Joseph Walker
Appearances
The Journal.
The Collapse of Walgreens
Walgreens was started by a man by the name of Walgreen. And he was a pharmacist. He bought up a local pharmacy store where he worked. And the company expanded, you know, pretty fast. It went public in the 1920s. It was a very successful stock for a lot of years. It was managed by descendants of the first Walgreen up and through the late 20th century.
The Journal.
The Collapse of Walgreens
Early on, you know, one of the things that sort of distinguished itself was that they had a lunch counter and one of their people there came up with the malted milkshake, right, which is like a sweeter version of your regular milkshake. And that made it a big hit.
The Journal.
The Collapse of Walgreens
To the point where today, you know, I think we all see where, you know, you go down the street, there's a Walgreens, then a couple blocks later, there's another Walgreens, right? And then next to that is a CVS, and then another Walgreens a block and a half away. And the idea there just being that you want to just give customers as many chances as possible to shop at a Walgreens.
The Journal.
The Collapse of Walgreens
They implemented the drive-thru pharmacy, which is obviously now, you know, pretty standard at many pharmacies and suburban type of areas.
The Journal.
The Collapse of Walgreens
And it kept going, really. I mean, I think if we want to say the peak, you know, probably going up until like 2010. I think the reimbursement pressures that the company is facing now really started to pick up around then and then accelerated.
The Journal.
The Collapse of Walgreens
They're getting paid less money than they were in the past, right? So every day they're getting paid a little bit less for the same prescriptions that they're dispensing.
The Journal.
The Collapse of Walgreens
And what happened there was, in any negotiation, right, it's all about leverage. And so for many years, you know, Walgreens could say, hey, we're Walgreens. We're everywhere. People love us. You know, like our customers love Walgreens. You got to give us our terms or, you know, you can't exclude us from your network of pharmacies that you allow your patients to go to.
The Journal.
The Collapse of Walgreens
And Express Scripts said, well, we're not so sure about that and kicked them out of the network. And there was not a, you know, uproar among the customer base saying, you know, we want our Walgreens. You know, we're loyal to Walgreens. People weren't storming the barricades necessarily.
The Journal.
The Collapse of Walgreens
And that was sort of a big sign that maybe the pharmacies like Walgreens, despite their omnipresence, were not as powerful as had been thought before.
The Journal.
The Collapse of Walgreens
Walgreens, which has been a publicly traded company for close to 100 years, agreed to sell itself to a private equity firm called Sycamore Partners for about $10 billion, or something like $90 billion less than it was worth about 10 years ago.
The Journal.
The Collapse of Walgreens
Stefano is well known in Europe for being a very savvy businessman from building up this small pharmaceutical distribution business into a behemoth with properties across Europe, including the UK and France and Italy and so on.
The Journal.
The Collapse of Walgreens
And his idea was that, well, number one, the front of the store. We got to beef up the front of the store. The front of the store, meaning where you buy your candy, your chips, your batteries, your deodorants, right? But also your beauty supplies and making these stores into little comprehensive markets where you could go and pick up your prescription, but also get anything else you need, right?
The Journal.
The Collapse of Walgreens
And the idea there was that, you know, you offset the declining profit margins in the back of the store at the pharmacy with the front of the store.
The Journal.
The Collapse of Walgreens
The other idea was to try to integrate more with the rest of the healthcare system. So let's buy up primary care medical providers or let's invest in urgent care providers and other healthcare companies. And then maybe we can attach them to our pharmacies, right? So you can not only get your prescription at the pharmacy, but you can also see a doctor to check to see if you have the flu or not.
The Journal.
The Collapse of Walgreens
And so it was diversifying, expanding, acquiring in all these different areas sort of besides pharmacy.
The Journal.
The Collapse of Walgreens
Well, it doesn't work well enough to solve their problems at the pharmacy counter.
The Journal.
The Collapse of Walgreens
And when you go back to like the 2012, 2015 timeframe from when Stefano and Walgreens first linked up, the thing that Stefano would talk about over and over again, right, is look, the back of the store where we dispense the prescriptions, those margins are declining. You know, the American pharmacy business has had real rich margins for a long time, but that's declining.
