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5 Prescriptions for $1 Billion in Cost Cuts at Walgreen

By Bruce Japsen - Dec 29, 2014 at 1:31PM

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Walgreen this week completes its acquisition of European drugstore chain Alliance Boots, in a deal that involves a commitment to slash expenses as part of a global expansion plan.

On Wednesday, Walgreen Company (WBA 1.30%) will complete its acquisition of major global drug retailer Alliance Boots and make its debut as a new holding company, Walgreens Boots Alliance, on the Nasdaq market under the ticker symbol WBA. Walgreen CEO Greg Wasson is also retiring and handing the company's reins to Italian billionaire and Alliance Boots executive and shareholder Stefano Pessina, on an interim basis.

Walgreen will begin 2015 as the largest drugstore chain in the world, moving into the global marketplace with plans to expand in emerging markets such as China, South America, and beyond. As part of the Alliance Boots deal, executives say they're looking across the company to cut $1 billion in costs as the company forges ahead with global expansion.

Here are five ways Walgreen executives are looking to reduce expenses over the next few years:

1. A reduction in jobs and related overhead is coming at headquarters in the northern Chicago suburb of Deerfield. "We are starting at the corporate level and working our way down to the supply chain, and we're making best efforts to mitigate any impact it may have on delivering service to our customers," CFO Timothy McLevish said on the company's fiscal 2015 first-quarter earnings call last week.

2. Store relocations are potentially in the offering as executives ponder ways to boost operational performance. McLevish said Walgreen's strategy in the past was to "have the best corner or location in any geography" to generate more traffic and higher sales. "In some cases that worked; in some cases it didn't," McLevish said.

3. Redesigns of stores and smaller formats and layouts are possible. "In some locations we would benefit by a smaller format store," McLevish said. And Alex Gourlay, president of customer experience and daily living, said the company wants to make better use of stores by "having the right offer in that locality for the customers who are actually based around that store."

4. Even though Walgreen decided against an "inversion" that would have relocated its headquarters from the northern Chicago suburbs to overseas, new leadership could still have the company looking outside the U.S. for a lower tax rate. It's been reported that Pessina and Wasson clashed over the company's decision against an inversion, which would have reduced Walgreen's corporate taxes by several billion dollars. Walgreen's tax rate of 37.5% in 2013 was almost twice what Switzerland-based Alliance Boots paid that year.

5. There will be store closures, and there could be changes to location leases. While Walgreen doesn't expect large numbers of store closures, executives have stated that they are looking "to renegotiate leases," McLevish said.

With 8,230 drugstores in all 50 states, the District of Columbia, Puerto Rico, and the U.S. Virgin Islands, Walgreen has more retail pharmacies than chief rival CVS Health. Even after the major reduction in expenses, Walgreen is expected to remain the largest U.S. drugstore chain and to be poised to expand its global reach in the future. 

Bruce Japsen has no position in any stocks mentioned. The Motley Fool recommends CVS Health. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Walgreens Boots Alliance, Inc. Stock Quote
Walgreens Boots Alliance, Inc.
$40.59 (1.30%) $0.52
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CVS Health Corporation
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