Walgreens Drug Stores sees good medicine in Colorado Springs, building four new stores in the past two years with another planned to open this spring at Murray Avenue and Platt Boulevard.
Each store, which represents a $3 million-$4 million start-up investment, is part of a high-growth strategy that pits its local-convenience marketing strategy against one-stop superstores. Walgreen’s is on pace to build 6,000 new stores by 2010. It opened about 475 stores in 2001—for a total 3,520 stores—and expects to open another 475 in 2002. Next year’s capital expenditures are projected at $1.3 billion, including stores, new distribution centers in Florida, Ohio, and Texas (another is planned for 2004 in Southern California), plus new technology.
Walgreens reported a net store gain in 2001 of 699 stores, compared to a combined net loss of 334 stores for its closest competitors. Rite-Aid, for example, ended its Colorado Springs presence last summer, part of a corporate management shakeout under stormy financial clouds.
“Our fiscal strength uniquely positions us to grow our store base as planned,” Chairman Dan Jorndt said in his annual report.
Walgreens reported a record $872 million in fiscal-year earnings (up 15.3 percent) on sales of $24.6 billion (up 16.1 percent). Walgreens has reported 27 consecutive years of record financial results
Walgreens spokesman Mike Polzin from the company’s Deerfield, IL, headquarters said additional Colorado Springs properties are being reviewed for new store sites. “I think you’ll see more Walgreens opening in the coming years. We won’t be stopping with these.”
New stores were built at Lexington Avenue and Research Boulevard, Austin Bluffs Parkway and Rangewood Avenue, Platte Avenue and Union Boulevard, and on Powers Boulevard near Constitution Avenue. Stores also were built in Pueblo and Brighton in 2001, bringing the state total to 68—17 of them in Colorado Springs.
Polzin said Walgreens is taking the opposite approach of drug discounter Wal-Mart, which is building about 300 stores annually and has two superstores and a standard store in Colorado Springs and one in Fountain. Most of the new Wal-Marts will be superstores that offer pharmacy along with vision care, haircutting, banking and other services, plus groceries and its massive merchandising offerings.
“Walgreens’ emphasis is on convenience,” Polzin said. “When you need a prescription and one or two items, you don’t want to drive five miles to a super center, park 100 yards away and walk through 100,000 square feet of store to get a few items. We’re trying to put stores in neighborhoods where people live and work.”
Walgreens stores typically have 1- to 2-mile-radius marketing areas and are able to locate stores more closely than larger retail formats. In his annual report, Jorndt said Walgreens reports the most profitable stores are in markets with dense store coverage.
Although prescriptions and healthcare are its mainstays, Walgreens is expanding beyond the typical drug-store one-hour photo, sundries and cosmetics offerings. (Walgreens is second in cosmetic sales only to Wal-Mart, according to the annual report.) Convenience-food items and single-serve drinks are proving lucrative, and Walgreens is test marketing competitively priced private-brand milk and bread products—a category that has demonstrated sales increases nationwide for the chain.
Polzin said most Walgreens use local suppliers and vendors for many product offerings, providing positive local economic impact.
What’s Driving the Growth?
With its plans to build a Walgreens “on every corner,” some analysts have questioned whether the retailer will have more stores than the market will bear. But Walgreens President Dave Bernauer says “absolutely not.”
The United States has an aging population and prescription sales are expected to increase 40 percent by 2006. Drug prescriptions accounted for 57.5 percent of Walgreens’ 2001 sales, up 21 percent over last year.
The National Association of Chain Drug Stores reported four out of every five patients who visit a doctor in the United States leave with a prescription. The association reported prescription-drug sales rose to $132 billion last year, up from $121 billion in 1999 and are projecting sales to rise a further 75 percent by 2005.
Bernauer reported that the rapid Walgreens growth during the past two years has caused logistical stresses, which is why it’s opening the new distribution centers—at a cost of $140 million each. But the company has established “beachheads” in major U.S. markets where it has planned expansion and the next growth phases will be focused on local market needs.
Polzin said ongoing demographic studies and population densities will direct new-store locations, as well as “holes” in marketing-area coverage.
The End of the Independent Pharmacist?
Prescription drug sales are expected to continue increasing because of the aging U.S. population and health insurance benefits to pay for them, which could create a local market big enough for both national chains and independents.
Barry Patterson, pharmacist and owner of two Colorado Springs Medicine Shoppe franchises, said most customers have health insurance, and that often dictates pricing. So lowest-price competition isn’t the primary competitive factor between independents and chain drug stores.
“For me, the biggest thing is competing on service. If I can get a customer in the door, I know they’ll stay,” he said.
He said older patients especially like the personal touch and the professional-pharmacist relationship when it comes to discussing treatments and doctors’ medicinal strategies. Medicine Shoppes primarily offer medicine and healthcare aides and services.
Patterson said independents do have to take a different administrative tact, like being part of a national franchise or other national group to gain economies of scale, have legislative and legal advocacy and other support. However, even as an independent he can use technology for patient care and for pharmacy and business management, which allows him to streamline his operations to compete effectively against the giants.