Walgreens in Deal to Acquire Drugstore.com

Discussion
Mar 25, 2011
George Anderson

Walgreens announced yesterday that it had signed a definitive
agreement to acquire drugstore.com.

“Our acquisition of drugstore.com today significantly accelerates our
online strategy to leverage the best community store network in America by
becoming the most convenient choice for health and daily living needs whether
customers shop online or in our stores,” said Gregg Wasson, president
and CEO of Walgreens, in a press release.

Walgreens said it intends to continue
operating drugstore.com as a standalone business along with its Beauty.com,
SkinStore.com and VisionDirect.com sites.

“This acquisition offers a unique opportunity that will provide us immediate
access to more than three million savvy, online loyal customers, and will allow
us to move even closer to our existing customers through relationships with
new vendors and partners, adding approximately 60,000 products to our already
strong online offering,” said Mr. Wasson.

Walgreens President of E-commerce
Sona Chawla said, “Over the past two
years, we’ve established the infrastructure from which to grow our multi-channel
products and services, and by combining drugstore.com’s capabilities
we are well on our way to achieving our goal of becoming the most convenient
multi-channel retailer for health and daily living needs.”

The deal to
acquire drugstore.com comes on the heels of Walgreens’ announcement earlier
this month that it had reached a deal to sell its Walgreens Health Initiatives
pharmacy benefit manager (PBM) business to Catalyst Health Solutions.

A Chicago
Tribune
article quoted a research report by Scott Mushkin of Jeffries & Company. “While
the acquisition will be slightly dilutive and will prevent Walgreens from using
the proceeds from the sale of its PBM for such things as share repurchases,
the company looks to be effectively exchanging a non-core PBM business with
one that strengthens and broadens Walgreens’ core area of expertise,” Mr.
Mushkin wrote.

Deborah Weinswig of Citi Group told MarketWatch that the
move would help strengthen Walgreens’ beauty business. “We believe this
was a void Walgreen needed to fill,” she said.

Morningstar analyst Matthew
Coffina was negative on the deal. He told Reuters, “I
think the online business is going to be very competitive and it is going to
be very difficult for anybody to get a competitive advantage.”

Discussion Questions: What is your reaction to Walgreens’ acquisition of drugstore.com? What will it mean for competitors of the two companies?

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20 Comments on "Walgreens in Deal to Acquire Drugstore.com"


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Max Goldberg
Guest
10 years 1 month ago

There’s good and bad about this merger. Buying drugstore.com gives Walgreens access to a new trove of customers, and the opportunity to make them loyal offline and online. It also gives Walgreens the headache of aligning prices and practices. Drugstore.com needs to become a seamless part of Walgreens, whether or not it takes the Walgreens name. With an established brand identity and online presence, I’m in the camp of those questioning if the purchase will yield long-term benefits for Walgreens.

Dick Seesel
Guest
10 years 1 month ago

Clearly Walgreens sees faster growth in online business than in bricks-and-mortar as its penetration of every free corner in the U.S. grows. (And the Duane Reade acquisition puts it squarely in the center of the New York metro market.) There are plenty of economies of scale–focused on systems and logistics–by merging the “back office” functions of Walgreens.com and drugstore.com; the longer-term question is whether Walgreens wants to maintain separate website identities or more effective co-branding in the future.

Al McClain
Guest
Al McClain
10 years 1 month ago

To me, bringing 3 million drugstore.com customers into the Walgreens fold is the big win. It’s also a pretty good defensive play, I think.

Gene Detroyer
Guest
10 years 1 month ago

The Morningstar analyst Matthew Coffina makes a point. He told Reuters, “I think the online business is going to be very competitive and it is going to be very difficult for anybody to get a competitive advantage.”

However, he does not consider that the brick and mortar business has little competitive advantage over the online business. Unfortunately, Mr. Coffina’s type of thinking leads companies to the graveyard as the profile business models change.

This is a good decision on Walgreens’ part, but the key to success will be the integration of the two entities. If properly integrated, competitors will find them hard to touch.

