<<

. 34
( 39 .)



>>

said. “From what little research you could do in those days, Walgreens
looked like the best choice of drugstore chains in the Midwest you could
work for.”
During a single month”June 1967”Bernauer left the bucolic, footloose
lifestyle of a college student so fast he risked getting whiplash. On June 3,
he graduated from NDSU with a bachelor™s in pharmacy. One week later,
on June 10, he married his college sweetheart, Mary. On June 19, he started
his 36-year career at Walgreens as a pharmacist in Milwaukee. Then, “as
near as I can figure,” he said with a sheepish grin, “my son was conceived on
June 23. My life was set, and I™ve just been filling in the details ever since.”49
It was a busy month.




TLFeBOOK
poised to pounce 219

Bernauer approached his Walgreens journey as a marathon, not a
sprint. He said,

I think, like most successful people at Walgreens, I didn™t have a
grand scheme or a plan to get ahead. I always just focused on doing
the best I could at my job, first and foremost, then getting to under-
stand the impact I had on people who were affected by the job I was
doing, starting with my customers and going to my employees, up to
my managers. And then you have to figure out what are the things
that impact your job. Once you understand that, you start to under-
stand more about the entire operation of the company, in concentric
circles around your job, and that allows you then to redefine the job
you have and [to] expand the responsibilities you have and the im-
pacts you have. You start doing that, and that™s when people at
Walgreens start to recognize you, and say, “This is someone who
could do something in another job.”
One of the things that has made Walgreens successful is the cul-
ture that the company has established. Certainly, ethics are impor-
tant, but the thing I focus on is this: At Walgreens, you have to
understand pretty quickly that if you want to get ahead, it™s not about
protecting your interest in your particular store or division, but work-
ing toward the greater good of the company, thinking beyond the
narrow scope of your job. There is a tremendous amount of coopera-
tion with other people in the company.50

Bernauer™s career trajectory was far from meteoric, progressing in regu-
lar steps”but that™s also how it™s done at Walgreens. The race to Deerfield
is truly not to the swift but to the steady. “I don™t know that there were any
certain points when I can look back and say, ˜Boy this is the point when
my career took off,™” Bernauer said. “There™s only one job I ever asked for
in the company, and in that case, I first had to convince the top people we
needed to create the position of chief information officer (CIO), because




TLFeBOOK
220 america™s corner s tore

of a couple retirements that happened at once. They went for it, and I got
the job.”51
Bernauer advanced to president in 1999 and to CEO in the fall of 2002”
but in characteristic Walgreens style, his manner didn™t change at all.
If you arrange to meet him at Walgreens™ headquarters at 9 A.M., you™ll
invariably find yourself standing behind a knot of sales representatives at
the reception desk waiting to make their pitches to Walgreens™ buyers. As
you stand and stew, nervously checking your watch, don™t be surprised if
you suddenly feel a tap on the shoulder from a tidy, midsized man who asks
if you™re his scheduled appointment. “I thought so,” he™ll say, then reach
out his hand and introduce himself. “I™m Dave,” and his unassuming stick-
on nametag confirms it. “Let™s go to my office.”52
When you notice that the receptionist at the front desk has not even
batted an eye at the appearance of the CEO amid the swarm of sales reps,
you get the sense that he™s done this more than once”maybe every day.
The fact that none of the sales reps seem to take notice, either, suggests
that they™ve seen him many times themselves or that he™s so low profile
they don™t even recognize him.



constant competition

It is the modest man from Wadena, Minnesota, who™s now charged with
leading the company into its second century, a century that promises to be
every bit as unpredictable as the company™s first.
Nonetheless, Walgreens can already identify many of the forces that will
shape its strategy in the coming decades, including intensified competition.
Having outlasted once venerable chains like Shapiro, Liggett™s, and
Thrifty™s, among others, and surpassed Eckerd, Rite Aid, and CVS, it™s fair
to say Walgreens has held its own and has to be considered the greatest
drugstore chain over the past century.
(When longtime rival Rite Aid was posting record profits at the end of
the millennium, Walgreens executives couldn™t quite figure out how they




