Walgreens to Acquire Duane Reade for $1.1B (2024)

Prestige brands, get ready. There’s a new customer in town and it’s a big one: Walgreen Co.

Walgreens’ $1.08 billion bid for Duane Reade will give the $63 billion national drugstore chain a broad avenue of attack into the previously unreachable prestige beauty business.

On Wednesday, Walgreens said it will acquire the 257-store metro-New York chain from affiliates of Oak Hill Capital Partners. The purchase price includes the assumption of $457 million in debt. Oak Hill Capital bought Duane Reade in 2004 for about $748 million. Walgreens’ shares closed Wednesday at $34.19, up 0.3 percent, or 11 cents.

The deal delivers to Walgreens a well-packaged and -executed prestige beauty concept created by Duane Reade, called Look Boutique, which could serve as the national chain’s answer to CVS Pharmacy’s upscale boutique, Beauty 360. Duane Reade’s upscale beauty concept includes department store fragrance brands such as Lacoste, Juicy Couture, Usher, Burberry and Gwen Stefani’s Harajuku Lovers. It also features niche beauty lines like Pop Beauty, Ramy, Borba, Rilastil and MD Skincare by Dr. Dennis Gross.

The transaction, subject to regulatory approval, would include all Duane Reade stores, the corporate office and two distribution centers. Walgreens will fund the purchase with existing cash and anticipates the transaction will close in its current fiscal year, which ends Aug. 31. Walgreens expects to achieve synergies of between $120 million and $130 million in the third year after closing the transaction.

The acquisition, in terms of door count, widens Walgreens’ lead in the horse race with its number-one drugstore competitor, CVS Pharmacy — which, as of September, operated 7,008 units — bringing its total to 7,400 locations. It also gives the Deerfield, Ill.-based drugstore group the leadership position in the metro-New York market, where competition among national chains and Duane Reade has intensified in recent years. Excluding Duane Reade, Walgreens operates about 70 stores in the metro-New York area, including 13 in Manhattan.

The acquisition gives the national chain, “an immediate and leading presence in New York, the largest drugstore market in the country,” said Greg Wasson, Walgreens’ president and chief executive officer. “It would have taken many years of organic growth to reach the store count that this acquisition brings.”

The Duane Reade nameplate and management team will stay. Some observers speculated that Walgreens will cobrand its name with Duane Reade, as it did after its 2006 acquisition of regional Delaware-based chain Happy Harry’s.

“We are absolutely convinced there is power in this brand. And there’s power in what [Duane Reade] is doing in New York City,” said Wasson. “They are creating a completely new drugstore concept within this urban market. That’s what excites us and that’s the reason we’re leaving this team to continue that journey.”

Referring to Duane Reade’s Look Boutique, which was introduced at the Herald Square store last fall, Wasson said: “It elevates the merchandising of cosmetics and skin care products and many prestige brands, and is in line with where we believe we can take our beauty experience over time. These products are merchandised more on par with what you would see in a department store.”

Wasson has repeatedly said the category plays a pivotal role in the retailer’s Customer Centric Retail Initiative, designed to overhaul the front end of its stores — where beauty lives.

In May, Wasson told WWD Beauty Biz: “We have the opportunity to take that footprint and consider how we can make it more relevant. Are there select stores where we can create a different beauty experience across the chain?”

Referring to Walgreens’ Times Square store, he said: “We’re offering a more upscale department. We do a lot of testing, we do samples, we do makeovers. Our beauty advisers go through extensive training with our key vendor partners. It’s just the beginning, frankly.”

When asked how many stores he envisions with a prestige beauty presence, he replied: “Is it 10 to 20 percent? Instinctively I would think it would be that many doors, but we haven’t done enough research to truly know….I want to move away from a one-size-fits-all strategy. We’re in every neighborhood in this country — unlike other retailers.”

As CVS has opened more Beauty 360 outposts — it has roughly 13 — and Duane Reade unveiled its Look Boutique last fall, it appeared that Walgreens was behind in mapping out a prestige beauty strategy. Now, as part of the acquisition, Walgreens gains one of the principle architects of Look Boutique and of Shoppers Drug Mart Corp.’s Beauty Boutiques and its stand-alone Murale concept, namely Joe Magnacca, Duane Reade’s senior vice president and chief merchandising officer.

