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Here are five reasons why Walgreens’ recently announced acquisition of Duane Reade makes sound business sense.
1. New York City is the nation’s largest drug store market — and Duane Reade is the city’s dominant drug chain. Moreover, that dominance has, in recent times, come to extend beyond any market share figures (Duane Reade currently commands some 13% of New York City’s drug store business).
Walk around Manhattan, Duane Reade’s dominant borough, and it’s virtually impossible to travel five minutes without running into a Duane Reade drug store. No urban market can match that level of penetration. More than that, Duane Reade, once known only for its locations, has come to be appreciated and shopped for the quality and variety of its product offering and the excitement of the stores that surround that offering (see No. 2).
2. Duane Reade is opening some of the most exciting, innovative and successful drug stores this country has seen in some considerable time. The drug chain’s newest store, in Manhattan’s Chelsea neighborhood, is as much convenience food market as drug store.
Indeed, the entire street-level floor is given over to grocery merchandise, in an assortment that includes grocery staples, ready meals, refrigerated dairy products and frozen entrées, fresh baked goods delivered daily and Starbucks coffee for the on-the-go New Yorker. The urbanites who live in the neighborhood surrounding the new store could, if they wished, fill 90% of their weekly grocery needs at the unit. Only by descending one level do these urbanites encounter the drug store mix, one that includes an on-premises physician, the kind of breathtaking beauty offering that is becoming a Duane Reade staple, complete pharmacy services and a full O-T-C offering.
3. Duane Reade employs some talented chain drug store executives, particularly in the merchandising and marketing disciplines. These staffers have been responsible, most recently, for the drug chain’s new beauty care positioning, its New York City-directed marketing approach and its rich new customer loyalty program, initiatives Walgreens has not yet developed.
4. Though led by Canadians — the drug chain’s CEO previously worked for the Loblaws supermarket chain in Canada, and the retailer’s senior merchant was most-recently employed by Canada’s Shoppers Drug Mart chain — Duane Reade’s senior managers have more nearly captured the New York idiom, culture, spirit and way of things in their merchandising and marketing programs than have most born-and-bred New York City retailers.
Through the use of innovative signage and design elements, a heavy emphasis on local products and the creative employment of marketing elements and symbols unique to the city, they have successfully portrayed Duane Reade as New York’s drug chain. No other drug chain has even attempted to identify itself with the New York City resident.
5. Walgreens, in acquiring Duane Reade, is making a statement to the effect that it is not afraid to change, and that the old ways are not necessarily the only ways — or even the best ways — of doing business. Walgreens has been too predictable for too long. This bold step, more characteristic of CVS and Rite Aid in the recent past, signals a new direction, new priorities and a new approach to the chain drug store business from a retailer that until recently had been badly in need of all three.
Now, here are two things Walgreens needs to do to protect, enhance and maximize its new investment:
1. Don’t rush to change things. Walgreens has already announced that it intends, at least for now, to operate Duane Reade as an entity apart from its Deerfield, Ill., operations. It is a statement most drug chains tend to make upon acquiring a rival.
What sometimes happens, however, is that the apparent, though sometimes illusory, advantages in prematurely combining the two chains — the synergies in a common name, the economies of scale, the reduction or elimination of duplicate back-room functions — become too compelling to resist.
Walgreens’ senior managers encountered these inducements in the immediate aftermath of its Happy Harry’s acquisition in 2006, and found them too difficult to dismiss. In refitting the Happy Harry’s stores, they alienated customers who had understandably become comfortable shopping in a Happy Harry’s drug store. The changes, in jolting these heretofore loyal customers, came at a price the retailer continues to pay today.
2. Walgreens must resist the temptation, common when most companies make an acquisition, to believe that their people are somehow more capable than the people at the acquired company. More than that, Walgreens’ staffers must, at all levels, determine how, when and where to tap into the talent and expertise of the people they are acquiring.
Doing so will not only ensure that Duane Reade remains true to the concepts and ideas that have transformed drug store retailing in New York City. It will guarantee as well that the best of those concepts and ideas find their ways to Chicago, to ultimately be dispersed throughout the Walgreens drug chain.
