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McDonald’s Savior Jim Skinner Chairs the Walgreen Board: If Only He Were CEO

Jim Skinner pulled off one of the great corporate turnarounds in modern business at McDonald’s (MCD), slamming on the brakes when he took over as CEO in 2004, returning simple business discipline and cleanliness to the chain’s stores, and widening profit margins and lifting the stock price.

MCD Chart

MCD data by YCharts

The work he did was so prosaic, that despite the stock’s incredible performance during his tenure, Skinner is underappreciated. For a rare glowing look at his management approach, read this Fortune magazine profile. What he did was instill in McDonald’s managers, again, a drive for incremental improvement, the same sort of nuts-and-bolts management approach that has made Southwest Airlines (LUV) and Wells Fargo (WFC) the best-managed companies in their industries.

I relate all this by way of introduction. Skinner is the chairman of the board at Walgreen (WAG), a non-executive position, and it occurs to me the drug store chain would do well to emulate McDonald’s during the Skinner era. I know, all the attention on Walgreen of late has been its disastrous hissy fit with pharmacy benefits manager Express Scripts (ESRX), recently patched up but still costing Walgreen lost sales, and on its acquisition of a 45% stake in Alliance Boots, the European drug store chain. Both of these were bold strokes, the sorts of moves (or screw-ups) American managers are known for. Skinner’s grinding out of ever-better results is dull and tedious, by comparison, and to this mind, preferable.

What prompted this thinking on Walgreen was a visit to one of its new, flagship stores, opened recently in my Chicago neighborhood, Bucktown, in an old bank building. The store is beautiful, on three levels, and adds a huge selection of upscale food items to Walgreen’s normal pharmacy and front-end mishmash. And there was this: a well-scrubbed platoon of store employees falling all over themselves to offer assistance. Bravo.

Sadly, very few Walgreen stores will be like this one, and many, many more of the chain’s 8,000 or so outlets resemble a store some four blocks away from the flagship outlet. A tired old Walgreen store – my store, where I fill prescriptions and buy razor blades and aspirin and batteries – this one is dingy by comparison. And, as I reported to Walgreen CEO Greg Wasson during an interview for a Chicago magazine article in late 2011, workers at the store are more likely to hurry away from me than to ask if I need help, and items are often out of stock. A man could starve to death waiting for help at the photo counter. (The pharmacy employees, by comparison, offer great service. The problem is the front-end.)

Yes, yes, I know, dangerous to extrapolate wildly from a personal data point. But I’ve been to quite a few Walgreen stores in the Chicago area and elsewhere, and I wouldn’t single the chain out for great service or bright employee moods, the way one would Nordstrom (JWN) or Southwest Airlines. The impression one gets is of a chain that realizes it has great locations, is milking them, but lacks institutional will power to make store managers and clerks do a great job. Walgreen employs 240,000 (vs. more than 700,000 at McDonald’s in the U.S. alone) and anything short of an iron will results in less-than-good service, and that hurts sales.

Prescriptions account for more than 60% of Walgreen sales. Non-prescription medicines another 12%. And general merchandise – the front-end mish mash – about 25%. Due to the Express Scripts mess, prescription sales, on a same-store basis, fell 6.1% during fiscal 2012, ended August 31. Comparable-store front end sales were up an anemic 0.6%. In the first fiscal quarter, ended November 30, same-store front end sales plunged 11.3%, as same-store prescription sales (which bring people into the store) were off 7.2%.

WAG Revenue TTM Chart

WAG Revenue TTM data by YCharts

Many Express Scripts customers are returning, but to stores that aren’t nearly as inviting as they could be.

Walgreen, in its SEC filings, talks a fair amount about a program, Customer Centric Retailing, which over several recent years modified 5,843 stores, improving lighting and layout and merchandise selection. The cost was just a few hundred million dollars, and you don’t get much for that. And lowering shelf height doesn’t make store clerks friendly.

Wasson, the CEO, meanwhile, oversaw a separate initiative, Rewiring For Growth, that the company will tell you saved it $953 million on selling, general and administrative functions – the overhead that at many companies creeps up and reduces margins. And yet, SG&A soared 25% during the 2008-2011 period Walgreen says the savings were achieved, to $16.6 billion. Sales were rising just 22% during the period. No economies of scale there.

During this period, Walgreen upped its dividend aggressively. Net income during that period was essentially flat, so the payout ratio has been rising to levels not recently seen.

WAG Dividend Chart

WAG Dividend data by YCharts

And with the debt taken on for the Alliance Boots deal – and to acquire the remaining 55% Walgreen would incur billions more in borrowing, quite likely – resources for a more thorough refreshing of the stores would seem lacking.

The Express Scripts and Alliance Boots deals have no doubt been huge distractions to Walgreen management. A shareholder might hope – as would a customer – that Greg Wasson & Co. turn their attention to their 8,000 stores. And borrow a little will power from Jim Skinner.

Jeff Bailey, The Editor of YCharts, is a former reporter, editor and columnist at the Wall Street Journal and New York Times. He can be reached at editor@ycharts.com.

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