Organizational skills

FfWalgreens - A Strategic Analysis

Table of Contents TABLE OF CONTENTS 1 TABLE OF FIGURES 2 THE RETAIL DRUGSTORE INDUSTRY 3 BUSINESS ACTIVITIES 7 INDUSTRY OVERVIEW 7 BACKGROUND 8 MODERN DRUGSTORES 8 CURRENT ORGANIZATION AND STRUCTURE 9 CURRENT CONDITIONS 10 FUTURE INDUSTRY PERFORMANCE 13 HISTORY OF WALGREENS 16 COMPETITIVE ANALYSIS 20 RITE AID CORPORATION 20 CVS CORPORATION 25 DRUGSTORE.COM 29 CUSTOMER PROFILE 32 EXTERNAL OPPORTUNITY ANALYSIS 34 EXTERNAL THREAT ANALYSIS 39 SUMMARY OF EXTERNAL OPPORTUNITIES AND THREATS 41 OPPORTUNITIES 41 THREATS 42 INTERNAL STRENGTH ANALYSIS 42 FINANCIAL STRENGTH 43 PRODUCT INNOVATION 44 HISTORY 45 GROWTH RATE OF STORES 46 MANAGEMENT TEAM 48 INTERNAL WEAKNESS ANALYSIS 48 SUPPLY OF PHARMACISTS 48 LACK OF EMPLOYEES 48 LEGAL LIABILITY 49 SUMMARY OF INTERNAL STRENGTHS AND WEAKNESSES 49 STRENGTHS 49 WEAKNESSES 50 FINANCIAL ANALYSIS 50 LIQUIDITY 51 Inventory Turnover 51 Current Ratio 53 LONG-TERM DEBT-PAYING ABILITY 54 Debt / Equity Ratio 55 PROFITABILITY 56 Net Profit Margin 56 Return on Assets 57 ANALYSIS OF THE MISSION STATEMENT 58 ANALYSIS OF WALGREENS'' OBJECTIVES 61 STRATEGIC ALTERNATIVES 64 GROWTH 65 Advantages (growth concentration): 65 Disadvantages (growth concentration): 66 Advantages (growth diversification): 67 Disadvantages (growth diversification): 68 RETRENCHMENT 69 STABILITY STRATEGY 70 COMPETITIVE STRATEGIES 70 DIFFERENTIATION 71 FOCUS 71 IMPLEMENTATION 72 CONCLUSIONS 75 BIBLIOGRAPHY 77 APPENDIX 82 Table of Figures FIGURE 1 - INVENTORY TURNOVER 52 FIGURE 2 - CURRENT RATIO 53 FIGURE 3 - DEBT / EQUITY RATIO 55 FIGURE 4 - NET PROFIT MARGIN 57 FIGURE 5 - RETURN ON ASSETS 58 The Retail Drugstore Industry Introduction Knowing the importance of a strategic vision, every company undertakes a complete analysis periodically. In order to create a strategic plan the parties involved must know every aspect of the industry and the company at hand. The purpose of this paper is to describe and analyze the retail drugstore industry and then focus on Walgreens, the industry leader in terms of sales. As part of the in-depth analysis of Walgreens, its major competitors will also be described and analyzed. The retail drugstore industry consists of all those stores that contain a pharmacy and sell prescription drugs. It also includes businesses that sell prescription drugs online and through the mail. Most retail drugstores also offer other consumer goods and services to augment the low margin earned on prescription sales. To be considered a member of the retail drugstore industry requires sales of prescription pharmaceuticals to the end consumer. Many convenience, food and discount stores sell over-the-counter medicines, but these stores would not be considered retail drugstores because they do not also sell prescription medicines. Relevant Environment Competition: The relevant environment, which consists or interactions between the task environment and task environment, has been changing over the past 25 years. As competition has increased among grocery, discount and mass merchandising chains, blurring of channels has occurred. This is due to stores selling an increasing variety of goods to try to broaden their customer base and provide ''one-stop'' shopping. Many of these stores have added pharmacies as a source of convenience for their customers, and to increase store traffic, usually positioning the pharmacy in the back of the store. In response to this pressure, both independent and chain drugstores have greatly increased the variety of their retail product offerings. The sale of cosmetics, along with health and beauty aids, has become an important profit generator for retail drugstores. Many are now also positioning themselves to compete with convenience stores by offering snack food items, beverages, and staple items. The move to stand-alone stores located on major roads with ample, close-in parking has been an important factor contributing to convenience. Customers: As indicated by the type of competition seen in the retail drugstore industry, the target market is very broad. The target market for prescription drugs includes almost nearly all peoples. Currently, the most frequent users are children under 10 and seniors over the age of 65. The buyers of health and beauty aids also consist of a wide range of users. Younger users tend to buy hair care and hygiene products initially, then add cosmetics and skin care items as they mature. The addition of a wide range of household items, including kitchenware, toys, pet care items, and lawn care items has enhanced the appeal of the drugstore as a one-stop shopping destination, where frequently used items can be picked up while a prescription is being filled. The development of a strategy that focuses on convenience items will further broaden the target market. The sale of pharmaceuticals is considered to be a recession-proof industry, as medications are a necessity. However, drugstores are impacted by factors such as payment rates offered by third-party providers, prices charged by drug manufacturers, and legislation impacting the extension of drug patents. Obviously, the sale of non-drug items is not recession-proof. Suppliers: Drugstores obtain their prescription drug products from the drug manufacturers. Drug manufacturers have been accused of discriminatory pricing due to a practice of selling products to HMOs and mail-order houses at prices 40% to 60% under the price charged to community drugstores. The community drugstores have filed a class-action lawsuit in response to this practice. Many drugstores use large wholesalers as suppliers, obtaining everything from prescription drugs to health and beauty aids from the same supplier. Another supply source includes wholesalers who supply convenience and grocery stores. Employees: