Walgreens Ventures Where Tesco Feared To Tread, at Least in the U.S.

Last Updated Nov 30, 2010 6:59 PM EST

Walgreen (WAG) may emerge as what Tesco (TSCO) has feared being in the United States.

Word of an initiative by the drug chain to expand on a take-out food operation it has be running in Chicago and a few other urban areas broke in a story in The Tennessean earlier this month. According to the newspaper's account, Walgreen has been gearing up to launch a take-out food program across its 7,000-store chain.

That's not quite the case said Walgreen spokesperson Tiffany Washington, although she did say that the drug chain has plans for its take-out food operation.

By the Walgreen account, The Tennessean was interviewing Bryan Pugh, company vp of merchandising, about the chain's beer and wine program. During the course of the interview, Washington said, Pugh made a point about how convenient Walgreen makes it for customers to pick up adult beverages at it stores. In doing so, he added that the retailer could build on the convenience factor by expanding a take-out food program that it had going.

Acknowledging the program and plans to enhance it, Washington insisted any take-out food expansion is not intended as a chain-wide initiative. She conceded that the company had indeed hired a manager with responsibility for that program, but she said Walgreen is in the initial stages of working out how to take it to the next level. First of all, Walgreen has to establish how it could centralize control over the program and establish comprehensive quality standards. Procurement now is handled locally.

Expansion of salads, sandwiches and similar take-out food would focus initially on urban markets other than those presently served. Walgreen eventually might consider the program for the 'burbs and beyond, Washington said, but the company will focus immediate expansion considerations on locales where shoppers already are particularly apt to pick up the grocery, refrigerated and frozen food items it commonly stocks, including milk, eggs, soup, snacks and ice cream.

The comparison to Tesco comes right about here.

In cities across Britain, Tesco Express stores are ubiquitous. Essentially grab and go operations that feature a few groceries and a lot of take-out food, their target audience is lunchers and commuters who need to grab a quick meal between the time they leave work and get on the train or bus for home. Express outlets also offer lots of beer and wine, merchandising it prominently. Young adults are a focal point of Tesco Express operations.

Pugh's link between the adult beverage business and the take-out food program suggests that Walgreen is thinking along Tesco lines. After all, drug chains are particularly important to urbanites, young or young at lifestyle, who often have limited access to rare supermarkets. Walgreen has traditionally stocked a large assortment of food compared to other drug chains. But even those with more limited selections draw a good contingent of shoppers to their food aisles, Duane Reade being an example as it operates in New York.

When Tesco launched in the United States, many retail observers were surprised the company picked the West Coast and Southern California for its initial store launch. It was no secret that the Tesco was basing its U.S. stores on the Express format, they wondered, why not roll out in New York or, if the company was determined to go West, San Francisco?

Buying into urban markets is expensive, though, and Tesco didn't have to pay for downtown real estate when it launched Fresh & Easy Neighborhood Market in the suburbs or 'burb-like neighborhoods in L.A. and other sprawling western cities.

Walgreen already inhabits urban downtowns, and it has a very big pharmacy business that pays most of the bills. For drug chains, general merchandise, personal care items, food, etc., represent the lesser proportion of sales. Yet, the more revenue drug chains can generate from the larger part of the store outside the pharmacy department, the better.

In the first fiscal quarter, ended Nov. 30, Walgreen prescription drug business, which accounted for 66 percent of total sales, gained 10 percent. Prescription sales in comparable stores â€" those open for at least a year -- increased six percent. In contrast, front-end sales in comparable stores advanced by less than three percent.

In the company's first quarter conference call, Greg Wasson, Walgreen CEO, said the company continues to tailor its operations and layout more closely to core consumer needs. While he didn't address the take-out program specifically, his remarks do suggest an openness to such an initiative

"We are indeed looking at additional opportunities to improve the format -- whether it's in beauty, whether it's in expanded food -- and beginning to look at pilots and a better understanding of how we can improve the experience and become more relevant to the future shopper," he noted, as transcribed by SeekingAlpha, adding, "I think some of these others I'm talking about would be bigger format changes as we understand how we can leverage that footprint that we have now in areas like beauty, food, and so forth."

Even if Walgreen doesn't intend a chain-wide expansion of take-out food, the program could be significant. That would be especially true if it became part of a greater chain-wide commitment to convenience food, one that might be tied into particularly profitable private label efforts and complementary items, such as soft drinks and, again looking at the Tesco Express model, beer and wine.

Thus, Walgreen may adopt the role Tesco passed on in the United States and become the American Express, as it were.