TLFeBOOK
poised to pounce 221

were doing it”and with good reason. It turns out that at least four Rite
Aid executives overstated earnings by some $1.6 billion, leading to an ar-
tificially inflated stock price, which padded the executives™ incentive-
laden pay packages. At the time, Rite Aid™s restatement was the largest in
the history of U.S. business. When prosecutors produced a tape secretly
recorded by an employee, all four executives, including former CEO
Martin L. Grass and former chief financial officer [CFO] Franklyn M.
Bergonzi pled guilty and are now serving jail time.53)
Even among those who play clean, however, Walgreens still faces
enough competition to keep it honest. “Those guys are in our stores night
and day,” Jorndt said. “Why? They™re focused retailers! They figure if they
learn one little thing from Walgreens, it™s worth it. And we™re in their
stores all the time doing the same thing.”54
These days, however, the number and variety of competitors has ex-
panded greatly and now includes “mass merchants” like Wal-Mart, which
currently ranks third in prescriptions filled behind only Walgreens and
CVS. Wal-Mart has had its own problems, of course, but it promises to be
a formidable force for some time to come. Bernauer explained,

When you look at our industry, 80 percent of what™s sold in the front
end of the store comes from “big boxes” [like Wal-Mart], and that™s
important to understand. So in other words, when you look at our
categories”you™re talking paints and batteries and stationery, all
those things”all that stuff we sell in the stores, 80 percent of all of it
sold nationwide is [also] sold in food stores like Krogers and mass mer-
chants like Target and Wal-Mart; 15 percent of it is sold in other
drugstores; and 5 percent of it is sold in Walgreens. So, when we start
talking about competition, one of the keys to remember is that our
competition is much more about grocery stores and mass merchants
than it is about other drugstores. So now we have to focus on that.”55

Of course, competition is nothing new, going back to the days Charles
Sr. had to battle the cheap “pine boards” during the Depression and Chuck




TLFeBOOK
222 america™s corner s tore

had to stare down Spiegel™s and the like. Walgreens has always found a way
to separate itself from the rest.
Walgreens breaks down the current competition into two categories”
big boxes and drugstores”and has created two different approaches to face
them. Bernauer explained,

How we compete against drugstores is much more of an execution
issue, since we™re all trying to accomplish roughly the same thing.
The question is: Who can do it better? But with the big boxes, the
biggest difference is that, obviously enough, they™re big boxes, and
we™re a small box. We have a much smaller trade area than they do.
But because it™s a smaller trade area, it means we can offer more con-
venience”a quick stop compared to a long stop.56

Walgreens™ second advantage over the Wal-Marts of the world is the
target area of each store. Because a typical Wal-Mart super center draws
from a 15-mile radius of customers, it attracts a much broader mix of con-
sumers than does a Walgreens, which might draw from a 5-mile radius, al-
lowing the store to enact more niche marketing than Wal-Mart can.
“We get a pocket of population that is unique, in some way,” Bernauer
said, “so that allows us to tune our store to the specific neighborhood we™re
serving, in terms of age, income, race, even local events. We are continu-
ally developing that and finding the tools to broaden the mix of options of
what™s in each store. So that gives us a real advantage.”57
Despite all the evolutions Walgreens has undergone over the century,
some things never change, and three of them are location, location, loca-
tion. Bernauer observed,

The primary thing I™m focused on right now, on a strategic basis, is
site selection. Now you wouldn™t think of that as a strategy, maybe
more of a tactic; but because of the nature of our business and the im-
portance of being close to the customer, locating and designing the
store is a big way we can improve. We spend a lot of time on that. We




