionally followed an organic growth strategy in order to expand.
More recently, however, it has grown through the acquisition of companies such as the northeast
chain Happy Harry's and Mermark, a specialty pharmacy (Walgreens Corporation, 2006a;
"Walgreen Co. reports...", 2006). The company's continual growth has resulted in consistently
increasing sales and earnings. In 2005 Walgreens had sales of $47.4 billion and the company
generated over $1.5 billion in earnings (Walgreens Corporation, 2006a).
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II. Strengths
As the nation’s leading drugstore in sales, earnings growth, same-store sales increases,
prescription drug market share, and prescription sales per store, and first on the list of Global
Most Admired Companies in the food and drugstore category, Walgreens' position as the market
leader is perhaps its greatest strength (Walgreens Corporation, 2006c; Carpenter, 2004). Its next
closest rival, CVS, trailed Walgreens in sales by nearly $7 billion annually and Walgreens
outsells number three Rite Aid by over $30 billion (Walgreens Corporation, 2006c). The
average Walgreens store fills about 256 prescriptions daily, compared to the average 100
prescriptions filled by independent pharmacies and the average 180 prescriptions filled by other
chain pharmacies (Merrick, 2006). A national presence, Walgreens has established itself as a
known and trusted brand name across the country.
Along with the company's strong market performance, the Walgreens Corporation
continually shows considerable growth. 2006 ended with Walgreens' 32nd consecutive year of
record sales and earnings ("Walgreen Co. reports..., 2006). Walgreens' 2005 sales of $47.4 were
a 12.5% increase over the previous year and over $1.5 billion in earnings were a 15.5% increase
over the previous year (Walgreens Corporation, 2006a). Furthermore, a new Walgreens store
opens approximately every 19 hours (Carpenter, 2004).
Consequently, the Walgreens name carries considerable brand equity as a nationwide
retailer known for quality and convenience. In fact, Walgreens has positioned itself as the
drugstore offering the most convenience (Walgreens Corporation, 2006c). As such, Walgreens
offers drive-thru pharmacies in over 80% of its stores, and nearly 30% of stores are open 24
hours a day (Walgreens Corporation, 2006a). The company strives to offer a merchandise mix in
line with this focus, providing customers with one-stop stopping for not only prescription drugs,
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but also over-the-counter-drugs, health care products, grocery selections, gifts, holiday and
seasonal items, and one-hour photo developing (Biesada, 2006b).
Walgreens is also known for its superior locations. Following an organic growth strategy
has allowed the company to carefully select the locations where it opens new stores (Biesada,
2006b). On the other hand, competitors, such as CVS, have expanded mainly through
acquisitions and have had to make do with the existing locations acquired of stores (Biesada,
2006a). Walgreens stores are usually stand alone locations, which has allowed the company to
easily expand into 24-hour and drive-thru services in recent years (Walgreens Corporation,
2006a). These locations are definitely advantageous to the company, as some estimate that free-
standing stores usually generate more than 30% more in sales than the more traditional strip
center stores (Reeves, 2006). Furthermore, while other competitive strategies can usually be
copied over time, locational advantages cannot. These superior locations offer Walgreens long-
term sustainable competitive advantage (Levy & Weitz, 2004).
As a market leader Walgreens is also committed to leading the way in innovation and
technology. In 1968 Walgreens was the first to use child-resistant prescription containers. In
1981 Walgreens began taking steps to become the first drugstore chain to have its pharmacies
linked by satellite. In 2002 Walgreens began to offer non-English prescription drug labels and
was the first to do so (Walgreens Corporation, 2006b). The company’s continued emphasis on
developing and utilizing technology makes its business more efficient and serves its customers
better.
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III. Weaknesses

While Walgreens it the current market leader, the company's greatest weakness may be
its inability to set itself apart from competitors based upon price. Wal-Mart's recent
announcement that it will sell a month's supply of many generic prescription drugs for only $4,
later matched by Target, exemplifies the impact of large discounters. Following this
announcement by Wal-Mart, who is currently the number four pharmacy provider, the price of
Walgreens stock dropped 11% (Miller, 2006; Patsuris, 2004). While a large company,
Walgreens is not the low-cost leader in the industry and faces serious competition from
discounters, who are willing to accept lower margins on prescription drugs because they can
make up for lost profit in other categories. Walgreens will not match these prices, meaning that
Walgreens has chosen not to compete on price in its most important category.

