Walgreens is closing over 1,000 under-performing stores in an attempt to turn the company around.
Can they save themselves or is it too late?
In this segment of Business Breakdowns, Namaan and Jenny Rae dissect Walgreens' struggles, explore potential turnaround strategies, and debate whether the brand can reclaim its footing.
Can Walgreens script a comeback story, or is this the beginning of the end? Tune in to find out.
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Episode Links
- More Business Breakdowns
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More About Walgreens
- Walgreens.com
- Walgreens Investor Relations Site
- Walgreens financial documents (10-K)
Transcription:
Well, we're going to dive into this big business breakdown on Walgreens, formerly known as Walgreens Boots Alliance.
So WBA and Walgreens integrate retail with healthcare services.
And so for those of you who maybe aren't familiar with Walgreens or need a little bit of a refresher, Walgreens has a business model that includes 3 segments, pharmacy, retail and wholesale.
0:29
And I'm going to ask Jenny Rae to go over some of the high level stats in just a minute, but let me just define these three segments so we're all on the same page.
So the pharmacy segment of Walgreens business sells prescription drugs and provides pharmacy related services.
I think what's important for everybody to know here is that it's 63% of Walgreens total revenue.
0:49
So almost 2/3 of Walgreens revenue comes from its pharmacy segment.
Walgreens also has a retail segment, so they sell healthcare and other retail products including non prescription drugs, beauty products, toiletries, general merchandise.
I think all of us probably have been inside of a Walgreens.
1:06
We know that there's a wide selection of merchandise available to buy just over the counter and that the retail segment of Walgreens business accounts for 23% of its annual revenue.
So about 1/4 of its revenue comes from retail and then the remaining 15% of Walgreens revenue comes from its wholesale and other line of business.
1:27
So it's wholesale, excuse me, it's wholesale line of business was formed just five years ago in partnership with McKesson, right?
And so Walgreens owns a 70% controlling equity interest in this kind of combined wholesale business.
And I think we all know that a wholesale business is just kind of selling, holding, distributing products that are many products that are manufactured by other manufacturers.
1:54
And so Walgreens is getting into in the last five years this wholesale business as well.
And then kind of the other part of Walgreens business refers to its technology enabled care model.
So Walgreens offers clinical programs, it collaborates strategically with other businesses inside of the Walgreens Boots kind of portfolio to provide healthcare services.
2:17
So Walgreens does a lot, but as we've seen, 2/3 of its revenue is driven by its pharmacy segment.
And so with that Jenny Rae, I'll turn things over to you.
The company combines a really robust physical store network with a digital platform, right?
2:33
It employs a multi channel strategy.
We'll get into that.
But before we do, can you talk to us a little, a little bit about the P&L?
Sure.
So Namaan, this is a tough business.
I think that's just the first important thing to say, right?
2:48
The business for the fiscal year that ended August 31st lost money for the second year in a row.
And so just kind of kicking it off, recognizing that this is a really hard business, I think is important on sales of $148 billion, the gross profit was $27 billion, which is going to give us a really immediate clue into what kind of business we're operating here.
3:15
But then they managed to turn that $27 billion and, and, and make it into a loss, a $14 billion annual operating income loss.
You know, Walgreens has an unbelievable store footprint, one of the strongest in the world, over 8 1/2 thousand US stores.
3:34
And they don't actually cite their international stores.
They say several 1000, but we can assume that it's on approximately around 50% of the scale.
But it's again like you'd have to do a little bit more of a back of the envelope than we did for this specific call.
Certainly if we were working with, you know, somewhat in the sector, we would do a much deeper dive on that.
3:55
They have store Closings planned because of these operating losses.
And I'm going to just, you know, right away put a, put a note in the sand.
I'm going to just kick off with a hot take, which is I, I think it's necessary.
4:11
And I also think that it is, it's not going to fix the business, right?
Like I, I think that I think it's kind of one of those things where like, yeah, you can't keep bleeding money, so you need to cut off an arm.
But it's a real bummer to lose an arm because you would really like to have an arm later.
4:28
And these store Closings are to me the greatest asset of Walgreens.
And, the problem for me is that they have too many stores open.
The problem is the operating mechanisms inside the stores.
They're like the customer retention process, customer experience and more.
4:45
And so, even though like, yeah, as a business leader, you take that move indefinitely, I don't think that that's your ultimate goal.
Your ultimate goal is not to reduce the size of the Walgreens footprint.
Your ultimate goal is something else.
And we'll talk about something else as we go through it.
