Transforming the hedgehog
For years, Wall Street — and customers, too — rewarded Walgreens for being the hedgehog of retail. A homage to the old Aesop fable, unlike the fox, the hedgehog is steady and methodical. And, that’s just how Walgreens operated its business. It didn’t make big acquisitions; it grew organically and built its own stores. It didn’t hire a lot of experts from other fields; it tended to cross-pollinate and promote from within.
For decades, that was the key to its success. And while today the company’s values are very much the same as they have ever been, there is no denying that the hedgehog has grown a bit more nimble. “I wouldn’t say that the hedgehog mentality has been thrown out — I think we are building upon it,” Walgreens president and CEO Greg Wasson told DSN in an exclusive interview. “There are still some things that we do that are very deliberate, where we really pilot [new concepts and ideas] and spend time making sure things work, and then accelerate [from there].”
After all, being the hedgehog is what got Walgreens where it is today — the largest retail pharmacy chain in the United States, with sales of some $72 billion and providing 1-of-every-5 retail prescriptions filled, and on the verge of transforming the business of community pharmacy into a global industry while also transforming the experience of shopping a drug store into something no one has ever imagined — no one but Wasson and his team, that is.
“I think the hedgehog mentality was spot on and quite frankly what made us successful over the last two decades when we were opening drug stores on the best corners in America, to move us from 1,000 stores to the 8,000 we have now. Because of that, we have a tremendous foundation to take this company — and the profession of community pharmacy — forward in an even bigger way.”
What does that mean? For one thing, Walgreens doesn’t even consider itself a drug store anymore. That’s so 20th century. Enter the age of the health and daily living store, embodied in its new Well Experience stores rolling into a number of markets. Right now, there is nothing else like it in retailing. To further elevate the customer experience, this month Walgreens rolled out its new loyalty program, Balance Rewards, which the company has quietly crafted and tested over the last few years. It was one of the very first things Wasson decided Walgreens needed to have to effect the kind of transformation he envisioned for the company.
And it is a good example of how the hedgehog has learned to pick up the pace of innovation when it needs to. “There are times when I don’t think we can stay in hedgehog mode,” Wasson explained. “There are things that we do, where we do have to move things along more quickly. I’d say we’re a little bit of a hybrid.”
Indeed, in the past three years under Wasson’s leadership, Walgreens moved quickly to seize opportunities that helped accelerate its long-term strategic goals. It acquired Duane Reade in 2010 and Drugstore.com in 2011. Most recently, its two-step mega-deal with Alliance Boots (valued at a little more than $16 billion in total), announced in June, redefines its mission. In the United States, Walgreens stores are now destinations for health and daily living located at the corner of “Happy and Healthy.” With Alliance Boots, it becomes a self-described “global pharmacy-led, health and well-being company,” with more than 11,000 locations, each set at the “corner of global reach and local relevance,” as Wasson has explained to analysts.
Indeed, the very nature of the two-step transaction speaks volumes to the “hedgehog hybrid,” Wasson described. It is a classic example of how Walgreens can move fast and still execute in the deliberate manner that has made it successful. The plan is largely for both sides to learn from each other over the next two to three years as the two companies march down the aisle to full completion of the deal, expected some time in 2015. (Details of the transaction provide a six-month window for Walgreens to exercise its option to acquire the remaining 55% of the company beginning two-and-a-half to three years following the initial close of the transaction, which occurred Aug. 2.)
Perhaps nowhere in the company is the “hedgehog hybrid” mentality reflected more than in the makeup of Wasson’s leadership team, which he said reflects “the perfect blend of internal, long-term talent” — like Wasson himself, a 32-year veteran of the company whose career began in the stores — and “external expertise and talent that has helped accelerate the transformation that we’re in the midst of,” he said.
In the three-and-a-half years since Wasson was tabbed for the top job at Walgreens, he has assembled a dream team of sorts, adding top minds from other fields to help inject the company with new thinking, and to look with fresh perspective for new ways to execute its five key growth strategies:
To transform the traditional drug store into a health and daily living destination;
To advance the role community pharmacy plays in health care;
To raise the game on employee engagement and customer service;
To expand access across new markets and channels; and
To focus on costs.
Driving all of this are a couple of undeniable forces that have created an immediate sense of urgency for Walgreens and the community pharmacy industry, in general. Affecting all retailers is the impact of the Internet and e-commerce — convenience and price take a backseat to experience in the brave new world of retail. Certainly, Walgreens’ new Well Experience stores, and the concepts it is testing in its growing number of flagship stores, are redefining content relevance at the local level and producing plenty of retail theater along the way. And its considerable progress in e-commerce has enabled it to cultivate a significant multichannel offering that allows its customers to shop Walgreens in just about any way imaginable.
But Walgreens as a health provider is facing a whole other set of challenges and opportunities. Wasson refers to these as the “push” and “pull” that is driving the transformation of community pharmacy. And, there is no denying that as head of the biggest chain in the industry, and chairman of the National Association of Chain Drug Stores, there is a discernible sense of obligation that Walgreens needs to lead from the front on this one.
“What is evident is that the industry has changed dramatically over the last three to five years,” Wasson explained. “There were both threats and opportunities. One of the threats is just being in health care. [All stakeholders] are going to be forced to reduce costs; continued reimbursement pressure; commoditization, whatever that may look like. … That’s what I call ‘The Push’ — what’s pushing this industry, not only Walgreens, but this entire industry, to step forward and move this profession further along. And being the leader in this industry, as Walgreens, the onus is on us to do that.”
“‘The Pull’ is that, frankly, the nation needs new innovation. And the profession of pharmacy and our presence in 8,000 communities across the country gives us the opportunity to build on that foundation that hedgehog mentality built.”
