Walgreen's Duane Reade Acquisition Makes it King of New York

Walgreen Co. (WAG) stores are not hard to find in most parts of the country. After all, the Deerfield, IL-based drugstore chain is the nation's largest, with more than 7,100 stores in all 50 states.

One major hole in its portfolio, though, is New York City, where it operates only a handful of stores. That will change, though, with the recent announcement that Walgreen is buying local market leader and city-street fixture Duane Reade Holdings for just under $1.1 billion from private-equity firm Oak Hill Capital Partners. With one big purchase, Walgreen has become New York's biggest player on many blocks, adding 257 metro-area stores to its portfolio.

This move makes sense for Walgreen, which has traditionally chosen to expand only by opening new stores. "It would have taken us many, many years," notes CEO Greg Wasson, "to gain that type of presence."

Duane Reade is an interesting buy. Though it is dominant in New York (its name comes from two downtown streets), in the third quarter, it lost $10.7 million, and comparable sales at stores open at least a year were stagnant.

These financial figures are a mystery. Any New Yorker will tell you that Duane Reades always seem busy. And it's a chain that people in the city love to hate. Often know for long lines and subpar customer service, Duane Reade even has a disparging Web site in its honor.
To its credit, Duane Reade has tried to goose sales, introducing a new logo, revamping some of its stores to make them brighter and more modern and putting out a fashionable-looking line of private-label goods called "Dr. Delish." Duane Reade also launched an entertaining ad campaign that's impossible to miss.

If anyone can turn around the chain, it's Walgreen. The company consistently turns in strong sales and earnings, as it did in most recent financial period, the fiscal first quarter.

The big question remaining is whether the Duane Reade name will survive. Glasson says there are no plans to change it. Whatever happens, New Yorkers can bet the lines in stores won't get any shorter.

Duane Reade image by flickr user bitchcakesny's photostream.