Walgreen Co. bets future on boomers

CHICAGO -- Ice cream, fast food, optical centers, a travel agency -- there was a time Walgreen Co. had so many businesses that prescription drugs seemed almost an afterthought.

Today, it's all about prescriptions as the drugstore chain expands at a breakneck pace to busy street corners across America. The only other business on its agenda appears to be construction of its own stores.

Opening a new Walgreens about every 19 hours, the company is betting its future more heavily than ever on aging baby boomers -- a generation already largely responsible for an explosion in prescription drug sales even before it hits retirement age.

In the context of that demographic certainty, CVS Corp.'s recent acquisition of Eckerd drugstores, while giving CVS more retail outlets, scarcely dented analysts' assessment that Walgreen is winning the drugstore war.

Still No. 1 in sales and earnings growth, same-store sales, prescription drug market share and prescription sales per store, it is well on the way to becoming the McDonald's of drugstores with 7,000 stores by 2010 en route to a loftier target of 12,000.

"Walgreen is beating the pants off its drugstore competitors," said analyst Tom Goetzinger of Chicago-based Morningstar. Based on both operational efficiency and the speedy pace at which it is building new stores, he said, the company "should continue to leave CVS in the dust."

The CVS purchase of 1,260 Eckerd stores from J.C. Penney Co. gives it the U.S. drugstore lead with more than 5,000 to Walgreen's 4,400. But it also saddles the Rhode Island-based CVS with struggling outlets that will take millions of dollars and up to two years to turn around, according to retail industry analyst Richard Hastings.

"Walgreen shouldn't be worried" about its rival's increased presence in Texas, Florida and several southern states, said Hastings, of the New York-based credit advisory firm Bernard Sands. "Their biggest threat is Wal-Mart and Target stores, not CVS."

Unlike those two retail giants, however, Walgreen remains focused on the pharmacy business that brought it into being and not on selling every product imaginable. It's been that way for the last quarter-century since then-CEO Charles Walgreen III decided to sell off side ventures, including its Globe discount stores, travel agency, optical centers, Sanborns department stores in Mexico and Wag's fast-food restaurants.

The company has flourished for most of its 103-year history despite periodic challenges to its standing atop the drugstore industry. The newest: mail order drug suppliers. Mail orders accounted for 17.2 percent of drugs sold in the United States in 2003, a figure that is steadily rising.

But David Bernauer, CEO since 2002, downplays the threats and recalls all the previous ones that were supposed to doom retail pharmacies since he joined the company in 1966: Kmart and other discount stores, then food-and-drug combination stores, then deep-discount drugstores such as now-defunct Phar-Mor, and now the mail.

"It seems like in our industry you always have to have some nemesis out there, something ahead that's just going to decimate you," Bernauer, 60, said in an interview at company headquarters in Deerfield, Ill. "Mail's going to continue to grow, for sure. But it will top out at some point and not be able to grow any faster than the industry."

Walgreen is moving to claim its share of the new business, introducing 90-day prescriptions in its stores last fall and announcing it won't sign new contracts with drug-benefit-plan providers that require members to get maintenance drugs through the mail.

"Mail order is both a threat and an opportunity for them," said analyst Derek Leckow of Chicago-based Barrington Research Associates. "They've shown in the past they can manage through these threats pretty well."

Walgreen also has a wary eye on Wal-Mart, now No. 4 in the pharmacy business and rising, particularly since Walgreen's own sales of cosmetics and other general merchandise are less stellar than prescriptions. "We're always thinking about how do we compete against the Wal-Marts and the Krogers as much as we're thinking about how do we compete against the CVSes," Bernauer said.

The company has a history as an aggressive competitor, pioneering store format changes such as larger and more profitable freestanding sites, drive-thru pharmacies and 24-hour stores. Walgreen has more 24-hour pharmacies than all its competitors combined, adding 266 over the past year.

The main pharmacy battleground today is the Sun Belt, where a growing and aging population base make the region fertile prescription-drug territory. Walgreen has targeted California, the Carolinas, Florida and Texas along with Washington state for expansion and continues to relocate stores nationwide out of strip malls to stand-alone buildings.

Over a billion cars drive past Walgreens corners every week, according to the company's calculations, and that's by design. Its real estate teams study traffic patterns and form partnerships with developers that enable them to snatch up expensive but desirable sites before they even go on the market.

Sounds like another parallel to McDonald's, whose founder Ray Kroc liked to say that the company's main business was not hamburgers but real estate.

McDonald's comparisons get a smile from Bernauer, but he draws a distinction between the saturated fast-food market and the consolidating drugstore industry. With thousands of independent mom-and-pop stores having closed, the number of U.S. drugstores (55,000) is up just 2 percent from a decade ago. The average store also writes 50 percent more prescriptions than in 1994.

"If you want to know why it seems like there's so many drugstores out there today, it's because you can see them," Bernauer said. "They're on prime corners."

Motorists will spot many more in the years ahead. Walgreens stores write one of every eight U.S. prescriptions, but the company is targeting one in five. Analyst Goetzinger estimates that its pharmacy sales, now 60 percent of revenue, will hit 80 percent in five or six years.

Even 12,000 Walgreens won't be too many, according to Bernauer.

"We've got a private number that's bigger than that," he said, "and I believe that number will continue to grow."