DEBTLESS FACILITY EXPANSION: WALGREENS

The drug store retail chain Walgreens provides another example of focused use of
technology and creative access to other people’s money to rapidly grow a very fit
organization. Walgreens’ simple business vision is to become the McDonald’s of
pharmaceuticals.
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This clear parallel connotes clean, efficient operations and a large
number of outlets at prime locations throughout the country. Walgreens has pursued
this goal using a masterful techonomic approach, combining technology for effective
customer service with the economics of other people’s money to finance facilities
without incurring debt. This approach may not work exactly the same way for
everyone, but it exemplifies the foundation of techonomics: thinking that takes
advantage of technology and creates financial opportunities by leveraging resources.
Walgreens has been an early adopter of technology to manage customer records.
In the 1980s, the company created its own satellite communication system to link
its stores. The network allowed a customer of any Walgreens location to get refills
or other help related to prescriptions at any other store on the network. With the
advent of managed healthcare and prescription coverage for medications, Walgreens
was positioned to manage insurance billing for customers, making their transactions
easier.
Collecting store information from many outlets allows the collective whole to
learn from the localized patterns of operations.
Over the years, Walgreens has been
able to use demographic information to target expansion opportunities and then use
individual store performance to determine when full 24-hour operations are financially
justified based on revenues from different profit centers within the store. This detailed knowledge of financial performances and variances is a valuable component
for predicting the performance of potential store locations. As the number of distinct
locations grows, the amount of store performance data increases, as does the customer
database (population density, income, age, medical expenditures, etc.). The
successful local operational model can be replicated hundreds of times in communities
across the nation.
Confidence in the long-term success of individual operations provides a bargaining
position for establishing partnerships. Knowledge is power. Walgreens knows
the size of the store and the site needed. They know the location demographics that
maximize financial return. In a given community, they know where they want to be
located, down to which side of the street is best! Now all they have to do is get a
store open and execute their business.
How does Walgreens rapidly build a large number of stores without incurring a
burdensome debt or equity dilution? Like Dell and Wal-Mart, they find a unique
way to use other people’s money. Walgreens’ source is the local real estate developer.
Via a contractual partnership that affords the developer strong and lasting financial
returns, Walgreens induces the developer to finance the storefront.
In brief, the deal goes like this: Walgreens finds a choice location and approaches
a few developers in the area, seeking a partner. Walgreens states its willingness to
enter a long-term lease for the store at a premium rate (say, $25 per square foot for
30 years). Compare this opportunity to a one- or two-year lease from less stable
occupants at $18 per square foot, and you see why many developers are willing to
fund the Walgreens facility. With a known return on investment, the building and
occupancy risks are minimal for developers, and they are eager for the opportunity.
Walgreens knows, within a small variance, what revenue per square foot a store will
produce and is creating a successful proposition. Both parties win. Walgreens
expands without incurring significant debt.
A techonomic metric that can be helpful in the determining store performance
and product merchandising is the customer value metric. Measuring the cash received
as a result of each customer visit, this metric provides a means to track the productivity
of the store footprint, the product offerings, and the anticipated revenue based
on store traffic.