There’s been a bit of an arms race going on between Walgreens and its chief competitor, CVS. CVS recently bought all of Target’s 1,600 pharmacies. It also acquired the prescription benefits manager, Caremark, back in 2006.
Walgreens’ response was to expand globally. “Going global creates global buying synergies and they get better prices on drugs,” says Andy Wolf, a food and drug analyst at BB&T Capital Markets.
Walgreens recently acquired the European drugstore and health care products company, Alliance Boots, which will extend access to 2,500 stores in the United Kingdom, as well as thousands more pharmacies in Europe. It will also greatly increase Walgreens’ purchasing scale, allowing the company to get better pricing from suppliers.
In addition to reaping greater efficiencies on the pharmacy side, the merger could also help Walgreens sell more retail products such as cosmetics, something Boots has done quite well in Europe.
“Walgreens has two initiatives that it has to balance,” says George Hill, who covers the health care industry for Deutsche Bank. Getting people to come to its stores to fill their prescriptions is the first part. “And while those people are in the stores, you want to sell them more stuff in the front of the store, whether it be food, or whether it be beauty, that carries a higher margin.”
Walgreens, Hill says, also needs to continue to cut costs on the operations side, something the company’s previous management failed to do.