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--:-- Ryan Knutson: Welcome to The Journal. I'm Ryan Knutson.
--:-- Jessica Mendoza: And I'm Jessica Mendoza.
--:-- Ryan Knutson: Today, we're talking about Walgreens, the store with the red squiggly W. It's been an American institution for more than a century.
--:-- Jessica Mendoza: That's right. You can fill your prescriptions, buy deodorant, toothpaste, shampoo, or pick up a pint of ice cream late at night. And it's everywhere. 70% of Americans live within five miles of a Walgreens-owned pharmacy.
--:-- Ryan Knutson: But this American institution is now at risk of falling apart. Walgreens, which has been a publicly traded company for close to 100 years, agreed to sell itself to a private equity firm called Sycamore Partners for about $10 billion.
--:-- Jessica Mendoza: Or something like $90 billion less than it was worth about 10 years ago. That's our colleague Joseph Walker. He's watched Walgreens go from a company worth more than $100 billion down to worth $10 billion today.
--:-- Joseph Walker: Yeah, a great American brand over 100 years old really has this sort of ignominious demise or decline over the past, you know, five, 10 years in the way that it struggled to adapt to the market forces that were affecting its competitors, but didn't quite end up moving in the right direction.
--:-- Jessica Mendoza: And you can add into it, the Italian billionaire who stepped in and tried to help with that turnaround and, you know, so far has also failed to make it happen.
--:-- Ryan Knutson: Welcome to The Journal, our show about money, business, and power. I'm Kate Leinbaugh. It's Monday, March 10th.
--:-- Kate Leinbaugh: Coming up on the show, the collapse of Walgreens. CRM was supposed to improve customer relationships. Instead, it's shorthand for can't resolve much.
--:-- Ryan Knutson: Which means you may have sunk a fortune into software that just bounces customer issues around but never actually solves them.
--:-- Kate Leinbaugh: On the ServiceNow AI platform, CRM stands for something better. With AI built into one platform, customers aren't mired in endless loops of automated indifference. They get what they need, when they need it.
--:-- Ryan Knutson: Bad CRM was then. This is ServiceNow.
--:-- Ryan Knutson: This episode is brought to you by Walmart. Did you know that Walmart is one of Fortune 100's best companies to work for in 2025?
--:-- Jessica Mendoza: It's no surprise. Walmart is investing $1 billion in training and development to help associates build lasting careers with or without a degree.
--:-- Ryan Knutson: In fact, 75% of Walmart management started in hourly roles. With benefits like health care, paid parental leave and tuition support, Walmart isn't just a place to work. It's a place to grow. Learn more at walmart.com slash spark.
--:-- Jessica Mendoza: Walgreens was founded in Chicago in 1901. That was the same year that President William McKinley was assassinated and Teddy Roosevelt took over.
--:-- Ryan Knutson: Roast beef cost 15 cents a pound and a dozen eggs cost less than a quarter. Ford's Model T wasn't even built yet.
--:-- Jessica Mendoza: Walgreens was started by a man by the name of Walgreen, and he was a pharmacist. He bought up a local pharmacy store where he worked, and the company expanded, pretty fast.
--:-- Ryan Knutson: It went public in the 1920s. It was a very successful stock for a lot of years. It was managed by descendants of the first Walgreen up and through the late 20th century. A family business.
--:-- Jessica Mendoza: Yeah, very much so. Very much so.
--:-- Ryan Knutson: Early on, one of the things that sort of distinguished itself was that they had a lunch counter and one of their people there came up with the malted milkshake, right?
--:-- Jessica Mendoza: Which is like a sweeter version of your regular milkshake. And that made it a big hit.
--:-- Ryan Knutson: They were the milkshake innovator to create the malted milkshake?
--:-- Jessica Mendoza: It's true. I feel like this is like, Americana trivia, like really good stuff.
--:-- Ryan Knutson: It is. It is. It's true.
--:-- Ryan Knutson: Walgreens kept growing. In the decades after it would put pharmacies in neighborhoods across the country And business boomed Walgreens the pharmacy America Trust For the nearest 24 location call 1 To the point where today you know I think we all see where you know you go down the street and there a Walgreens Then a couple blocks later, there's another Walgreens, right?
