Walgreen (WAG +0.00%) investors are used to looking at the company from the highly visible vantage point of its drugstores. However, Fools may have to rethink this assumption because Walgreen has taken significant measures to transform its business, creating several significant growth opportunities. Let's look at three primary strategic growth drivers more closely.
Walgreen's long-term growth opportunity
Before going into detail on these long-term profit drivers, some background on how Walgreen changed its course. The first significant change occurred in 2011 when Walgreen sold its pharmacy benefit management, or PBM, business to Catalyst Health Solutions.
The second step occurred when Walgreen embarked on some aggressive deal making in order to expand its business domestically and internationally. The key to its plan was its 2012 purchase of a stake in European drugstore and pharmaceutical wholesaler Alliance Boots. The partnership between Walgreen and Alliance Boots then led them to sign a 10-year agreement with drug distribution company AmerisourceBergen (ABC 0.96%) to distribute drugs to their stores. The deal also gives the two companies the right to buy significant stakes in AmerisourceBergen, and this opportunity sets the scene for Walgreen's growth strategy.http://www.reuters.com/article/2013/03/19/us-amerisourcebergen-walgreens-idUSBRE92I0EP20130319
Walgreen's 3 strategic growth drivers
These deals are an integral part of Walgreen's strategic growth plan. It defines its key drivers as follows:
- Create a so-called "well experience"
- Advance the role of community pharmacy
- Establish an efficient global platform
The "well experience" relates to its front-end-store operations, the most visible part of Walgreen. Not only does the AmerisourceBergen deal allow for more efficient distribution of products, but Walgreen is also able to distribute beauty products from Alliance Boots. Indeed, Walgreen affirmed on its latest conference call that it was pleased with the progress in refining its stores' formats to incorporate health, beauty, and convenience products.
Another key part of this program is its Balance Reward scheme (80 million active members), and with advances in customer-data analytics occurring almost daily, Fools should look to Walgreen to have significant opportunities in the future to tailor its store layouts in line with customer behavior.
The aim of becoming a community pharmacy is producing some tangible changes to Walgreen's stores. Simply put, Walgreen is trying to shift more services in-store and expand its health-care clinics accordingly. CVS Caremark is also following a similar strategy with its minute clinics. The idea is that pharmacies will increasingly provide service for patients with conditions that require ongoing treatments, such as rheumatoid arthritis and diabetes for example. Walgreen is also expanding its immunization program and recorded an impressive 11% increase in vaccinations in the first half of its fiscal year. Demonstrating its commitment to the program, Walgreen plans to add another 100 health-care clinics to its existing 400 in 2014. The AmerisourceBergen deal should allow Walgreen to better distribute drug treatments for these purposes.
The third part -- establishing an efficient global platform -- is arguably the most exciting. So far, Walgreen has consistently generated more synergies than expected from its partnership with Alliance Boots. For example, last year it had expected $125 million to $150 million in cost synergies, but the figure came in at $154 million. For 2014, Walgreen had estimated $350 million to $400 million, but following better-than-expected synergies in the first half, the target was raised to $375 million to $425 million.
In conjunction with the Alliance Boots and AmerisourceBergen partnerships, Walgreen intends to become the largest global purchaser of pharmaceuticals, and the opportunity to generate cost savings with its increased purchasing muscle is significant in future.
The bottom line
All told, the way that Walgreen is transforming its business represents a fundamental shift away from the kind of integrated (PBM+drugstore) business that used to be its focus. Walgreen's partnerships with Alliance Boots and AmerisourceBergen are turning it into a truly global health-care force, while also increasing the operational efficiency and product range in its U.S. drugstores and clinics. It's time to start looking at Walgreen in a different light