The central employee in the pharmacy is the pharmacist. In 1996, pharmacists made up 17 percent of the 605,000 people employed in the drugstore industry. The other 83 percent of the employees worked as store managers, inventory specialists, stock clerks, and cashiers. The industry also employs buyers, merchandising managers, and inventory replenishers at store headquarters. Political/Societal Forces: There are a number of political and societal forces impacting the retail drugstore industry. Lobbying by drug manufacturers for favorable legislation regarding patent extensions has an impact on the profit margins of drugstores by restricting the availability of the more profitable generic drugs. Currently, the state of Maine is attempting to pass legislation to impose price controls on drugs at community pharmacies (Drug Store News, 5/12/2000). Technology is a factor that will be critical to competition and cost control in the drugstore industry. The continual upgrading of technology that contributes to efficiency will be necessary to remain competitive. Systems are being developed that will enable physicians to send prescriptions on-line to a pharmacy, and software has been developed to manage everything from inventory control to insurance filing. Pharmacies are also impacted by a number of socio-cultural forces, as indicated by the attempted legislation in Maine. Another emerging issue is the use of drugs for practices that have moral implications, such as pregnancy prevention or termination, and assisted suicide. Wal-Mart has refused to carry the new emergency contraceptive called Preven, because it fears boycotts by right-to-life groups. Some pharmacists may refuse to fill certain prescriptions, such as ones for contraceptives, because of moral beliefs. K-Mart''s policy is to fire any pharmacist who refuses to dispense any FDA-approved drug (P. Miller, Betty Dodson.com). The industry analysis will describe the background of the industry, the major business activities, economic forces that impact the drugstore industry and the organization and structure of the industry. There is also a discussion of current conditions that affect the drugstore industry as well as a discussion of factors which will influence future industry performance. Business Activities Companies in the retail drugstore industry are engaged in the retail sale of prescription drugs, proprietary drugs, and nonprescription medications. Most also sell medical devices, as well as a variety of cosmetics, toiletries, tobacco, novelty items, and snack foods and beverages (Encyclopedia of American Industry). As competition increases, many businesses in this industry are adding more goods and services to the basic activity of filling prescriptions. Some of these services include photo processing, drive-through prescription windows, and 24-hour service. Drugstores are now offering more snack-food and impulse-buy items as well. Industry Overview The drugstore industry has moved from being a fragmented industry, prior to the mid-eighties, to one undergoing rapid consolidation driven by several factors. The sales volume of the drugstore industry more than doubled from approximately $40 billion in 1983 to over $93.6 billion in 1995. This growth led large supermarkets and mass-merchandisers to enter the drugstore market, putting more competitive pressure on the smaller independent stores. Profit margins are narrowing, due to attempts to reduce health care costs. In response to these pressures, there has been a wave of consolidation, with regional chains buying out one another out. Other responses to the pressure of competition and decreasing profit margins include: an effort by drugstores to concentrate on customer service, expansion into niche markets, forming partnerships with suppliers and health-care providers, and the use of technology to increase cost-efficiency (Encyclopedia of American Industry). The drugstore industry is considered to be a recession-resistant growth industry, due to the increasing number of aging baby boomers (Fool on the Hill, 5/18/99). Background The drugstore industry had its beginning in the mid-1800s. At that time, Americans began using more ''patent medicines'', reducing dependence on home remedies. Early pharmacists worked in village apothecaries, purchasing chemicals in bulk and mixing them on the premises to fill prescriptions. After the Great Depression, the science of pharmacology developed and pharmaceutical companies grew rapidly, opening sophisticated research facilities. Drug patent issues grew from fewer than 100 before 1940, to over 4,000 by the 1950s. Medications began to be distributed under the manufacturer''s brand name in a final-dosage form, instead of in bulk as generic ingredients that were then combined by the pharmacist. The number of drugstores increased and pharmacists took a more service-oriented role when dispensing prescriptions (Encyclopedia of American Industry). Modern Drugstores The early drugstore tended to be a small store, from 1,000 to 2,000 square feet, located near grocery stores and other high-traffic areas. The bulk of the stores'' sales were from pharmacy items. Many of these small stores had a variety of ''sundries and notions'' available in the front of the store, where shoppers could browse while waiting for their prescription to be filled. The addition of the soda fountain came about early on when bottled soda water, and charged water were originally considered to be a health items (Walgreen''s.com ). Up until the advent of ''fast food'' restaurants in the late 50''s and early 60''s, the soda fountains were significant generators of revenue, expanding their offerings to meals as well as beverages. Current Organization and Structure Competitive forces caused the drugstore industry to vary