5:02
So you want to talk about the business model even though we just gave a giant fat clue when we were talking about the PNL?
Yeah, absolutely.
Jenny Rae, Walgreens is a primarily variable cost driven business and doesn't mean it doesn't have fixed cost.
I think when people think of Walgreens, they think of the massive physical store network and the retail footprint.
5:20
They think, oh, that must be a fixed cost business because of that.
But when you look at the PNL, you find that for every prescription that Walgreens fills, for every transaction that it facilitates, for every product that it sells, there is an incremental cost to that prescription being filled to that product being sold.
5:40
And that is a much larger share of the pie when it comes to Walgreens cost structure then it's fixed cost footprint.
And so Walgreens is a primarily variable cost based business that changes the way you look at the business.
It changes the way that you think about turning the business around and it changes the way that you think about what's important in terms of price versus volume.
6:03
So if I'm a primarily variable cost based business, I'm looking to maximize the revenue that I can from each individual transaction and customer interaction versus just primarily thinking about volume.
And so I think as we move through our discussion today, we'll be thinking more about Walgreens through that variable cost based lens and you'll see how that affects some of the metrics that we've thought about in terms of how to turn this business around.
6:29
So Jenny Rae, I'll let you lead off with your metrics first.
This time, what would you be thinking about as you think about turning Walgreens around?
1st a story.
So the reason I wanted to put Walgreens on our radar is that I went into a Rite Aid recently.
I love Rite Aid's ice cream, even though it's kind of weird and they serve it to you basically in a giant square.
6:50
I love the fact that they have it.
I think that the flavors are delicious.
And my kids and I do ice cream Fridays regularly.
And so that was our choice for Ice Cream Friday.
And when I walked into the Rite Aid, the stores were basically the shelves were empty and, and, and somebody from behind the counter was like, yeah, we're in bankruptcy.
7:07
And honestly, my thought was literally the store looks just about like it normally would.
And y'all are behaving just like you normally would.
So sometimes you can see bankruptcies before they come and sometimes you're just like super unsurprised.
But I wanted to focus on this sector because I wanted to understand what's happening in this space right now and what are the alternatives?
7:28
What are disruptible opportunities inside the space?
And so when I, I think about the three metrics, you know, if I were going to turn Walgreens around, what's this operating loss that they're going after?
They're obviously trying to avoid going down the bankruptcy line, just like Rite Aid I'm currently.
7:45
The number one thing that I think about is repurchase rate.
I'll tell you what, I go to Walgreens only if I have to and it would be a really different customer situation if you are able to get your customers back to Walgreens more frequently.
8:03
So you know, things like finding people opportunities.
They have a ton of seasonal merchandise usually in Walgreens.
About 1/8 of the store is moving seasonally, right?
It's like candy and the swag from Christmas and now it's on to Valentine's Day.
8:22
And then it will move on beyond that.
But like that amount of turnover from your SKU base gives you opportunities to communicate with customers.
But Walgreens doesn't give me an excuse to come in and I try to avoid it at every chance that I can.
8:38
So that's not a great customer situation or opportunity if I'm not bringing my customers into the store and I'm only bringing them in when they have a prescription to fill or when they have something else going on.
So especially on the retail side of the business, which Namaan I, I don't, I, I don't know if you were able to dive into it.
8:57
I tried, but just at the high level with the limited amount of time, I wasn't able to map the revenue to profit percentages.
You know how we've kind of said like, look, if it's membership fees, that's, that just falls straight to the bottom line.
My best guess is that wholesalers are actually our highest margin on this business.
9:16
Usually that's not the case for a wholesale business.
And then I would say retail is next and pharmacy is third.
But I don't know, I don't know that for sure.
And it seems like the attention inside Walgreens is really focused on the pharmacy portion of the business, which leaves this repurchase opportunity on the table for the retail side of the business.
9:42
The second one is basket size.
Yeah, like I do there, there are ways that they've thought about this just in the basics store design, you have to walk all the way to the back of the store, right to get your items.
But when I'm in line at a Walgreens in a drive through, they are not offering me anything.
10:05
And they could and they should, right?
What else can we give you before you walk out of here today?
Here's 5 core items that people are walking out with, right?
There should be a screen for me to interact with because I'm usually waiting for five or seven or 8 minutes.
That time should be used to merchandise the customers.
10:24
And so somebody, you know, in the store ran around and grabbed 14 items for me while I'm waiting to buy something else, increasing my basket size.
When you have a captive customer audience, an audience is an opportunity.
And in a variable cost business, that's what you're trying to do.
