Service is the name of the photo game

Last year Walgreens wrote off its analog photo-lab equipment by investing a huge chunk of its profits--close to $400 million--in digital technology, rolling out new Fuji machines to all of its photo labs.

Company executives expect the addition of the digital service in the stores to "reap quick dividends," but also concede that in the short term, the analog-to-digital overhaul definitely impacted the operating-expense ratio. The investment in the technology, as well as the increase in payroll to run the digital photo labs, wasn't exactly "small change," noted Jeff Rein, Walgreens president and chief operating officer.

But over the long haul, company executives expect the move should lead to higher margins and increased profitability in photo, as Walgreens competes for a greater share of the digital processing business-which finally surpassed home processing, signaling a major resurgence in the photo business at retail.

The rollout already seems to be paying off. Digital photofinishing contributed significantly to Walgreens' increase in gross profits for general merchandise in 2004, according to Rein.

Still, even as Walgreens blazes ahead in digital photo processing, this is by no means a slam dunk. The chain will face plenty of competition for market share from its top rival CVS, which has pursued partnerships with vendors and online photo services and was an early adopter of the technology.

The good news for Walgreens, however, is that more consumers than ever are printing their digital photos at retail, and being as the chain plans on opening about 450 new stores during its fiscal 2005, consumers will have more Walgreens' digital photo labs to choose from.

A report issued in mid-February from the Photo Marketing Association found that in 2005, 40 percent of the 7.7 billion anticipated digital prints would be made at retail locations--an increase from 31 percent in 2004.

That means service will become the name of the game--a game in which Walgreens has demonstrated its mastery repeatedly.

"After several years of development and improvements in digital technology, the focus is shifting back to consumers and their needs," according to PMA's recent released report, Photo Industry 2005: Review and Forecast. "Completing the retail infrastructure and configuring services that deliver solutions, convenience and value to users of digital cameras is in the center of this effort."

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