their store formats in order to differentiate themselves from competitors and strengthen their image as health care providers. This has resulted in the emergence of five main store formats: independents, chain drugstores, mass merchandisers, supermarkets, and mail order. A decline in use of conventional drugstores began as early as the late eighties as other competitors, especially the supermarket drugstore, were developed. In 1988, 69 percent of prescription purchases were made in conventional drugstores. This dropped to 57 percent in 1990. In 1992, sales of over-the-counter (OTC) medications were $9.45 billion, or 16.8 percent of drugstore sales. By 1995, sales of OTCs were only 13.8 percent of sales at drugstores, due to increased competition from discount retailers and supermarkets. In 1994, there were 53,216 drugstores in the five categories. Of these, 24,862 (46%) were independently owned, 17,270 (32%) were chain drugstores, 4,837 (9%) were mass merchandisers, and 6,247 (12%) were supermarkets. The mass merchandisers were the fastest growing segment. In 1995, independents made 34 percent of all prescription and OTC drug sales, chain stores made 41 percent of prescription and OTC sales, mass marketers made 11 percent of the prescription and OTC sales, and 4percent of these sales were made through mail order outlets. By 1996 there were 58,333 drugstores in the United States. Of these, 35,000 (60%) were independently owned. The deep discounting outlets, a segment of the mass merchandisers, had begun to lose market share due to other stores'' adaptation of their low price strategy (Encyclopedia of American Industry). By 1998, sales of prescription drugs through all channels rose to $103 billion. Drug chains and independents made 66percent of those sales, down from 75percent in 1995. Mail order outlet sales rose to 13percent, supermarkets sold 11percent, and mass merchandisers sold 10percent (Standard & Poors Industry Survey). Current Conditions The sales of prescription drugs jumped 7.95 percent in 1998, for an increase of $2.73 billion. The average prescription price rose by 8 percent from $35.72 in 1997 to $38.43 in 1998. The drugstore industry as a whole had a 3.3 percent increase in sales in 1998, for a total of $134.4 billion. Due to a 15 percent increase in pharmacy volume, chain drugstores did better than the average. Their sales grew 8.2 percent to $96.7 billion, which was 72 percent of the industry total. Chain drugstores filled 60percent of all prescriptions. Sales at independent stores dropped by 7.6 percent, for a total of $37.7 billion. Much of this is due to the chain drugstores receiving a greater share of business from third-party payment plans. The strong growth seen in the drugstore industry is due to several factors. The two demographic groups using the greatest amount of medication are adults over 65 and children under 10. These two groups are the fastest growing segment of the American population. The 65-and-older age group uses an average of 12 prescriptions per person, at any given time. The increased availability of generic substitutes for expensive, brand name drugs has increased the overall market for pharmaceutical products. Another important factor is the trend toward self-medication, which is increasing purchases of OTC medications (Encyclopedia of American Industry). Other factors that had an impact on prescription sales are drug price inflation, the introduction of new drugs, and an increase in the number of individuals participating in third-party insurance programs. The increased traffic in drugstores has also resulted in increased sales of higher margin products such as OTC medications and non-pharmacy items (front-end merchandise)(Standard & Poors Industry Survey). An increasingly important contributor to the profit margin of chain and independent drugstores is the sale of ''front-end'' items. These items are non-pharmacy goods ranging from snacks to hardware to gift items and greeting cards. The margins on this merchandise run at least ten percent higher than those carried on third-party prescription sales (Standard & Poors). As increased drug prices and the emphasis on lowering health care costs continue to cut into profit margins on prescription sales (currently averaging 2 percent), sales of front-end items will be an increasingly important contributor to drugstore profits. Accordingly, many drugstores, especially those occupying their own building with convenient parking, are positioning themselves to compete with convenience stores. The convenient parking and easy-in, easy-out features, when compared to a typical grocery store, provide a shopping experience almost as hassle-free as stopping at a corner convenience store. The larger store size allows the drugstore to carry a wider variety of convenience products and many plan to add more easy-to-prepare food items to allow a quick, easy one-stop shopping experience for people on their way home from work (Drug Store News, 8/2/99). A significant event in the drugstore industry has been the move toward consolidation which took place throughout the 1990s. In order to generate economies of scale in distribution, buying power, corporate overhead, and the technology needed to compete for third-party prescription drug business, it has been necessary for chain drugstores to increase their numbers. This is achieved by rapidly building new stores or by buying smaller independent stores or regional chains. Their increased size results in greater bargaining power with suppliers and the ability to negotiate for better prices with third-party providers (US Business Reporter). In 1998, the top four drugstore chains, ranked by sales, were Walgreens, CVS, Rite Aid, and Eckerds. All but Walgreens ...

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