David Dorf
Guest
10 years 1 month ago

The acquisition represents an opportunity for both reward and risk. A successful integration of the supply chain and customer accounts could lead to synergies that increase revenue, but true channel integration is never simple and can easily become a distraction to the core business. I don’t see how operating drugstore.com as a separate business helps Walgreens. The goal should be full integration over time, with a consistent brand experience that extends from physical stores into the digital Web. This is a perfect opportunity for omni-channel retailing if executed correctly, but if my Walgreens and drugstore.com accounts are not merged, they will be leaving money on the table.

Dan Frechtling
Guest
10 years 1 month ago

This is a good deal for the dealmakers but a wash for online shoppers.

It’s good for Walgreens, which spent about .75X sales after $80MM in tax benefits from the deal and acquired 3MM drugstore.com customers for about $100 each.

It’s good for drugstore.com shareholders, who held stock in a company that never turned a profit and earned a 113% premium over the closing price Wednesday.

It’s a push at best for shoppers. Walgreens’ CEO Greg Wasson cites Walgreens shoppers can now access 60K more products. But nothing stopped them from accessing those items from an independent drugstore.com. And the newly acquired shoppers of drugstore.com will now add 6.25% Illinois sales tax on all their purchases.

Anne Bieler
Guest
Anne Bieler
10 years 1 month ago

This marks another step in the development of Walgreens’ growth strategy–the biggest one in terms of exposure for the brand identity. Retailers are no longer multi channel–from a shopper perspective it’s “Walgreens.” This is a bold, smart move, but will require seamless execution to align with brick and mortar stores.

Shoppers will consider all channels when making purchases, so alignment is critical across the product offering and service level. With expansion and exploration in new directions with Duane Reade, fresh foods, other online acquisitions, and more upscale beauty items, implementation will determine success.

Ryan Mathews
Guest
10 years 1 month ago

This isn’t a black and white issue. The first issue is the actual acquisition price. Assuming that’s realistic, here are some of the pluses and minuses.

On the plus side, Walgreens inherits a significant, established book of e-commerce business. Going online also allows the chain to expand its inventory and perhaps even improve its service position.

On the negative side, it’s a hard market to protect and Walgreens lacks real experience competing online. Pricing is also an issue since one assumes a difference in digital and physical retail prices may be acceptable but only so long as it doesn’t insult the customer.

David Biernbaum
Guest
10 years 1 month ago

This is a potentially brilliant acquisition for Walgreens. I do hope that the intent, at least in part, is to acquire the expertise, the wherewithal, and experience, that drugstore.com possesses with selling HBC products online. This has not been a particular strength for Walgreens and so it’s critical to me that they allow drugstore.com to run the business in which it has knowledge, expertise, and history.

Ed Rosenbaum
Guest
10 years 1 month ago

Walgreen’s obviously sees the strong competitor it has in CVS. CVS made a move last week and Walgreens counters. This is a good move for Walgreens because of the large numbers of potential new customers now driven to their site. It is clearly a change from the strictly brick and mortar approach.

Now is the time to sit back and watch the competitive events unfold between the two drug chain giants. My guess is the CVS agreement with Aetna to be their fulfillment house had a lot to do with this move. After all, why would we think Walgreens is sitting back after CVS brought a few million more potential customers in the house. Let’s see who makes the next counter punch.

Anne Howe
Guest
10 years 1 month ago

My sense is that Walgreens will merge the two entities together at some point in the future. Not to do so will add so much complexity to the operation from a pricing point of view that I agree it could distract from the core business model. It will take time to learn shopper preferences, and applying the learning from each to a merged online portal could give Walgreens a shopper intelligence advantage as they merge the specialty portals into one cohesive shopper solution.

Mike Spindler
Guest
Mike Spindler
10 years 1 month ago

Wow, 7,000 pick-up locations. How cool is that?