The Journal.
The Collapse of Walgreens
Now you gotta deal with that. And the way that you deal with it is the way that we dealt with it over in Europe, which was to make the front of the store into a desirable place to go shopping.
The Journal.
The Collapse of Walgreens
Aside from many other missteps that the company might have made there, just people were buying less and less inside of the store. People, you know, were much more likely to shop online.
The Journal.
The Collapse of Walgreens
where everyone else zigged and Stefano zagged was not pulling off a big deal with an insurer. There was a period of time in the past five, 10 years where it seemed as though every big healthcare company was merging with another big healthcare company. And so the most direct competitor that you could think of perhaps is CVS. So CVS and Aetna combined. Aetna is a health insurer, right? And so
The Journal.
The Collapse of Walgreens
You know, a great American brand, over 100 years old, you know, really have this sort of ignominious demise or decline over the past, you know, five, 10 years in the way that it struggled to adapt to the market forces that were affecting its competitors, but didn't quite end up moving in the right direction.
The Journal.
The Collapse of Walgreens
CVS pharmacies, they depend a lot on health insurers for how much they get paid and all that reimbursement. And so by hooking up with an insurer, it just gives it that much more leverage, both internally and externally, on the payments that it receives for dispensing prescriptions.
The Journal.
The Collapse of Walgreens
Express Scripts, that big PBM with which Walgreens had this pretty nasty dispute back in the 2011 timeframe, they hooked up with Cigna. They merged with Cigna, which is another large health insurer. So they got bigger and bigger, and again, they're hooked up with the insurers that have so much power in this equation, and Walgreens was left sort of standing alone at the dance.
The Journal.
The Collapse of Walgreens
And those are some, like, real exciting dances, let me tell you.
The Journal.
The Collapse of Walgreens
Its stock has just been decimated. And there's just really, you know, very little faith that the company can turn it around. Because all of its other diversification strategies, again, just didn't solve its cash flow problems, you know, didn't solve its declining margins.
The Journal.
The Collapse of Walgreens
I think that Pessina looked at the US healthcare system as a European and he said, this is crazy. These people spend so much money on healthcare. It's not even like their health outcomes are any better than us in Europe who spend way less. In fact, their health outcomes are worse.
The Journal.
The Collapse of Walgreens
But, you know, you can't just keep spending 15, 20 percent of your GDP on health care and it's just going to keep rising like that forever. This is unsustainable. There's going to be a focus on efficiency and payment reform in a way that's going to change things and make it more European like. So it turns out that the rising health care costs in the U.S.
The Journal.
The Collapse of Walgreens
aren't unsustainable, that Americans will continue to pay more and more out of pocket, and that there hasn't been this big reckoning of the government or health insurers really cracking down on the way we pay for health care, which, you know, easier said than done. And the system hasn't quite made that turn yet, if ever.
The Journal.
The Collapse of Walgreens
And you can add into it, you know, the Italian billionaire who stepped in and tried to help with that turnaround and, you know, so far has also failed to make it happen.
The Journal.
The Collapse of Walgreens
Well, certainly not right away. You know, it still has a huge presence in the United States. So I don't think we'll see them disappear, at least not right away. I think a lot depends on, you know, what Sycamore and its new owners do to help the turnaround.
The Journal.
The Collapse of Walgreens
When Sycamore completes the deal, it will have to decide, you know, how much more it can downsize and how much more efficiencies it can get out of this company and whether it can do what the previous management at Walgreens couldn't.
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A lot remains to be seen as to exactly how Sycamore will go about this. Some of the plans already underway to shrink the Walgreens footprint across the U.S. will continue. The company has said that it plans to close about 1,200 stores over the next few years. We also expect to see the company's different divisions split up.
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So maybe the pharmacy business will be split up from the pharmacy and wholesaling business in Europe and perhaps as well the Boots Pharmacy in the U.K., which is a favorite of our friends across the pond.