What does that mean exactly? For years, community pharmacy has talked about advancing the profession, and certainly there has been some important, albeit incremental, change. “We know pharmacists can do much more than they currently are allowed to — we learned that with flu shots and vaccinations/immunizations. Walgreens led the entire community pharmacy industry, and now we’re there — now people think of community pharmacy as the place to go for flu vaccinations.”
Wasson believes that the combination of these early advances and the daunting challenges that lie ahead for the United States — with 32 million newly insured Americans set to be introduced into the health system in 2014 and a nation of hand-wringing payers desperately looking for new answers to old problems — has created a perfect storm in health care. Everything that came before now has led Walgreens and community pharmacy to this one moment to help transform the way patient care is delivered in this country.
“It means expanding the scope of services that community pharmacy can provide — and I want to be clear, I mean community pharmacy — not just community pharmacists,” Wasson explained. “Because community pharmacy encompasses not only the role of pharmacists within the store, but for many of us that are co-locating nurse practitioners and physician assistants, and in some cases, physicians in their stores, it means expanding the scope of services a community pharmacy can provide, and expanding that even further.”
There are signs that the future is already upon us. The state of Massachusetts, which in many ways has been the learning lab for health reform, in August passed a new cost containment law that aims to reduce health spending in the state by some $200 billion over the next 15 years. Among other key measures, the new law expands the services that can be provided in a Massachusetts retail clinic to the full scope of practice for a nurse practitioner, including diagnosis and treatment, management and monitoring of acute and chronic disease, and wellness and preventive services.
“So now all of a sudden in a very convenient location all across the country called community pharmacy, people can get a lot of their healthcare services cost-effectively and with high quality,” Wasson said. “That’s ‘The Pull.’ This nation needs solutions, and we’re ready to step up.”
And now, with the Alliance Boots acquisition, Walgreens has a new opportunity to create new growth opportunities by moving beyond the U.S.-centric view of pharmacy that has defined its business for more than 100 years. The reality is that the problems facing the U.S. healthcare system are very similar to the problems facing western nations throughout the world. By bringing together the two most iconic brands in pharmacy retailing in the world, “you now have the U.S. and the European markets,” Wasson said. “Close to 1 billion people who are aging, the generic wave coming full speed at us, every country in the world trying to control healthcare costs … and what’s the best way to control healthcare costs? To get more people compliant on generic drugs. This sets us up in two of the biggest economies in the world on a global scale, with the opportunity now to expand beyond Europe into Asia and Latin America.”
And that will create new opportunities for Walgreens’ Pharma partners. In many ways, Big Pharma finds itself in a similar chapter in its history. If for years Walgreens’ hedgehog model was premised upon it putting its head down and focusing on delivering new stores to drive topline growth, branded pharmaceutical makers operated on a similar variation on that theme.
“When you think about Pharma, for years their model was pretty consistent,” Wasson said. “They had a pipeline full of blockbusters; they rolled them out, and life was good. Now that pipeline is a little less robust, and they’re looking for new ways to grow their business. One way is to work with new partners in ways that they’ve never worked together before. One example is working with community pharmacy to help people stay more compliant and adherent, to come up with new programs and services.”
Indeed, for branded pharmaceutical companies there can be a lot of money to be had in plugging up the leaky bucket of patient compliance and adherence. Particularly as it relates to specialty pharmacy drugs, a 5% improvement in patient adherence could be worth as much to a drug maker in one year as a brand-new blockbuster drug launch, and without any of the research and development costs.
The growth of specialty and biotech drugs also will create new opportunities to expand the role of the pharmacist. “In a world where pharmacy has proven that pharmacists can inject patients with flu shots, why can’t we begin to do more first-dose injection training?” Wasson posited.
To be sure, its deal with Alliance Boots also will enable it to continue to push the envelope in such areas as store design, beauty and private brand. When you back out the global supply chain implications of the deal, and the massive purchasing synergies that will be created as the combined company becomes the single biggest purchaser of prescriptions in the world, like Duane Reade before it, the Alliance Boots acquisition will be an accelerant to many of Walgreens key strategic goals, particularly, transforming the store and the customer experience.
“Duane Reade had started the new drug store concept, and now you see a lot of that influence coming back to Walgreens and accelerating where we’re headed — the loyalty program, the private brand. … A lot of what we’re doing that acquisition helped to accelerate,” Wasson said.
“When I look at Alliance Boots, I think of it almost the same way — it’s an accelerant. They have innovative store design concepts; they’re a pretty significant player in beauty, where we want to head; they have the leading loyalty program in all of Europe; they have the leading private beauty brand selection in the world,” Wasson said.
And while it’s true that each of these areas is critical to Walgreens’ future growth, creating new reasons for customers to use its stores and ultimately buy more stuff, none is a replacement for its core reason for being. As Walgreens continues to transform the concept of community pharmacy to the health and daily living destination, it is important to remember that none of the heightened focus on front-end business, like beauty and fresh food, come at the exception of pharmacy. “I’ve said this before — our center of gravity is indeed the drug store,” Wasson said. “That’s where we’re focused, and I say that with a whole lot of emphasis and meaning behind it — that is our center of gravity. Everything we do is focused on [bringing] more value to our patients, our partners and our payers.”
By that measure, you can say that the law of gravity still exists — it’s just been transformed somewhat. Just like Walgreens. Walgreens is still the hedgehog of retailing all right, but you better believe it’s a faster, more nimble hedgehog. Like the massive robots from the blockbuster “Transformers” movies that are the theme for this exclusive, special issue of DSN, Walgreens has the ability to transform itself in seemingly endless configurations to create innovative solutions for patients and payers.
In the pages ahead, DSN examines the massive transformation that is occurring at Walgreens throughout just about every aspect of its operation.