Ed Dennis
Guest
Ed Dennis
10 years 1 month ago

Drugstore.com? Why? Isn’t Walgreens the most recognized name in the Drug industry? Why do they need another web site? Do they think they are buying customers? If so, why did those customers go to Drugstore.com to begin with. I think Walgreens is spending a lot of money to try to overcome flaws in their business model. Does Walgreens have pricing or service issues? Have they lost customers to CVS?

Justin Time
Guest
10 years 1 month ago

I really think this was a defensive move on Big W’s part.

If a competitor had made an offer, than Walgreens.com would have been at a disadvantage.

It should be a win-win for Walgreens. But they need to fully integrate the Walgreens brand into the site. In years past, Rite-Aid used drugstore.com to sell its private label line before starting to sell these items on riteaid.com.

Carol Spieckerman
Guest
10 years 1 month ago

I’m focused on the branding aspect. All of Walgreen’s omni-channel competitors are single brand players that are getting better and better at forging seamless connections. Amazon too is largely sticking to a uni-brand story (even as they snatch up once-annoying uber-niche-ers such as diapers.com/Quidsi). Walgreen has a bit of a conundrum in this regard–keeping Drugstore.com as a separate brand puts them at risk of breaking the brand connection (though without prohibiting site-to-store initiatives). Re-branding Drugstore.com as Walgreens immediately opens the price transparency floodgates and risks dropping whatever loyalty the Drugstore.com brand enjoyed.

Based on the Duane Reade and Drugstore.com acquisitions, Walgreens may fancy themselves a multi-brand portfolio manager. Can they swing it?

Dave Wendland
Guest
10 years 1 month ago

This is BIG for Walgreens. Offensively it is a market builder. Defensively it increases their web reach (Drugstore.com has attracted many eyeballs) and puts others chains at a disadvantage. And it is definitely in line with the vision of positioning Walgreens synonymously with health and wellness on a much larger stage.

Bill Hanifin
Guest
10 years 1 month ago

Based on what I know of the online pharmacy/vitamin/supplement industry, shoppers are wholly mercenary in their pursuit of the deal.

PPC and price scraping of competitors to show well in “today’s” search results are the focus of some marketing teams because that is the only lever they have with consumers.

That said, I wonder how the acquisition will impact Walgreen margins overall? The answer lies in how many existing brick and mortar Walgreens customers are inclined to shift spend to the online portal. The percentage of shift to the online channel will deliver thinner margins to Walgreens, thereby being destructive to overall margins.

I am interested to see what Walgreens will do to protect their higher margin brick and mortar clientele and how they will position Drugstore.com as an integrated offer.

Herb Sorensen
Guest
10 years 1 month ago

This continues the movement to “The Amazonification of Walmart” by about one third. When I identified that trend several years ago, it was neither about Amazon nor about Walmart, but about the growing convergence of online, mobile and bricks-and-mortar (COMB) retailing. In Walgreens’ case it is very wise to be pursuing both an online and bricks-and-mortar strategy. But these TWO strategies must become one going forward, where the Walgreens customer is a Walgreens customer. Not this kind or that kind. A mobile Walgreens will complete the coming troika in retailing, and will further facilitate the unitary relationship of the retailer (Walgreens) with the customer.

Any retailer that does NOT pursue such a strategy will certainly gradually lose ground to Amazon who is clearly pursuing this strategy from the other pole. At some point, a dominant, successful, mobile sales app will intensify the battle and elevate the stakes. The best “salesman” will win the war. Presently, that is, hands down, Amazon.

Camille P. Schuster, PhD.
Guest
10 years 1 month ago

Walgreens has been developing an excellent technology infrastructure so they are probably in a good position to work with and integrate drugstore.com.

Joel Warady
Guest
Joel Warady
10 years 1 month ago

Walgreens has never been seen as an innovator, and they still lag the rest of the industry when it comes to connecting and engaging with its consumers. If they are smart, they will take some of the learnings that they gain from operating drugstore.com, and apply these learnings to its core business. They can only continue their growth and dominance if they learn how to get closer to its consumer.

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