10:39
If you're, if you make a margin on every item that you sell me, you're trying to sell me more items and you're trying to figure out which items you're able to get to me.
So if I'm fulfilling something for the cold and flu, like please work for heaven's sake, like offer me, you know, some throat lozenges and.
10:57
You know, a can of chicken over.
The counter, yeah, a can of the chicken soup and over the counter Nyquil and and like, you know, yeah, something something for comfort, something for fun, right.
So I think just increasing basket size is my number two and then the third one is the payer mix.
11:14
So I, I don't want to isolate this because this could be my personal experience, but I own a small business.
My small business, it does not make sense for me to pay for private insurance.
So I use an exchange which basically makes it look too medical providers like I am a cash payer.
11:32
For me.
The experience at Walgreens is not catered to me but I am an amazing customer segment for them.
Like they should want me.
I might be small but I pay every taller that I pay no one else is paying for.
They don't have to submit that claim anywhere and it goes straight to their bottom line and they could charge me 50% less than somebody else and 20% more than their margin and still make money on me because of the ease of that process.
11:59
Well, there's no cash pay prices, there's no price transparency.
They don't really focus on that payer mix.
I think they just kind of are assuming that they're going to get what they get.
And so I think having the opportunity to really target specific payer mixes, especially on the pharmacy side would transfer to the other two metrics that I already mentioned.
12:57
I think those are our great metrics.
They're compelling.
I thought about the business differently and I think we have a little bit of disagreement here, which I love because the first, the first thing that I would focus on is closing underperforming stores.
I agree with you that you cannot cut your way to growth, but I think where Walgreens is at today, they need to stabilize operations and they need to enhance cash flow.
13:17
And I think when you are losing money, that is priority number one.
And the biggest way that you can do that is by closing underperforming stores.
And the way that I define underperformance is stores that have lower revenue today than they did three years ago because I think one of the things you have to do when you think about underperformance is, OK, what does that mean in our business?
13:34
And so the way that I defined it, looking at Walgreens PLN, looking at historical performance is stores that are underperforming relative to where they were three years ago.
I think somewhere north of 70% of the US population lives within a five mile radius of the Walgreens.
There probably is over saturation in terms of Walgreens retail footprint.
13:52
We can afford to close underperforming stores and still retain the accessibility like in local communities that kind of sets us apart from something like maybe an Amazon pharmacy or some other competitors that are springing up and so I.
Agree, by the way, with the principle of that.
14:08
What I was mentioning earlier is like, I think that I, I trust Walgreens not at all to actually execute on this in a way that satisfies customers because yeah, I mean in my city there are three Walgreens.
If you pull me to one, I might still go to Walgreens, but not if my wait time is 3X is long, not if my experience is 3X is poor.
14:29
And so I don't think you get that aggregate benefit until you actually are executing in store well.
And I don't see that from. 100% I, I do think that you need to stabilize your core retail pharmacy operations and they need to rationalize their retail footprint.
And I agree with you, I don't think they're going to do a great job of it, but they like, if I was there, that's what I'd be thinking about too.
14:49
And I would do that first before I focus on reuniting growth.
So closing those underperforming stores, rationalizing that footprint, that would be kind of job number one for me if I was there.
The second thing I'd be thinking about is my wholesale revenue is a percentage of my overall revenue.
15:04
And so wholesale, the wholesale kind of line of business at Walgreens is the fastest growing piece of the pie.
When I looked at historical performance at Walgreens retail and pharmacy, those two segments have been flat for the last two years in terms of revenue.
So like growth is coming from the wholesale side of the business.
15:21
And you're right, that's also where a lot of the margin is coming from.
And so again, just to reorient everybody, wholesale is the business of purchasing, storing and distributing products from manufacturers to customers.
And so I think even if we rationalize and reduce our retail footprint, we still can use that as a competitive advantage and use those locations as distribution hubs.
15:43
And so I'd be thinking about wholesale revenue as a percentage of overall revenue and continuing to accelerate the growth inside of that segment of the business.
The third thing that I'd be looking at is the percentage of my revenue that comes from e-commerce.
And I think this is now where we're starting to get to like the customer experience, right?
16:00
The wait time you were talking about, OK, like we should be looking to increase basket size by offering right throat lozenges with the prescription, right?
I think an easier way to do that is through e-commerce and through kind of AI and machine learning driven recommendations that are automatically kind of populated depending on what you have in your cart.
16:21
And so I think the biggest threat to Walgreens pharmacy business is Amazon Pharmacy.
