Walgreens to cut at least $1 billion in costs within three years, plans store, warehouse closings

Dec. 20--Walgreens announced plans Thursday to cut at least $1 billion in annual costs within three years while using technology to address changes in how consumers shop and finding more ways to draw customers into stores.

The cost-cutting will include some warehouse consolidations and store closings, Walgreens Boots Alliance executives said on an early morning call with analysts.

Walgreens also is looking to change and update its products and services and develop new income streams to attract more customers.

"In the world we live in today, we must create a company that can interact with our customers however, wherever and whenever is right for them," Alex Goulay, co-chief operating officer, told analysts. "We can't wait for them to come to our stores."

The Deerfield-based company said it has retained Accenture to help it review its cost structure over a 16-week period and plans to adopt zero-based budgeting, a tool used by consumer product companies to more closely justify all corporate spending. Earlier this year, Accenture said more than 300 companies around the world use the tool. In the Chicago area, that list includes Kraft Heinz and Mondelez International.

"Whether this will be three or five (years) is difficult to say because many of these tests take a lot of time to come to a real fruition," CEO Stefano Pessina said, adding, "We are doing an incredible effort to digitize the company and to use the digitalization for not only improving the efficiency of the company but also to offer many, many more services to our customers."

Part of that digitization effort includes a partnership with Verily, which is part of Google parent company Alphabet. In an arrangement that was announced Wednesday, Walgreens and Verily are initially developing a pilot project that will use devices to help people take their medications as prescribed. Broadly, they plan to work together on finding ways to improve access to health care technology, such as through sensors and software to help prevent, manage, screen and diagnose diseases.

It's the latest in a series of Walgreens partnerships announced recently.

Walgreens partnered with Kroger to carry Kroger groceries in more than a dozen of its stores in northern Kentucky and allow grocery pickup at those stores. Walgreens also recently announced that it would expand its partnership with LabCorp, opening at least 600 LapCorp centers at Walgreens stores, where specimens can be collected for lab testing. Earlier this month, Walgreens announced that it had launched next-day nationwide prescription delivery with FedEx. And Pessina said Thursday that Walgreens has advanced its collaboration with health insurer Humana.

John Boylan, a senior equity analyst with Edward Jones, praised the partnerships in a note to investors Thursday, but he cautioned that only time will tell how much of a difference the partnerships, and the cost-cutting, will truly make.

"Many of these partnerships are still in their very early stages, and we would like to see if these services will have a notable impact on growth and profitability, and if its cost cutting efforts will counteract the continuing reimbursement pressure we are seeing in the drugstore market," Boylan wrote.

Broad details of the cost-cutting program came as Walgreens reported fiscal first-quarter net earnings of $1.1 billion, or $1.18 a share, compared with $821 million, or 81 cents a share, in the year-ago period. First-quarter sales rose 9.9 percent from the comparable quarter a year ago and included results from recently acquired Rite Aid stores.

Walgreens spent more than $4 billion to acquire nearly 2,000 stores from Rite Aid in a deal it closed last year.

The call also followed a number recent changes to employee benefits that angered many workers and former workers, including deep cuts to bonuses for store and other managers.

Walgreens also decided that starting in 2019, employees won't qualify for paid time off unless they work at least 30 hours a week, versus 20 hours currently. And the chain decided to eliminate health insurance for a number of its eligible retirees after 2019. However, the company is adding a paid parental leave benefit that will offer full pay for eight weeks of leave to new mothers and fathers. Also, it is expanding short-term disability leaves for hourly employees working at least 30 hours a week.

[email protected]

___

(c)2018 the Chicago Tribune

Visit the Chicago Tribune at www.chicagotribune.com

Distributed by Tribune Content Agency, LLC.