Duane Reade Acquisition Could Signal More Aggressive Strategy For Walgreen

Last week’s announcement that Walgreen Co. has agreed to acquire New York-based drugstore Duane Reade, marked a major change in strategy for the traditionally conservative chain. Now as the merger takes shape, analysts are speculating that the innovations being driven by Duane Reade around CRM and in-store merchandising could further reshape the combined company.

“In terms of the innovation that Duane Reade has been putting into place, I have to think that part of the rationale (of the acquisition) is not just the expanded distribution and additional store count, but getting some of the skill sets rather than developing their own loyalty or CRM program,” said Craig Johnson, President of Customer Growth Partners, LLC, a retail consultancy based in New Canaan, CT.

Walgreen said Duane Reade stores will continue to operate under their own brand name after the transaction closes, but eventually the two brands will synergize, as Walgreen is currently operating 70 stores in the New York City metropolitan area. Duane Reade has made some significant strides to modernize and remodel the stores to promote a more customer friendly and focused strategy.

Johnson said that Duane Reade had a leg up because they were able to increase the lifetime loyalty of their customers before CVS and Walgreens could otherwise expand in the city, which is one of the advantages Walgreen will now be able to capitalize on.

Johnson noted four strategic themes on Duane Reade’s behalf that will ultimately lend themselves to Walgreen’s new strategic plans:

Customer Centricity- After Duane Reade’s in-store enhancements, Johnson said, there have been vast improvements to cater to customers and streamline their shopping. “The stores that have been redone have been dramatically improved from a signage and layout perspective,” Johnson said. “With new aisle height and width, and counter height adjustments, it’s a more inviting store and has much better curb appeal than the older stores.”
Extended Offerings- A number of Duane Reade stores have seen the launch of its food and beverage brand, DR Delish, an offering designed to cater to the on the go consumer. “It’s customer friendly, and from a store point of view, they like it because it increases store traffic,” Johnson said. “Secondly, it’s a good opportunity to cross sell. If customers come to pick up lunch, there’s a good chance they’re going to pick up something else, too.”
Strategic Options: Knowing its market in the busy New York City scene, Duane Reade has expanded its cosmetic offerings within the last six to 12 months. The store-within-a-store prestige beauty concept called “Look Boutique,” is designed to elevate the merchandising of cosmetics and skin care products with prestigious beauty brands. “New York, more so than most of the US markets, is a high indexing upscale cosmetic market,” Johnson said. “Particularly with all the department stores, which have the cosmetics and beauty items on the first floor, they know if women only need cosmetic items they can run in and get it quickly. It’s a big market in the drug stores. They all carry [cosmetics] but typically the stuff that has been historically available at the drugstores has been low to middle market kind of cosmetics. If you’re in the city, you’re somewhere near a Duane Reade, so they’re picking up part on that market, which is smart.”
Rewards Program: Duane Reade has expanded its customer loyalty program, FlexRewards, which they have been rolling that out over the last six months and promoting. “These are all things that Walgreen’s has not been doing that much of, and so those are the kinds of things, all customer facing, [that make it easier for customers to shop], easy to find things with good signage,” Johnson said.

Walgreens expects to retain Duane Reade’s store, pharmacy and distribution center employees and many members of Duane Reade’s senior management team following the acquisition. Over time, consolidation of core functions at the corporate offices will occur.

To date, Duane Reade has opened or converted 30 stores to the new format and has plans for up to 30 more new or remodeled stores in 2010. The continued rollout of “Look Boutique” is also planned for a growing number of stores across the network.

Duane Reade’s transformation initiatives correspond to Walgreen’s current Customer Centric Retailing (CCR) initiative to reinvent the shopping experience. To date, CCR has been implemented in more than 600 Walgreens stores nationwide, with plans to have as many as 3,000 stores converted by the end of fall 2010.

“It’s a real win-win for both the store and the customer,” Johnson said. “I have to think that Walgreen’s, in terms of its acquisition, allowed it to do a jump start penetration. Getting real estate in New York is very difficult; here it allows itself to get instant number one on the market, a huge leap-frogging over CVS,” he said.

Duane Reade had unaudited net sales of $1.8 billion for the latest 12-month period ending Dec. 26, 2009, and claims the highest sales per square foot in the retail drugstore industry nationwide.