And so I think that they need to fundamentally rethink some of their business models, right?
And I actually would not be trying to increase foot traffic to bring people back into the stores as much as I'd be focused on growing the percentage of sales that are completed via my app or completed via e-commerce.
16:39
And I would start to think about if I could offer prescription delivery, right?
When I look at the Walgreens consumer, I see a consumer that is typically lower to middle income, right?
And so I think that there's an opportunity there to maybe like to, to capture that consumer away from Amazon.
Like if, if that particular demographic isn't able or willing to pay for a Prime membership.
16:59
And so can I keep their prescription business with me, especially if delivery or a simplified pickup experience is part of the value proposition, right?
And I'm not an expert when it comes to pharmaceutical -like regulations, but I could see Walgreens moving to a concept like Amazon lockers where I can order my prescription through the app.
17:20
I don't have to wait in a 30 minute drive through line.
It's sitting in a secure locker for me.
And I'm sent a code and I can go unlock that locker, pick up my prescription right and leave, right?
Or I can like it, I have been offered other products in my cart, right?
17:37
I've added those to my cart along with my prescription.
My whole order is sitting right in the locker ready for me to pick up, right?
So I'm able to increase my basket size.
I'm also able to increase the convenience factor, right?
And, and I think that's what they're going to have to do if they're going to protect right 2/3 of their business from these upstart competitors that are popping up in the space.
17:59
Let's get in mind, yeah, I think recognizing that the main reason that people go to Walgreens is you're sick and you need a prescription and then the other stuff is gravy.
You cannot refocus your business on why someone else would come into the store.
So when we focus on hot takes, I, I, you know, I really think we're going to see a complete modernization of the customer experience inside the Walgreens.
18:26
And actually I have a way too hot to take that I'm not, I'm not 100% sure is going to happen, but I think there's something on it.
I think you're going to be able to get food somewhere like this.
And I think it's going to be a really simple offering like what like for real milkshakes and hot dogs or something like that.
18:46
But I think like, anytime you have a drive through mechanism, what you're going to think through is how many customers you can process through, but also how much you can get them out the door as they're going through.
And so I thought like, what is something that Costco has Costco pharmacy that that other people don't have?
19:05
They have, you know, you can also grab a hot dog when you're there.
It's like a one stop shop type of item.
And so if I'm going to wait in line for those minutes and I'm thinking about what else I might want to purchase some like limited amount of either Co merchandising where you have a, a Starbucks in the store where you have a like a, a very like lightweight, you know, Dunkin' Donuts or something like that, right?
19:30
Where you're, you're like Co where you're creating these Co reasons for orgs to exist.
I think it would be massive.
And I expect to see probably like 1/3 reduction in skews in store and then a movement toward this increase in basket size.
19:45
But more like bossy recommendations, right, for using AI.
Hey, you're here for this.
You probably also need these three things.
You bought this last Christmas.
You should buy it again this Christmas more and I would love for them to be more intelligent about me.
I think I would spend more money with them if they were.
20:03
I like that.
I had lunch.
I was in Pennsylvania this last week and I had lunch at a Sheetz.
If you don't know Sheets, it's a gas station, right?
So you could, I could certainly see people, yeah, picking up some comfort food as they're picking up their medicine at a Walgreens.
My hot take is a little bit different.
20:18
I think Walgreens is in 2025 going to split from the parent company, and I think they're going to be taken private.
So when you think about private equity in the US, they're sitting on $3 trillion right now of unallocated capital.
That is a hell of a lot of dry powder.
And I think that Walgreens is an attractive target for private equity to come in.
20:37
And going private would give Walgreens the breathing room that it needs to streamline its operations, to cut costs, to reimagine its business model away from the scrutiny of the public markets.
And so my hot take is I think Walgreens is private by the end of this year.
I love it.
20:54
Well, just wrap it up.
This is a tough business when you're trying to, you know, utilize a highly regulated pharmaceutical sector and pharmaceutical service.
You have certain staff requirements that can be really challenging to fulfill.
21:11
You're trying to create a working environment for the staff members, but you're also using 95% of your footprint for something totally different.
I think just to, and I think what both of us are feeling is that Walgreens is unfocused with what it needs to do.
21:27
It hasn't done what it thought it needed to do.
It knew that it needed to grow revenue, but it did it in a way where it didn't focus on that margin growth on the variable cost side.
And so thinking about how we can get everybody who comes into the store to spend more has a different premise than how we acquire new customers.
21:45
And I think just for the season that they're in, Walgreens is ripe for disruptions.
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22:03
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