TLFeBOOK
poised to pounce 223

apply a lot more science to it than we ever did before, and we™ve
enhanced that, too. Over the last 10 years, we™ve opened 3,000 stores
and only closed two stores due to poor sales. That™s not bad.58



walgreens™ advantages

When asked how Walgreens has managed to keep a step ahead of its rivals
for over a century, Cork Walgreen shrugged, chuckled, and said, “I don™t
know. We just stick to our knitting, so to speak, stay focused, and try never
to be satisfied that we™ve made it. You always [have] to run faster than the
competitors. It™s like Jorndt used to say, ˜Be a moving target, because
they™re harder to hit.™”59
Walgreens has never moved faster than it™s moving right now. The
number of prescriptions filled, the profit per customer, the years of record
profit, and the number of store openings have all been growing since 1975;
and they hit new heights each year”all with virtually no debt incurred
along the way.
When Cork Walgreen retired in 1998, Walgreens got a letter from a Mr.
and Mrs. Robert Rose, longtime Walgreens stockholders. “We have been
shareholders for many years and want to thank you, Mr. Walgreen III, for
all you™ve done for us,” they wrote. “We purchased 50 shares of Walgreen
stock many years ago. Today it™s grown to 3,600 shares and is worth more
than $100,000. Selling our shares would be like losing a family member.
We just can™t do it.” It™s hard to think of too many other U.S. companies
whose stock alone can engender such loyalty.60
In 2003, Walgreens opened more than one new store a day, over 400 for
the year”roughly equal to the total number of stores the entire chain
could boast for the middle five decades of the previous century, from 1930
to 1970”including three a day for the month of August 2003, the end of
Walgreens™ fiscal year.
Such remarkable growth creates problems, too, of course. Said Dan
Jorndt:




TLFeBOOK
224 america™s corner s tore

How do you inculcate and expand the culture to all the employees in
4,000 stores when you can™t meet all the workers? It is a bigger chal-
lenge. We™re going to have both Dave Bernauer and [President] Jeff
Rein in the stores a lot. People love to see the leaders in the stores.
We™ve got senior vice presidents and operations vice presidents on
the road constantly.
We just keep trying and trying. We keep changing, and we keep
going. Every strategy gets tested. There is no magic formula, and
there™s no strategy that lasts forever. Every strategy runs out of gas
eventually. So you™ve gotta keep changing.61



the future is now

For all the vicissitudes of the drugstore business, the industry™s future looks
bright. “The prescription business has a 50-year ramp-up coming,” Jorndt
told Marilyn Abbey. “People are going to live to be 80 and 90. At 50, you
take six prescriptions a year. At 60, it™s 11 a year. At 70, it™s 15.”62
Without doing the math, you can see that Walgreens™ pharmacy de-
partment”the very division that Charles and Chuck insisted on promot-
ing and perfecting even when it brought in just 3 or 4 percent of the stores™
sales volume for over a half century”will be the locus of the company™s
revenue in the foreseeable future.
“Over 60 percent of our sales are prescriptions, and that™s going up,” said
Cork, who is still very much on top of the many details that make
Walgreens run. “The average prescription is close to fifty bucks, today, and
the average sale in the rest of the store is about seven bucks.”63
Furthermore, the average store now fills about 300 prescriptions a day, up
from only 20 prescriptions a day in the 1960s.
The catch is, however, that the store™s net profit margin on prescriptions
has dropped to about 2 percent today, according to Cork. This speaks to
the growing competition in the health care field and to the increasing
pressures from HMOs and the like to keep health care costs down.




TLFeBOOK
poised to pounce 225

But Walgreens has seen the future, and the future is health care. To
meet this growing and ever-evolving demand, the company has created a
division called Walgreens Health Initiatives (WHI), which includes a
Pharmacy Benefits Manager. Walgreens is also stepping into the growing
field of home care services for those people who receive long-term help at
home and has launched a specialty pharmacy program for patients with
chronic diseases that require complicated pharmaceutical regimens. Cork
also believes Walgreens will be at the forefront of new drug therapies and
more affordable generic drugs.
Granted, everyone this side of Nostradamus seems to do a horrible

<<

. 34
( 39 .)



>>