Chicago : Walgreen goes upscale with new Loop flagship

Walgreen's new, 27,000-square-foot flagship store on State Street will offer everything from sushi to flu shots.

Photo by: Erik Unger

Walgreen Co. is about to unveil a new Loop flagship store that company executives are betting will change the way you think about drugstores.


On Tuesday, Walgreen will open a 27,000-square-foot, two-story location with an eye-popping array of amenities, from manicure stations to a sushi chef, in the former Loehmann's department store at State and Randolph streets. The shiny, porcelain-tiled space is a 180-degree turn from the grab-your-Q-tips-and-run stores that have blanketed Chicago for years.
But with this opportunity for brand reinvention comes plenty of risk, namely an already-crowded marketplace catering to busy professionals. And as pharmacy margins increasingly tighten, much is riding on the 110-year-old company's effort to increase personal care, food and convenience sales.

“Drugstores in general have really recognized that their hold on the beauty market has been whittled away by the Ultas and the Sephoras of the world,” says Wendy Liebmann, CEO of New York-based consumer research firm WSL Strategic Retail. “They know if they want their female customers to buy an extra item when they walk in, they really have to up their game.”

' The purpose of the new flagship is to change the perception of the brand.'

— Neil Stern, senior partner,
McMillan Doolittle & Co.

Walgreen executives won't comment on how many flagships they plan to open, but the company confirms it is evaluating former Borders bookstore sites across the country.
The No. 1 drugstore chain's makeover won't come cheap. The new Walgreens will include a sleek cosmetics area that looks like a mini-Sephora and offers $15 manicures and eyebrow-shaping. There also will be a barista, made-to-order sushi, a juice and smoothie bar, self-serve frozen yogurt, upscale wine and spirits and a wide cheese selection—even a humidor.
On the pharmacy side, the store will staff a full-time “health guide” to act as a concierge, helping customers navigate health care options. Self-serve kiosks will allow customers to grab prescription refills quickly and there will be private consultation rooms where they can get flu shots, blood-pressure screenings and blood-glucose tests.
GETTING SQUEEZED
It's by far the most aggressive in a string of moves by the Deerfield-based company to attract upscale, professional shoppers while boosting sales outside the pharmacy at the back of the store, from which Walgreen historically has drawn two-thirds of its revenue. Profit at the chain hit a record $2.7 billion in fiscal 2011, but a shake-up in the pharmacy world is threatening that figure in 2012.
Pharmacy reimbursement rates are being squeezed by the government and private insurers as they attempt to bring down health care costs. Walgreen's prescription income will decline this year after St. Louis-based Express Scripts Inc., a pharmacy benefits manager that administers health plans for corporate and private health insurance clients, dropped Walgreen from its network in a fight over prices.
As a result, Express Scripts clients—who include local employees of Exelon Corp., W. W. Grainger Inc., Allstate Corp. and William Blair & Co., to name a few—no longer can get their meds at Walgreens at in-network prices, which could cost the retailer $5 billion in sales in 2012.

Shannon Curtin is heading Walgreen's makeover.Photo: Erik Unger

Carol Levenson, a credit analyst with New York-based GimmeCredit LLC, says the corporate divorce also could lower front-end sales by decreasing the overall number of people walking through Walgreens' doors.
This is where Shannon Curtin comes in.
“My whole existence is to enhance front-of-store sales,” says Ms. Curtin, who, as Walgreen's general merchandise manager for beauty and personal care, is overseeing the overhaul. An avowed beauty junkie who got her start spritzing perfume at a Dillard's department store in Arkansas, Ms. Curtin has worked for MAC cosmetics and most recently spent nearly a decade as a senior buyer for skin care products at Wal-Mart Stores Inc.
At Walgreen, “our heritage is in pharmacy, but we want to uncover untapped potential in the front end,” she says.
Ms. Curtin has spent two years conducting market research and recruiting little-known overseas brands like Becca, an Australian makeup line whose packaging—and $25 price tags for eyeshadows—resemble those of Laura Mercier or Bobbi Brown. A facial serum from Italian skin care line Rilastil will retail for $160.
Though the European brands add a certain air of sophistication, the real litmus test will be whether major American cosmetics manufacturers “start to believe this is a legitimate outlet for higher-end products,” Ms. Liebmann says.
UPSCALE SPACES

The cosmetics area, called the Look Boutique, debuted two years ago in the New York-based Duane Reade chain as part of a successful transformation from dingy, urban drugstores to sparkly, upscale spaces that resemble department stores. Walgreen acquired Duane Reade from Stamford, Conn.-based private-equity shop Oak Hill Capital Partners in 2010 largely to capture the chain's merchandising and marketing prowess and since has tested the Look Boutiques in a handful of Walgreens across the country.

“The purpose of the new flagship is to change the perception of the brand,” says Neil Stern, a senior partner at Chicago retail consultancy McMillan Doolittle & Co. “Walgreen has always been conservative. You don't go into a Walgreens and say, ‘Wow.' “

Perhaps a bigger problem is that customers often go into a Walgreens unaware that it is, in fact, a Walgreens.

“Everyone used to say, ‘Oh, you walk inside a Walgreens and a CVS and you can't tell the difference,' “ Ms. Curtin acknowledges. “Well, now you can.”

But with Sephora, Ulta and a Macy's within blocks of the new store, not to mention scads of food options catering to the Loop lunch crowd, Walgreen will have to fight for customers.

“I might get a manicure or some sushi there,” says Heather Salisbury, a River North worker walking past the store on a recent evening. But she says she won't stop buying her makeup from the nearby Macy's Clinique counter.

With the possibility of more mega-Walgreens comes the possibility of ever more amenities—perhaps even an in-store bar. When asked whether the Loop store will follow in the footsteps of a Manhattan Duane Reade's decision to serve draft beer, a Walgreen spokeswoman says, “Never say never.”