--:-- Jessica Mendoza: And then next to that is a CVS, and then another Walgreens a block and a half away. And the idea there just being that you want to just give customers as many chances as possible to shop at a Walgreens.
--:-- Ryan Knutson: They implemented the drive-thru pharmacy, which is obviously now pretty standard at many pharmacies and suburban type of areas. If only you could get everything done without getting out of your car.
--:-- Jessica Mendoza: Fortunately, Walgreens offers the most drive-thru pharmacies in America.
--:-- Ryan Knutson: And it kept going, really. I mean, I think if we want to say the peak, you know, probably going up until like 2010.
--:-- Jessica Mendoza: I think the reimbursement pressures that the company is facing now really start to pick up around them and then accelerate it.
--:-- Ryan Knutson: What do you mean by reimbursement pressure?
--:-- Jessica Mendoza: They're getting paid less money than they were in the past, right? So every day they're getting paid a little bit less for the same prescriptions that they're dispensing.
--:-- Ryan Knutson: Pharmacy chains like Walgreens strike deals with pharmacy benefit managers, or PBMs. PBMs are businesses that set which medicines patients can get.
--:-- Jessica Mendoza: And they are the ones that negotiate with pharmacies on reimbursement rates.
--:-- Ryan Knutson: In 2011, Walgreens tried to play hardball with one PBM. It wanted better terms from Express Scripts.
--:-- Jessica Mendoza: But its tough tactics didn't work out.
--:-- Ryan Knutson: And what happened there was, in any negotiation, right, it's all about leverage.
--:-- Jessica Mendoza: And so for many years, you know, Walgreens could say, hey, we're Walgreens. We're everywhere. People love us. You got to give us our terms or, you know, you can't exclude us from your network of pharmacies that you allow your patients to go to.
--:-- Ryan Knutson: And Express Scripts said, well, we're not so sure about that and kicked them out of the network.
--:-- Jessica Mendoza: And there was not a, you know, uproar among the customer base saying, you know, we want our Walgreens. You know, we're loyal to Walgreens.
--:-- Ryan Knutson: People weren't storming the barricades necessarily.
--:-- Jessica Mendoza: And that was sort of a big sign that maybe the pharmacies like Walgreens, despite their omnipresence, were not as powerful as had been thought before.
--:-- Ryan Knutson: Being kicked out of Express Scripts' network meant that Walgreens lost access to millions of customers.
--:-- Jessica Mendoza: And it added more financial pressure on the company.
--:-- Ryan Knutson: The next year, in 2012, Walgreens came up with a new solution. It hitched its wagon to a European pharmacy chain, Alliance Boots.
--:-- Jessica Mendoza: The American retailer Walgreens has signed a deal to take a 45% stake in Alliance Boots, the parent company of the high street chain, Boots.
--:-- Ryan Knutson: As part of this deal, which was completed in 2014, Walgreens got a new director and shareholder, an Italian businessman named Stefano Pessina.
--:-- Jessica Mendoza: Stefano is well-known in Europe for being a very savvy businessman, from building up this small pharmaceutical distribution business into a behemoth with properties across Europe, including the UK and France and Italy and so on.
--:-- Ryan Knutson: Pessina eventually became CEO, and he came up with a new plan for the company.
--:-- Jessica Mendoza: One main focus was on its retail business. And I firmly believe that retail has a key role to play in improving life conditions and not only in helping people living longer, but also living healthier.
--:-- Ryan Knutson: And his idea was that, well, number one, the front of the store. We got to beef up the front of the store. The front of the store meaning where you buy your candy, your chips, your batteries, your deodorants, right?
--:-- Jessica Mendoza: But also your beauty supplies and making these stores into little comprehensive markets where you could go and pick up your prescription but also get anything else you need, right?
--:-- Ryan Knutson: And the idea there was that, you know, you offset the declining profit margins in the back of the store at the pharmacy with the front of the store.
