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Location, location, location
Walgreens, which has a history of over 100 years, has pharmacy stores in every corner of the United States and sells prescription drugs, health and other wellness products. The company's blueprint for growth was based on expanding its retail footprint across the United States and the strategy was dubbed as "seven by ten" by its management. The "seven by ten" referred to their goal of seven thousand stores by 2010. They not met their goal but exceeded their own expectations by reaching their target of 7000 stores by 2009.
In its 7 by 10 era, the company's core competencies lay in business analytics followed by real estate and construction. The company would study potential new locations and analyze the sites across various parameters to be able to predict with just a 3% variation, the kind of footfalls and volumes it could anticipate in each new location. This predicted volume would then determine the size and layout of each new store and then its super-efficient real estate and construction team would take over, to buy land and construct the store exactly as laid out in its templates, within cost and time budgets. At the peak of its store expansion, Walgreens was opening one new store every 17 hours, somewhere in the US.
With each new store opened, came in the volumes pretty much as predicted, and thus the profits - again pretty much as predicted. A well-oiled machine that ran on a cookie-cutter approach with a clear top-down command and control hierarchy in place. The head office did all the planning, stores did the execution. No variations across locations - standardization at its best.
Powerful winds of change started blowing in the medicine retailing business even as Walgreens celebrated the completion of its successful 7 by 10 program. Grocery chains started creating pharmacies in-store, in their huge supermarkets. Amazon led the way in the online sales front, delivering prescription drugs to consumers doorsteps. And you had third party health benefits management companies that delivered prescription drugs by mail, among the services they offered to consumers. Suddenly, the consumer had many more options to buy medicines than go to the same old drugstore.
From location focus to emphasis on customer experience
Walgreens understood that its focus on location, location, location had to change to consumer, consumer, consumer. What will make the consumer want to go to Walgreen's drugstore when so many other delivery mechanisms were vying for her attention? Walgreen found in its consumer research that consumers had more loyalty towards their coffee shop than they had to the place where they bought far more relevant and serious stuff - medicines. A humbling discovery for a 100 year old giant.
Walgreen decided to put its entire focus on delivering a better consumer experience in its drugstores. It wisely understood that this new focus called for a radically different style of management. Customers vary from location to location, their needs and preferences vary and therefore delivering a superior customer experience actually meant delivering 7000 separate experiences across 7000 drugstores. And that meant that its well-oiled machinery of cookie-cutter head office controlled branch operations had to be dismantled and in its place, a truly bottom-up management style had to be introduced that gave sufficient flexibility and incentive to local store managers to innovate in their effort to deliver the best experience that their stores' customers wanted.
Stores were grouped by location and a set of stores were managed with considerable autonomy by district managers. Each district manager typically had responsibility for 1000 staff members. Total staff strength was a staggering 240,000 plus. Accountability down to profit level was given to district managers, and central support functions like finance, HR etc started serving each district, out of 30 key locations rather than from one central office, to ensure better and quicker service.
Merchandizing was decentralized - which allowed stores to play around with promotions the way they thought best served their clients. Store managers were given the flexibility to staff their stores in accordance to footfall patterns - some stores saw heavy footfalls in the morning hours, others wouldn't see a customer till mid-morning. Store managers were incentivized to go truly "local" - to participate actively in the community they served and thus build relationships with their own communities. Performance evaluation of store managers - which hitherto was based very simply on revenue generated and maintaining costs within budgets, now saw a sea change. They were evaluated based on 4 parameters - profit contribution, team management, customer service and community engagement. In the first two years since this change was institutionalized, Walgreens participated in over 16,000 local community events, totaling to over a million volunteer hours. That's a million hours spent in building deeper community engagement. A million hours which will help customers connect with Walgreen emotionally and build brand loyalty.
Walgreens tracked its customer engagement and customer service levels through Gallup, an independent research agency. Gallup found that in two years since the change, Walgreens' customer engagement levels moved up from the bottom 25% of its peer set straight up to the 95th percentile. They actually thought the numbers were wrong, and re-did the calculations just to be sure: no organization had moved so rapidly so high in Gallup's huge experience. Customer service levels were at an all time high by 2013 - 2 years into this program. And financially, the company was in its strongest position in a decade.
Head office focused on the big picture
Meanwhile, the head office focused on an even bigger picture: in 2014, the company agreed to buy out the remaining 55% of Swiss-based Alliance Boots it did not own and thus became a truly global business. Boots is the leading drugstore chain in the UK, Alliance is the market leader in Switzerland and Germany. The combined behemoth - Walgreen Boots Alliance - is today the world's leading pharmacy led health and wellness enterprise.
Takeaways for our financial distribution businesses
The Indian financial intermediation business has seen the growth of a number of "national" and "regional" distributions firms, which have expanded their branch network significantly in the last couple of decades and which now serve lakhs of investors. We also have banks who have aggressively harnessed their existing branch network to sell investment and insurance products to their clients - a business that is popularly known as third party distribution.
During the expansionary phase of the last 2 decades, a management style akin to Walgreens' top down cookie cutter approach served very well. Those who perfected the Walgreens erstwhile top-down approach, have grown tremendously. Reaching out to investors using a standardized templated approach worked very well during the phase when channel options for investors were less. Investors hitherto chose between their bank or a large distributor or an IFA/MFD. The proposition was face-to-face in all - and each investor chose the one that they were most comfortable with.
Today, the dynamics of the distribution business have changed, much like they did for Walgreens. Investors have a choice of going direct online, they have a choice of using efficient robo-advisors, they will soon be able to buy funds through e-commerce platforms that they use regularly for other shopping needs, they can opt for a fee based advisory proposition or they can continue with their existing bank/distributor. At times like this, individual distributors find it easier to step up their customer engagement in a bid to retain clients and maintain their growth path. It is a whole lot more difficult for a large distribution firm to seamlessly step up customer engagement at a local level, across the length and breadth of the country. This is where taking a leaf out of Walgreens' case study can be immensely useful for our large distribution businesses who wish to not only retain but continuing growing their client base, notwithstanding the advent of multiple channels of competition.
Content is prepared by Wealth Forum and should not be construed as an opinion of HDFC Mutual Fund.
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Wise Advice: Evolve
Walgreens - the iconic century old US pharmacy chain, with drugstores across the length and breadth of the US, is a great example of how it successfully evolved from a hyper efficient top-down management style to a bottom-up focused one, in response to the evolving competitive landscape and changing consumer needs. This case study has valuable insights for all our multi-branch financial distribution businesses and banking networks, who may now have to start thinking the way Walgreens did, in order to be future ready in an environment where providing a winning customer experience will critically influence the choice of intermediation that investors will make as options multiply for them.