Taking the lead in urban markets

Drug Store News,  March 25, 2002  by Laura Heller

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Charles Walgreen Sr. opened his first drug store on the corner of Bowen Avenue and Cottage Grove on Chicago's South Side in 1901. While the neighborhood may have changed quite a bit since, one thing that hasn't: Walgreens' commitment to the inner city.

"We have an urban store in almost every trade area we're in," said Mark Wagner, senior vice president of store operations. "Even in Des Moines, Iowa, and Lincoln, Neb., there's an [economically] depressed pocket."

According to Walgreens spokesman Michael Polzin, the percentage of the company's stores in lower-income areas is comparable to the percentage of the U.S. population that falls below the poverty line, which is between 11 percent and 15 percent of the population over the past decade, according to Census Bureau statistics.

The issue of retail operations in lower-income areas is a hot topic in most municipalities, but one that is seldom addressed from a business or operations perspective. Typically, retailers use local philanthropy and community-based and employee programs to promote loyalty among customers, and Walgreens is no exception.

But operating stores in economically challenged environments is hardly a charitable act--it's simply good business.

"Among Walgreens' greatest strengths is the quality of its real estate and its geography," said Jonathon Ziegler, a securities analyst with Deutsche Banc Alex. Brown. "We believe this positioning in high-growth, densely populated protected urban markets provides a truly proprietary position, which is impossible to duplicate."

To be clear, there are two kinds of urban areas. One is the middle class to affluent residential and commercial urban areas, and the other leans more to economically depressed inner-city communities. Walgreens operates stores in both these demographics, but occupies the latter to a greater extent than both its drug store competition and national retailers from other channels.

Drug, grocery and discount stores tend to consider new suburban communities ideal growth markets, but urban centers yield profits, even if they do present unique challenges.

Location selection is more difficult in these areas than in the suburbs, explained Wagner. Rather than a single property owner, there is often an apartment building, gas station and several single-family homes to negotiate with, he said. Then there often are environmental issues and clean-up costs on former industrial sites.

"But the biggest challenge is the income level," said Wagner. "The average sale per customer is a little bit less, and they are more than likely buying things on a got-to-have basis versus on a nice-to-have basis. Fixed income consumers also respond more to sales."

But regardless of age, ethnicity or socioeconomic status, drug store customers all share one characteristic. "Everybody needs the basic items that we sell," said Polzin. "And they like having a clean, well-stocked store."

Often, Walgreens is the only place urban consumers have that fits that bill.

"Walgreens has figured out that those people need to be served," said Erik Gordon, research director at the University of Florida's Center for Retailing. "As more and more retailers pull out [of urban areas], it looks better and better to them." One reason for this is because inner-city locations provide Walgreens with another ample financial opportunity: little to no competition.

"You don't have the pressure of the mass merchants," said Wagner. "But we do have the added pressure of protecting our image."

Walgreens treads a fine line with pricing, in order to not establish itself as high-cost retailer. "We don't want to have a high-price image in the inner city," he said.

The company also encourages employee participation in mentoring programs such as the Midtown Education Foundation, of which it is the largest sponsor along with the City of Chicago. Since it's inception, additional outposts based on this program have been rolled out to a half dozen other cities.

In spite of its best efforts, Walgreens' mere presence in these communities often opens it up to controversy. For example, in March 2001, Illinois announced reimbursement cuts for Medicaid prescriptions. Walgreens reacted by discontinuing extended pharmacy hours and putting future new-store development in heavy Medicaid neighborhoods on hold pending reinstatement of adequate reimbursement.

The bold move prompted the cuts to be rescinded as community members and activists pressured legislators to help keep Walgreens--one of the only companies providing retail services to low-income areas--at these locations.

Not only did this serve to strengthen Walgreens' position in these urban centers, but also sent a strong message to other states considering Medicaid cuts, said Wagner. "We had tremendous grass-roots support in the local community," he said. "If you're the governor of--pick a state-and you see the amount of support we got, you've got to think twice."