In late December, the company announced plans to further reduce its organic store openings [image-nocss] to a rate between 4% and 4.5% in 2010 and between 2.5% and 3% in 2011. This is a further reduction from plans announced last July to slow organic store openings to 5% by 2011. The company will continue to open new stores in strategic markets.
The new target growth rate will reduce capital expenditures through 2011 by approximately an additional $500 million beyond the $500 million capital expenditure savings announced last July.
We believe that further slowing of organic store growth is a prudent step in the context of current economic conditions," Walgreens president and COO Gregory D. Wasson said. "Furthermore, by freeing up human and financial capital, substantial upside exists to drive greater value creation by enhancing the best community-based store network in America. This includes refreshing and remodeling existing stores, more efficient assortment within stores, prescription file buys and continued expansion of retail and worksite clinics.
He added, We continue to post solid sales results and achieve strong cost control in this difficult retail environment. Customer traffic strengthened through the quarter and we're making substantial progress on our growth strategies to get more from our core operations and enhance the customer experience.
Rewiring for Growth is one of the company's key strategic initiatives designed to leverage the value of its core businesses: to earn "more from the core" for its shareholders. The project, first announced at Walgreens Analyst Day meeting in October, will align the company's cost, culture and capabilities to enhance customer service and satisfaction levels for shoppers, patients and payors, it said.
To reduce overhead, including the number of people employed in corporate and support roles, Walgreens is enabling eligible employees to voluntarily resign or retire from the company with both severance pay and benefits coverage based on years of service and retirement eligibility.
This program is being offered in advance of a supplemental involuntary separation program that will begin in February. The company intends to reduce to the extent possible the number of involuntary separations by offering a more favorable voluntary program first. Under the voluntary program, eligible employees can receive more weeks of severance pay and continuation of retiree medical benefits if they meet certain age and service requirements.
"Our Rewiring effort is finding ways for Walgreens to be more effective and efficient so that our growth strategy can move forward," said Wasson. "We are committed to reducing our corporate and support staff level fairly and with respect for all of our employees, which is why we're first offering a voluntary separation program. We've succeeded for more than a century by changing as the economy, our industry and the marketplace change and have always adjusted to keep our company strong and growing."
Walgreen executives said they plan to remodel stores and scrutinize the merchandise they order, acknowledging that some stores became cluttered and outdated, said a Wall Street Journal report. In certain categories, the chain already has boosted sales by making items easier to find. Walgreen said its private-label items, which cost less than brand-name merchandise, are selling especially well. Other drugstore chains have reported similar trends as consumer spending slows. The staple items Walgreen is bulking up on include groceries and paper goods.
In its entirety, Rewiring for Growth targets $1 billion in annual savings by fiscal 2011. The company will achieve savings through strategic sourcing on indirect spend (all goods not for resale), reduction in overhead and labor and the POWER project, which is designed to enhance patient-pharmacist interaction while reducing costs.
Walgreens expects to incur costs of $300-$400 million over fiscal years 2009 and 2010 as it implements Rewiring for Growth; 50% of the project's benefits are expected to accrue beginning in fiscal 2010, with the full $1 billion in targeted annual savings beginning in fiscal 2011.
Deerfield, Ill.-based Walgreens had fiscal 2008 sales of $59 billion. The company operates 6,636 drugstores in 49 states, the District of Columbia and Puerto Rico.
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