Friday, January 30, 2009

Walgreens’ CEO – An Inside Job

I have a confession to make.  There is software on this blog that allows me to see statistics about what posts are most popular, where my readers are coming from and how they get here.  I can’t tell down to the exact reader, but because I can see what networks the readers are using and the geographic region they’re coming from, so I get a pretty good idea of who my readers are.  And, much like the authors that check their Amazon book sales rankings, I confess that I regularly check my statistics with great interest to see if anyone is reading this stuff.

I’ve been surprised to find that the post I wrote about the firing of Walgreens’ CEO “Why Not Just Tell Us Why You Fired Him?” continues to be among the top visited posts four months after it was written.  Also surprising to me is that people using the Walgreens network have been among my most frequent visitors over the last month.  So, even though I haven’t worked for Walgreens for ten years, hello out there to all you Walgreens people, it’s nice to be remembered.  Of course, I’m not sure you remember me quite so fondly as I would like in light of some of the things I’ve written, but hang on, I’m about to say some positive things.

Earlier this week Walgreens announced that it was appointing Greg Wasson, its President and COO to the post of CEO following a search to replace their former CEO, who was “retired” last October.  This announcement was followed by catcalls from a number of sell side analysts that follow the company.  The received wisdom of the Street seems to be that Walgreens needs a new perspective, which an insider can’t bring. 

So my question for them is: “What sort of a fresh perspective do they expect an outsider to bring?”  One like Bob Nardelli brought to Home Depot?  Or one like Larry Johnston brought to Albertson’s? Or that Carly Fiorina brought to Hewlett-Packard?  I could go on, but I think you get my point.  Bringing in an outsider to run a company is tricky, and it’s even trickier when the company has a strong culture, as Walgreens does. 

Further, and this seems to be the elephant in the room that nobody’s talking about, Walgreens has an installed base of over 6,500 drugstores.  And those drugstores are performing pretty well, thank you very much.  Not as well as they used to, but better than 90% of all retailers in today’s environment.  So you don’t want someone to come in there and muck it up.  And, no matter what you do, short of a merger with a company equal in size and profitability, (and good luck finding one of those these days) the drugstores are going to be the engine that drives the train of profitability for Walgreens for a long time to come.  All this other stuff that is going on with the drug store/healthcare arena – clinics, specialty pharmacy, home infusion and the like, is at the margin.  It all sounds great, but the sales base in the drugstores is at least $55 billion and it takes a pretty good shift in segment sales to make a dent in the overwhelming weight of the drugstores.  In other words, you better have someone who understands drugstores running the show because they’re going to be what pays the freight, even if you elect to pursue a Boston Consulting type strategy where the drugstores are run as the “Cash Cows” of the business.  And that’s what makes Wasson, an insider, the right choice for the CEO job.  Nobody runs drugstores better than Walgreens does, but in retailing, if you take your eye off the ball, things can spin out of control in a hurry.

Walgreens closest rival, CVS drugstores, recently announced that it was lowering its guidance for next year’s earnings to an expected increase of 4.5%.  The reason given for the disappointing guidance was weakness in the pharmacy benefits management business, which just happened to be their big strategic acquisition (Caremark) of a couple of years ago.  The stock price performance for Walgreens and CVS has been similar over the past year, with both stocks losing between 20% - 25%. Yet I don’t hear any sell side analysts calling for an outside CEO at CVS.  I guess you get more credit with some Wall Street analysts if you go for big “game-changing” acquisitions than if you undertake to do things in a prudent and reasoned manner.

I’ll end by reiterating something I’ve written before:  Wall Street analysts are lousy at strategy.  Walgreens’ Board should be congratulated on keeping their heads when analysts were shouting for an outsider.  It’s rare that a knight can ride in on a charger and fix things with a wave of Excalibur.  More often, it takes someone who knows the system, can work with the culture to implement gradual change and is willing to make the hard decisions.  It’s very early days yet, but it appears that Wasson has a better chance to do that than an outsider would.


Adam J. Fein said...


FYI, I linked to your earlier post on my Drug Channels blog, which has very high traffic. See What Happened at Walgreens?.

Keep up the good work!


Pac Man Pete said...

Walgreen's is using constructive discharge to terminate the professionals at store level. Recently an RxS visited a pharmacist in an "at risk position" and assured that person that they would not be let go without notice and would have an opportunity in other company pursuits. The 900 open company positions would not be in the Tampa market but most likely be in the Orlando Market and in other states. This same pharmacist after assuring the manager that they were not looking for alternate employment was terminated 3 business days later by LP officer for district 132. Despite the employees genuine lack of knowledge of the incident in question. Was terminated 2 1/2 weeks before their anniversary date avoiding vacation payout, denied Cobra and unemployment. A single parent with 2 children and unable to secure work since discharge. Is this the CEO's plan to save Walgreen's 80,000 per discharge? How much will these managers get on their bonus for following unjust termination practices to save cash on the front end in this company's metamorphosis from a drug store to a health care company?