Walgreens (see chart here) has been one heck of a company. It's growth has been unparalleled for such a large retailer the last 2 decades. But quarterly earnings just came out, and management announced they were down 10% versus a year ago (read here). That's a big warning signal. Two consecutive quarters of such performance and Walgreens will officially hit a Growth Stall. Company's that hit Growth Stalls only find the ability to grow a mere 2% a remarkably low 7% of the time. Or – stated another way – after a growth stall 93% of companies never again find consistent growth.
Why would such short term performance – only 6 months – indicate such horrible ongoing performance years into the future? The answer is that most companies Lock-in on a Success Formula, and they practice perfecting it. As long as they grow, such behavior is sensible. But, when markets shift and growth slows the company is unable to change to meet market needs. It only takes a couple of quarters to bring out the market shift. And most organizations react by trying to do more, better, faster, cheaper of what they've previously done (the old Success Formula) hoping results will return. But because what's needed is a change in the Success Formula – not just cost cutting or "better execution" – the returns stagnate. Companies fail to realize that they were already executing really well, so execution isn't the problem. The market has shifted and what's needed is more permanent Success Formula change.
Walgreens has been a marvel at opening new stores. Somewhat like Starbucks, there seemed to be a new Walgreens opening every time we drove down the street. All across the country. Similar to WalMart, Walgreens was riding a wave of perfecting the success of their unique stores – which were a rare combination of goods unlike any other competitor. So Walgreens kept opening more and more of them – almost one per day. Many of us have wondered if that sort of new store opening rate could continue. When would there be all the Walgreens (like all the McDonalds or all the Starbucks) we need. With the recent credit squeeze, we've found out that in fact the number of additional stores needed may not be nearly as great as thought. And as store openings have slowed the overheads are rising as a percent of sales – and results are struggling. Walgreens NEEDS to open all those stores to keep the Success Formula working, without them it's unclear the company is worth anywhere near its old valuation.
Walgreen has had other options. I've even blogged about them. Walgreen's brought out its own cosmetic line, including "cosmoceuticals" which are cosmetics with pharmaceutical properties. Walgreen's brought out exclusive clothing. The company built relationships to offer unique photo services for digital photographers seeking prints. And they launched a printer ink cartridge refill service. These are just some of the things they brought to stores the last few years.
But Walgreens didn't create any Disruptions when launching these new business ideas. The ideas did not find true White Space – because although they had permission to do new things, they were not given adequate resources. Instead, money was poured into opening new stores rather than developing new Success Formulas which could generate growth. As a result, they consistently did not receive sufficient management attention. And they consistently fell by the wayside as management kept focus on opening new stores. Certainly some of these ideas (or others not on this list, but taken to market), would have been able to generate incremental revenue across all stores – had they been pursued, analyzed, developed and grown to take a leading market position. But that didn't happen because everyone was happy to keep pushing the old Success Formula – opening more stores. Lacking a Disruption, the White Space didn't "stick" and the opportunities disappeared.
Now, Walgreens' growth has slowed. Walgreen's needs to figure out how to make more money with the stores it has, not just open more stores. But the organization and people at Walgreens are not geared for this new task. They are Locked-in to the new store opening Success Formula. Unless Walgreens Disrupts really fast, growth will remain slack – and profits will struggle. We can expect the reaction to be layoffs and other cost cutting – but that will not help Walgreens become a "great" retailer. "Survival" behavior does not make for "great" companies.
Walgreens is on the precipice of change. The stock is down over 50%, to values not seen for almost a decade. Either they Disrupt and fast open White Space to learn how they can change their Success Formula and regain growth — or they will end up cost slashing to prop up profits but erode their ability to succeed. We need to watch Walgreens closely, because the direction they take NOW will determine what employees, investors, customers and suppliers can expect for the next several years.