Magnacca was tapped by chairman and ceo John Lederer, who joined Duane Reade in April 2008. Lederer previously was president of Loblaws Cos. Ltd., a $30 billion Canadian grocery chain.

Tyler Wolfram, a partner at Oak Hill Capital, who heads the consumer, retail and distribution group, said the private equity firm recruited Lederer for Duane Reade, based on his vision of transforming the drugstore chain into a differentiated “urban box” rooted in New York. “The urban box model is something that no other U.S. retailer has done particularly well,” said Wolfram. “Duane Reade is building a compelling consumer proposition around its marketing message of ‘Your City. Your Drugstore,’ and the three pillars of its front-end merchandising strategy: unique beauty offering, compelling private label offering and creative loyalty program.”

Since Lederer’s arrival, the Duane Reade management team has brought sweeping changes to the retailer, which was known for convenience but notorious for lackluster customer service. Its previous merchandising philosophy of “stack them high, and let them fly,” has been replaced by a streamlined assortment organized into three distinct color-coded areas of the store: How Do I Feel (blue), How Do I Look (purple) and What Do I Need (green). These colors have replaced royal blue and red in the company’s logo. Duane Reade ushered in these changes with a snarky ad campaign.

During the company’s latest earnings call with analysts, held Nov. 3, Lederer outlined the chain’s response to competitors encroaching on its home turf. “We’re renovating stores, we’re marketing, we’re turning staff over where we need to improve the store proposition,” he said. “This is our market. Duane Reade: ‘Your City. Your Drugstore.’ So, we’ve got to protect this market. We’re going to grow this market and we intend to do that going forward with a stronger proposition.…Great competition, which we deal with, forces you to be better and it helps us reach to a higher level. That’s what drives the business forward in a very positive, aggressive manner.”

Under Lederer’s watch, Duane Reade has overhauled roughly 30 stores to a new format, complete with ample natural light, clutter-free windows, updated fixturing and wider aisles. Lederer said Wednesday Duane Reade plans to open or remodel 30 more stores in the new format this year.

Wasson said, “We like them a lot and there’s absolutely no reason we would not want to continue their journey.” The retailer expects to keep pace with Duane Reade’s schedule, and complete the remodels chain-wide within four to five years.

In the past year, some industry watchers have said Duane Reade’s debt could hamper its renovation plans.

On Wednesday, Walgreens said it intends capital expenditures of more than $60 million annually over the next several years in Duane Reade to continue to drive its store openings and remodeling program. Duane Reade said each store remodel costs about $1 million, and results in roughly a 15 percent lift in sales.

In August, Duane Reade completed a debt refinancing, which improved the company’s liquidity position and its ability to execute its strategic plan. In a presentation to investors in December, John Henry, Duane Reade’s senior vice president and chief financial officer, said of the refinancing: “It took away a significant part of our refinancing risk by extending a major portion of our debt for five years. And again, we felt very strongly because it increased our liquidity and strengthened our financial position.”

He also emphasized Duane Reade’s productivity, saying: “We believe we have a very productive store base. We average about $7.2 million in sales per store and we’re over $1,000 [in sales] a square foot.”

Also, given Duane Reade’s urban footprint, front-end sales represent about 57 percent of its retail sales, said Henry, adding: “That’s significantly higher than you would see for most chain drug companies, where it’s in the 30 percent to 35 percent range.”

Duane Reade had unaudited net sales of $1.8 billion for the latest 12-month period ending Dec. 26. For fiscal 2008, the chain’s net sales gained 5.4 percent to $1.77 billion, from $1.68 billion the prior year, with total same-store sales increasing 4.2 percent.

Wendy Liebmann, founder and ceo of WSL Strategic Retail, said, “Duane Reade, albeit on a small scale, has been working to reinvent itself. It’s shown what a New York City drugstore can look like and that is appealing to Walgreens.” She acknowledged there will be operational challenges ahead, particularly for Walgreens, which has opted mostly for organic store growth in the past. “These are things Walgreens has had to deal with less often, and what you get when you mix and match a chain that has grown organically.”

Duane Reade opened its doors in 1960 and employes 7,000 people. Its name is ubiquitous with the denizens of New York. “This will be brilliant for Walgreens if they leave Duane Reade alone,” said Industry consultant Allan Mottus, who added that Duane Reade’s new look is one of the best in the business.