In addition, Kroger’s investment in distribution center infrastructure to support existing Walgreens stores is almost certainly a better ROI proposition than the prohibitive cost and time involved in building its own store network. Then there’s the issue of expanding the Kroger-Ocado smart-platform customer fulfillment centers to supply Walgreens stores. In a state such as Florida, where Walgreens operates roughly 800 locations, such an arrangement offers huge potential. The Walgreens brand could also be rolled out to other Kroger banners currently selling Kroger private label.
The Path Forward
The in-store performance benefits for Walgreens are clear: Conversion of unproductive front end space, particularly in 4,250-square-foot extended refrigeration concept stores, is a big net gain. Cannibalization results for the Walgreens brand are uncertain, especially given current pricing instability. But store close proximity is bound to impact Walgreens sales of its own brand, notably if Kroger implements a discounting strategy. The proliferation of signage and unique white Walgreens shelving in the Kroger pharmacy section appears to suggest that a transition to Walgreens is just a matter of time.
Kroger’s external gains in improved cost of goods sold, increased volume of Kroger manufacturer products, and supply chain leverage, plus additional pickup locations, appear to outweigh any in-store benefits. The space adjacent to the pharmacy isn’t prime in-store real estate, which mitigates the potential gains by comparison to Walgreens’ replacement of front end photo-processing departments at many of its stores.
Building Express grocery concepts to recapture the elusive convenience shopper isn’t new for Kroger. In 2017, it built two 12,000-square-foot Fresh Eats Market stores in Ohio. Using someone else’s real estate, however, overcomes the ROI viability hurdle by limiting capital investment and operating expense exposure, and avoiding lengthy site acquisition and development resources and time.
All of the aspects of the Kroger-Walgreens partnership that made sense 18 months ago make even more sense going forward.
Cincinnati-based Kroger employs nearly half a million associates who serve 9 million-plus customers daily through a seamless digital shopping experience and 2,757 retail food stores under a variety of banner names. The company is No. 3 on The PG 100, Progressive Grocer’s 2020 list of the top food retailers in the United States.
Walgreens operates 9,277 drug stores, with a presence in all 50 states, the District of Columbia, Puerto Rico, and the U.S. Virgin Islands, along with its omnichannel business, Walgreens.com. The company is No. 4 on The PG 100, Progressive Grocer's 2020 list of the top food retailers in North America.