Walgreens: Retailing done right
"The galling thing is that I'm so mad about not owning Walgreens that I need to go there to buy Tylenol!"
I really didn't even need to be in Walgreen's (WAG) today. Not the stock, which is making 52-week highs as I type, after reporting a terrific quarter yesterday and in which, gallingly, I have no position. I'm talking about the actual Walgreens in Mill Valley, where I went this morning to pick up a prescription for the wife.
The Big Ideas of the trip were: 1) Score some points with the lovely, brilliant & 8-month pregnant Mrs. Jeffmacke 2) Effectively delay the process of writing a primer on retail metrics, which is a little more Left Brain than I generally like to write and involves spread sheets; making a delay attractive to me.
It didn't even occur to me that I was ignoring an ongoing retail success story until I had to fish through two different bags to give my wife her 'script and bank the points on objective #1. I mean, I spent nearly $100 on both useful (vitamins, batteries, phone cord) and useless (Esquire, GQ [for the... um... article on Jessica Simpson] and Time magazines and the Racing Stripes DVD in the off-chance the kid would enjoy it) impulse items.
I barely even remember making the buys. They were just things that I'd unwittingly always needed, scratching itches that I wasn't aware of, prior to entering the store. Either Walgreens is secretly spritzing customers who enter the store with Roofies (related story linked; Mbop's prom is ruined) or the chain is executing exactly how they should.
Roofie'd or not, I've got to think that I would have been too annoyed to have bought any add-on's if the store had been a mess. Remember, I take such things personally.
In the interest of clearing Walgreens' good name of my wildly irresponsible spritzing allegations, let's walk through what little I can remember about the store. We'll let the observations determine whether Walgreens is rocking or if the chain is the Sabastian Janakowski of retail.
Business Model: Walgreens is a retail drug store. They get people into the stores by filling prescriptions. In addition to trying to herd customers into taking higher-margin generic drugs, Walgreens makes their money selling impulse and quick-fix items such as tape, make-up, batteries etc.
They carry a ton of special buy apparel (eg: 6 pairs of socks for $5) and chockie items sourced largely from Asia (eg; a clock that beams the time on your ceiling "Why are you suffering under the tyranny of alarm clocks requiring you to turn your head??").
To do well Walgreens stores need to be: clean, in-stock (no empty pegs!), and well kept. The pharmacy needs to be efficient and located at the back of the store. In-store help isn't really expected but should be available on demand. The flow of items (adjacencies, end-caps [stuff at the end of shelves]) should make enough sense that people can figure it out themselves.
- Service Perfect score for my visit here. The pharmacy was ready with the prescription on time. When I went looking for vitamins anyway (yup, I bought all this stuff when the script was already waiting for me) the first person I asked not only knew where the vitamins were located, she walked me right to them.
That's all Walgreens is looking for in their stores. Until you've tried to get associates to act like this ("just be freaking friendly!") you have no idea how hard it is to acheive.
- Appearance: Immaculate. In fairness, a retailer should be immaculate on a Tuesday morning. The real test is a Saturday afternoon, when traffic is flowing and half the staff has called in "sick".
My personal acid test for how a store is being managed is the magazine rack. Magazines are low-margin, high maintenance space. Whether a store buys them themselves or, as is often the case, stocking is outsourced, the store itself needs to make sure the racks are organized and up to date. Nothing says Sloth like a box of unshelfed magazines in front of a messy rack.
My dad was huge on appearance when he ran Target (TGT). "A messy store is a 'screw you' to customers." (At least I come by this stuff honestly.) This is doubly true for a place where people buy medicine.
- Lay-Out & Flow: I walked past the organized magazine rack on my way back to the pharmacy. I found my vitamins and ice bag then bought a phone cord, batteries and the DVD while I was being run up. Again, my prescription was ready on time, I didn't have a pressing need for anything beyond that and I didn't even wait in line to check out.
In short, I was utterly powerless to resist the hypnotic powers of properly displayed and priced impulse shopping. I actually (briefly) considered the time-beaming clock.
As attractive as my Roofie Conspiracy Theory is, I have to conclude that Walgreens is hitting on all cylinders. While far too much is made of buying stocks in companies where you shop ("The Peter Lynch" style, though Mr. Lynch never meant any such thing) you can learn much if you know where to look while you shop. What I learned today was "I'm really a moron for not being long Walgreens".
Consider the stores' target levels of service or appearance before you go in then look around to see how they are executing. Be tough but fair; Target associates aren't really supposed to help you try on 10 pairs of pants but they should help you locate the pants department.
Don't just rely on one store but make a point of dropping in on several, ideally in other parts of the country. When you put the pieces together you can quickly start to differentiate the Good (WAG) from the Bad (Blockbuster BBI). This doesn't eliminate any names as potential buys but it does allow investors to better understand what, exactly, they are looking for in terms of execution when they look at retail stocks.
Next time in our Retail 101 series we'll break down some of the financial ratios which are critical in retail investment and what the numbers should look like for various retail sub-sectors.
Of course, the column could be delayed a bit in the event of more shopping by its author...
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