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Walgreens Touches Up Its Makeup in Bid to Win Back Customers

Walgreens Boots Alliance Inc. has been losing American customers for the better part of the past three years. So a new, largely European management team is giving the largest US drugstore chain a fresh face.
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  • Bloomberg

DEERFIELD, United States — Walgreens Boots Alliance Inc. has been losing American customers for the better part of the past three years. So a new, largely European management team is giving the largest U.S. drugstore chain a fresh face.

The company is redoing its stores with what’s meant to be a more appealing cosmetics area with a wider array of products, even as it scales back its fresh food offering. Most prominent will be the company’s own Boots No7 skincare line, which has proved successful at drawing customers to stores in Europe.

It’s all part of a plan to make Walgreens stores the destination of choice for health-conscious women who make the bulk of purchasing decisions for their families. The early results have been encouraging for the company: In Phoenix, a test market for Boots products, customers are making more repeat purchases and spending more money each time they enter the store. And Boots No7 has become the city’s top-selling beauty brand for Walgreens.

"That's what our strategy is, to get our customers to see us slightly differently," said Alex Gourlay, executive vice president of Walgreens Boots Alliance and president of its Walgreen Co. unit. "How do we create the image that then stops them in the store and says, 'Whoa, I don't have to go to Macy's?'"

The company will have to overcome the hurdles that tripped up rival CVS Health Corp., which shut down a beauty-focused initiative after failing to get high-end cosmetics brands to stock its shelves. It will also have to contend with skepticism from consumers accustomed to going to the department store to buy top-tier skincare products.

“If I come here, the quality isn’t as good and I can’t be sure that the products will match my skin,” said Nonye Enogwe, a 22-year-old shopper at a Manhattan location of Duane Reade, a Walgreens-owned drugstore. She said her loyalty remained with the MAC Cosmetics store, owned by Estee Lauder Cos.

Walgreens’ beautification project was set into motion by the company’s $15.3 billion buyout of Alliance Boots last year, the consummation of a two-stage deal by the U.S. drugstore chain that saw Alliance Boots executives fill the majority of the top jobs in the merged company.

Pessina’s Influence

That was largely because of the influence of executive vice chairman and acting Chief Executive Officer Stefano Pessina, who built Alliance Boots through more than three decades of mergers before selling it to Walgreens. The U.S. business represents almost four-fifths of the combined company’s sales.

Investors are optimistic about the new management team’s strategy. Shares of Deerfield, Illinois-based Walgreens are up 12 percent this year, outpacing the 2.3 percent gain of the Standard & Poor’s 500 Index and the 6 percent rise of CVS.

Walgreens and the rest of the U.S. pharmacy industry are looking for ways to boost profits to make up for lower revenue from insurers and government health-care programs, which have been tightening their own budgets and reducing their reimbursements for drugs. Unlike CVS and Rite-Aid Corp., Walgreens doesn’t have a unit that handles prescriptions for insurance plans, so it can’t rely on that growing market to make up for a retail decline.

Fewer Shoppers

Walgreens has seen fewer and fewer shoppers enter its stores. From fiscal 2012 to 2014, its foot traffic fell each quarter from a year earlier in all but two quarters, including a 2.7 percent decline in the period that ended in November. In its most recent earnings results, when the company announced it would close about 200 stores in the U.S., it didn’t disclose customer traffic figures.

Drugstores are faced with the fading of former big moneymakers like greeting cards, photography and cigarettes. CVS has abandoned selling cigarettes altogether, though Walgreens hasn’t. Retail sales made up 36 percent of Walgreens’ revenue in 2014, with the rest coming from prescription drugs. Cosmetics represent one of the most profitable products Walgreens sells.

Tricky Business

But beauty is a tricky business, as Walgreens’ top rival has discovered. CVS’s Beauty 360 project, started in 2008 to create cosmetics-focused stores, was abandoned in 2012 because the company was unable to recruit the same high-end brands sold in department stores and other makeup chains like Sephora. The company has since been focused on upgrading its beauty selection in regular stores, said Erin Pensa, a spokeswoman for CVS.

Since it owns the Boots No7 line, Walgreens is betting it can build customer loyalty to the products. The brand is also sold by retailers such as Target Corp. and Amazon.com Inc.

Elvis Died

Walgreens’ Gourlay has a long history in this business, almost entirely with Alliance Boots. His first day on the job at Boots coincided with Elvis Presley’s death in 1977 -- a memory he chalks up to seeing the British tabloid covers when he arrived at work that day. He started out as a stock boy in the pharmacy and moved up to CEO for health and beauty at Alliance Boots before joining Walgreens in 2013.

Boots stores follow a different model than Walgreens, with some stores offering a higher-end beauty selection than what a typical U.S. drugstore would. Gourlay knows he won't be able to attract the highest-end cosmetic brands like Chanel to Walgreens stores. Instead he's going to focus on what he calls the "masstige" market, the mass market that's looking for a more prestigious skincare products.

“All I can say is 20 percent of our customers are interested in beauty,” Gourlay said. “They’ll buy more beauty from us if we get the experience right.”

By Cynthia Koons, Danielle Burger; editors: Crayton Harrison, Chris Staiti.

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