While Walgreens cannot compete against discounters on price, the company has failed to
fully exploit its main advantage over these retailers, its ability to provide convenience to its
customers. While the company is increasing the presence of 24-hour locations and drive-thru
facilities, the interior layout of a Walgreens store does not always reflect its commitment to
convenience. For example, Walgreens stores in Salem, Oregon, appear crowded with
merchandise, an atmosphere that is contrary to the clean image of fast service that Walgreens
would like to portray. There, upon entering a Walgreens store, one encounters aisles of
merchandise stacked to the ceiling. The first items evident are seasonal merchandise and novelty
goods. Health care items are not readily visible and are located toward the rear of the store. The
actual pharmacy may be located in the farthest corner from the door, without distinct design or
clear signage. As a company that attempts to set itself apart from competitors by being the
drugstore of convenience, this store layout and design directly contradict these goals.
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In stores such as the ones described Walgreens attempts to encourage impulse buying by
creating a deep loop to its core pharmacy and health care items, similar to the way grocery stores
often place milk and other staple goods at the rear of the store. This layout is especially
surprising given that nearly 64% of Walgreens' sales are generated by prescription drugs
(Hoovers, 2005). While this layout does encourage customers to browse other merchandise on
their way to the pharmacy, it does not provide the most convenience for pharmacy customers
who would like to get in and out of the store quickly. On the average trip to a drugstore a
customer will spend only ten minutes in the store, only eight minutes if the trip does not include
a prescription purchase ("SIC 5912...", 2006). Walgreens CEO Jeffrey Rein acknowledged at a
recent conference, "We don't necessarily need to carry everything we carry. In many cases, we
have too many products. The customer is confused" (Anderson, 2006). Furthermore, prototype
Wal-Mart stores are creating a shallow loop by placing the pharmacy counter closer to the
entrance (Troy, 2006). Wal-Mart is also introducing 24-hour pharmacies in some locations
(Patsuris, 2004). If Wal-Mart becomes better able to provide its customers with convenient
pharmacy services, Walgreens may lose its main competitive advantage over the discounter.

Additionally, while Walgreens is the market leader in many categories, it trails CVS in
number of stores. Walgreens has 5,461 stores, while CVS has 6,163 stores (Walgreens
Corporation, 2006d). Walgreens also is not the leading online pharmacy based on number of
website visits, with only 11.38% market share behind both Drugstore.com and
MedcoHealth.com (Greenspan, 2003). While online sales currently account for only a small
percentage of total prescription drug sales, as this category continues to grow, it will become
more important for Walgreens to gain market share.
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IV. Opportunities

Perhaps Walgreens greatest opportunities for increases in sales lie in the changing
composition of the American population. On the verge of a significant demographic shift, the
aging of the Baby Boomer generation will impact no industry more than the pharmaceutical
industry. In fact, Walgreens expects a 30% increase in demand for prescriptions from customers
65 and older in the next few years (Merrick, 2006). For Walgreens, 30% of prescriptions and
42% of prescription sales revenue came from older Americans in 2002, and the population over
50 years of age is expected to grow to 95 million by 2010 ("SIC 5912," 2006). Furthermore,
changes in Medicare plans have benefited Walgreens by making the prices Medicare participants
pay the same no matter where they shop (Merrick, 2006). This dramatic increase in the number
of older Americans will provide Walgreens with an increased demand for prescriptions and the
potential to increase sales and revenue in that category.

Overall demand for prescription drugs is also increasing. Fueled in part by the country's
changing demographics, the demand for prescription drugs is also increasing due to an increase
in the percentage of prescription drugs that are reimbursed by insurance companies and
government programs, new prescription drug choices, and increases in the availability of generic
substitutes ("SIC 5912...", 2006). Increased demand for prescription drugs, Walgreens' largest
category, potentially means increases in sales and profit for the company. This category is
especially important as pharmacy sales rose 12% in the last quarter, significantly more than the
5.2% increase in non-pharmacy sales (Miller, 2006).

Further opportunities for Walgreens lie in international markets. Currently only a
domestic business, as the United States market becomes saturated, Walgreens will be forced to
look internationally for expansion. While government regulations and cultural differences will
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likely prove challenging given the nature of Walgreens' business, international markets provide
significant opportunities for market expansion. Furthermore, competitors, such as CVS and Rite
Aid, have yet to enter international markets. Beating these competitors into international
markets could ensure that Walgreens remains the market leader. Moreover, this would also help
Walgreens stay competitive against large discount chains, such as Wal-Mart, many of which
already have a significant international presence.

Additionally while Walgreens stores currently devote significant space and inventory
investment to their non-pharmacy items, prescription drugs still constitute the majority, nearly
64%, of Walgreens sales (Biesada, 2006b). Walgreens has already recognized the importance of
non-pharmacy items, but has yet to fully realize the impact of sales increases in these categories.
According to the National Association of Chain Drug Stores the greatest growth opportunity for
stores like Walgreens is increasing non-pharmacy purchases that existing shoppers make. This is
especially important given that the number of customers shopping at drug stores is declining, but
those customers are visiting drug stores more frequently. Trips to the drug store are typically
prompted by needs related to prescriptions, beauty items, over-the-counter drugs, and photo
processing, and these categories comprise over 80% of purchases on these trips. However, only
30% of these shoppers make impulse purchases. This leaves enormous potential for Walgreens
to increase impulse buying in its stores. The average non-pharmacy drug store purchase in 2001
was $19.38. Therefore, adding just $2.00 to each purchase increases the average sale by nearly
10% (NACDS/American Greetings Research Council, 2002).
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