--:-- Jessica Mendoza: Beyond retail, Pessina also had a prescription to help the pharmacy side of the business. To buy up urgent care and primary care clinics.
--:-- Ryan Knutson: The other idea was to try to integrate more with the rest of the health care system. So let buy up primary care medical providers or let invest in urgent care providers and other health care companies.
--:-- Jessica Mendoza: And then maybe we can attach them to our pharmacies right So you can not only get your prescription at the pharmacy, but you can also see a doctor to check to see if you have the flu or not.
--:-- Ryan Knutson: And so it was diversifying, expanding, acquiring in all these different areas sort of besides pharmacy.
--:-- Jessica Mendoza: In a 2019 interview with The Wall Street Journal, Pessina said he was building a company that could last centuries.
--:-- Ryan Knutson: So Pessina has this strategy for how he can turn around Walgreens. How does it work out?
--:-- Jessica Mendoza: Well, it doesn't work well enough to solve their problems at the pharmacy counter.
--:-- Ryan Knutson: What went wrong for Pessina and Walgreens is after this break.
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--:-- Jessica Mendoza: Listeners of this show will get a $75 sponsored job credit to get your jobs more visibility at Indeed.com slash journal.
--:-- Ryan Knutson: That's Indeed.com slash journal right now and support the show by saying you heard about Indeed on this podcast.
--:-- Ryan Knutson: This episode is brought to you by AARP. They have reskilling courses and career tools to help your income live as long as you do.
--:-- Jessica Mendoza: The younger you are, the more you need AARP. Learn more at aarp.org slash skills.
--:-- Ryan Knutson: With Walgreens' pharmacy business struggling, CEO Stefano Pessina identified other areas that he thought could be more profitable.
--:-- Jessica Mendoza: He tried beefing up its retail business with Walgreens' branded merchandise.
--:-- Ryan Knutson: And when you go back to like the 2012-2015 timeframe from when Stefano and Walgreens first linked up, the thing that Stefano would talk about over and over again, right, is, look, the back of the store where we dispense the prescriptions, those margins are declining.
--:-- Jessica Mendoza: You know, the American pharmacy business has had real rich margins for a long time, but that's declining.
--:-- Ryan Knutson: Now you've got to deal with that. And the way that you deal with it is the way that we dealt with it over in Europe, which was to make the front of the store into a desirable place to go shopping.
--:-- Jessica Mendoza: But there was a problem with this formula. Online shopping.
--:-- Ryan Knutson: Aside from any other missteps that the company might have made there, just people were buying less and less inside of the store.
--:-- Jessica Mendoza: People, you know, are much more likely to shop online.
--:-- Ryan Knutson: Pessina also tried other things. Walgreens bought thousands of Rite Aid stores.
--:-- Jessica Mendoza: It acquired a couple doctor's office chains. But the deals added more debt and failed to stop the pressure on its cash flow.
--:-- Ryan Knutson: Meanwhile, Walgreens and its rivals were searching for new solutions for their pharmacy businesses.
--:-- Jessica Mendoza: Where everyone else zigged and Stefano zagged was not pulling off a big deal with an insurer.
--:-- Ryan Knutson: There was a period of time in the past, you know, five, ten years where it seemed as though every big healthcare company was merging with another big healthcare company.
--:-- Jessica Mendoza: And so, you know, the most direct competitor that you could think of perhaps is CVS.
--:-- Ryan Knutson: So CVS and Aetna combined. Aetna is a health insurer, right?
--:-- Jessica Mendoza: And so CVS pharmacies, they depend a lot on health insurers for how much they get paid and all that reimbursement.
--:-- Ryan Knutson: And so by hooking up with an insurer, it just gives it that much more leverage, both internally and externally, on the payments that it receives for dispensing prescriptions.
--:-- Jessica Mendoza: That deal allayed the reimbursement pressure for CVS
--:-- Ryan Knutson: And Walgreens tried to do something similar and get a deal with the insurance company Humana
--:-- Jessica Mendoza: But the deal fell through and the number of potential partners was thinning out
--:-- Ryan Knutson: Express Scripts, that big PBM with which Walgreens had this pretty nasty dispute back in the 2011 timeframe, they hooked up with Cigna.
--:-- Jessica Mendoza: They merged with Cigna, which is another large health insurer.
--:-- Ryan Knutson: So they got bigger and bigger, and again, they're hooked up with the insurers that have so much power in this equation.
--:-- Jessica Mendoza: And Walgreens was left, you know, sort of standing alone at the dance.
--:-- Ryan Knutson: A wallflower. Yeah. At the big PBM health insurance dance.
--:-- Jessica Mendoza: And those are some, like, real exciting dances, let me tell you.
--:-- Ryan Knutson: Pesina stepped down as CEO in 2021, but stayed on as executive chairman.
--:-- Jessica Mendoza: Walgreens hired two other CEOs in the past four years, but neither of them were able to turn the company around.
--:-- Ryan Knutson: And investors lost patience. Its stock has just been decimated.
--:-- Jessica Mendoza: And there's just really, you know, very little faith that the company can turn it around.
--:-- Ryan Knutson: Because all of its other diversification strategies, again, just didn't solve its cash flow problems, you know, didn't solve its declining margins.
--:-- Jessica Mendoza: Last week, the private equity firm Sycamore announced it would buy Walgreens for $10 billion, a fraction of the $100 billion it was once valued at.
--:-- Ryan Knutson: Pesina will stay on as a shareholder. Sycamore plans to take the pharmacy chain off the stock market.
--:-- Jessica Mendoza: In a statement, Walgreens' CEO said this will allow the company time to focus more long-term in its decision-making.
--:-- Ryan Knutson: The deal is expected to close in about six months.
--:-- Jessica Mendoza: What did Pesina get wrong about running pharmacies in America?
--:-- Ryan Knutson: I think that Pesina looked at the U.S. health care system as a European.
--:-- Jessica Mendoza: And he said, this is crazy. These people spend so much money on health care. It's not even like their health outcomes are any better than us in Europe, who spend way less.
--:-- Ryan Knutson: In fact, their health outcomes are worse.
--:-- Jessica Mendoza: But, you know, you can't just keep spending 15, 20 percent of your GDP on health care and it's just going to keep rising like that forever.
--:-- Ryan Knutson: This is unsustainable.
--:-- Jessica Mendoza: There's going to be a focus on efficiency and payment reform in a way that's going to change things and make it more European-like.
--:-- Ryan Knutson: So it turns out that the rising health care costs in the U.S. aren't unsustainable, that Americans will continue to pay more and more out of pocket, and that there hasn't been this big reckoning of the government or health insurers really cracking down on the way we pay for health care, which, you know, easier said than done.
--:-- Jessica Mendoza: And the system hasn't quite made that turn yet, if ever.
--:-- Ryan Knutson: So is Walgreens going to fall into the bucket of Kmart's and Borders books and other failed chains?
--:-- Jessica Mendoza: Well, certainly not right away.
--:-- Ryan Knutson: You know, it still has a huge presence in the United States.
--:-- Jessica Mendoza: So I don't think we'll see them disappear, at least not right away.
--:-- Ryan Knutson: I think a lot depends on, you know, what Sycamore and its new owners do to help the turnaround.
--:-- Jessica Mendoza: When Sycamore completes the deal, it will have to decide, you know, how much more it can downsize and how much more efficiencies it can get out of this company and whether it can do what the previous management at Walgreens couldn't.
--:-- Ryan Knutson: Before we go, we wanted to tell you that we're thinking about hosting a live journal event.
--:-- Jessica Mendoza: Tell us what you want to see by taking our survey. There's a link in our show notes.
--:-- Ryan Knutson: And for updates on our plans, please leave us your email address.
--:-- Jessica Mendoza: That's all for today, Monday, March 10th.
--:-- Ryan Knutson: The Journal is a co-production of Spotify and The Wall Street Journal.
--:-- Jessica Mendoza: Additional reporting in this episode by Sharon Turlop.
--:-- Ryan Knutson: Thanks for listening. See you tomorrow.
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