by Gary North
One of the great things about the free market is that it provides so many alternatives for the consumer's money. Because the consumer possesses money, and because money is best defined as the most marketable commodity (Ludwig von Mises), the consumer has the upper hand in most transactions. Whatever the seller is selling, it has a narrower market than money. I can walk into a store with cash and buy anything I want at the listed price (except, I discovered, at Walgreens). In contrast, the seller of anything in a store cannot walk into any other store and buy anything he wants with whatever he has to sell.
The high marketability of money is why the consumer is sovereign in a free market social order. I mean economically sovereign: the guy who holds the hammer. I don't mean legally sovereign. Every owner is legally sovereign, unless a court or legislature undermines this. I mean economically sovereign. Maybe we should call this "economic authority" rather than "economic sovereignty," leaving sovereignty for the legal sphere.
A seller who in any way attempts to evade free market causation — the final authority of the buyer — is asking for trouble. He is asking for reduced profitability. If he can persuade the buyer to part with some of his money-based authority, fine. That, too, is a matter of voluntary contract. But the classic mark of a seller who does not understand profit and loss is his attempt to hoodwink the buyer. Buyers tend to be unforgiving, especially first-time buyers.
We can learn what to do in our own sales efforts by observing what not to do in action. So, I offer you the story of my first (and last) experience with Walgreens.
ON A NEARBY CORNER
I recently moved to a new city. I have now, for the first time, seen Walgreens in action. Walgreens stores are everywhere. In my drive to church down the area's main street, going through three small cities, I find four Walgreens. The first one is across the street from the church. The fourth is a couple of blocks farther down from my cross street onto the main drag. Only Dollar General matches Walgreens in sheer numbers of stores on that street.
I have never before lived in a town with a Walgreens, but I have known about the company for most of my adult life. Walgreens put up the money to endow an economics professorship at the University of Chicago. George Stigler, who won the Nobel Prize, held that job for decades. I recall this because Stigler once attacked me in print for not knowing what I was talking about. He was wrong, and I was right, so why didn't the Nobel Committee give me the Nobel Prize — or at least the tax-free million dollars? Anyway, I never blamed Walgreens for Stigler's confusion.
Side note: What ever happened to possessives? Why don't they call Walgreens Walgreen's or Walgreens'? Why don't they call Albertsons Albertson's or Albertsons'? This is capitalism. Let's have some marks of ownership! Make it plain to everyone: "This store is mine (ours)!"
So, I walked into my first Walgreens this week. I was looking for a bottle of over-the-counter eye drops, a product line that I had never before purchased.
What amazed me was the amount of floor space devoted to non-drug-related items: magazines, toys, paperback books, toothpaste, junk food. It was a big store. Way in the back was a pharmacist and half a wall of over-the-counter products.
Walgreens, like Wal-Mart, Sam's Club, Costco, and other low-price warehousing operations, is governed by this rule for customers: "Find it yourself." There are lots of things to buy but very few sales people on the floor to show you where to look. In the case of the Walgreens I walked into, there was only one: the manager. But there were not many customers, either.
It takes longer to buy something in one of these warehouse operations than it does at a local 7-11 or mom and pop shop. In this world of scarcity, sellers can allocate in one of two ways: price or time. It's either "high bid wins" or "stand in line." The lower the price, the longer it will take you to make a purchase, other things (such as your preferred shopping hour) being equal.
I found a shelf with eye drop products. There were many brands, many bottle sizes, and many prices. I started looking at the list of contents on the boxes. The list was the same, in the same order, for every product.
Now my attention moved to bottle size. I didn't want too much. If this stuff won't cure my problem — or allow time to cure it — then I will go to a physician and get a prescription for something stronger.
So, I was now a shopper based on price.
Three bottles caught my attention. There were two differently named products, both with a Walgreens brand. They were identical in contents and identical in price: $3.29.
The third product was Visine. In front of the double row of Visine bottles was a blue label: "Sale price: $2.99." Being a bargain shopper, I bought it.
When I took it to the front of the store, the girl used the bar code scanner. It charged me $4.29, plus tax. That seemed too high. But I paid. Stupid me.
Then I went back to the pharmacist's assistant and said the price was too high. She called the manager. It took several minutes for him to show up. He had the authority to make the refund. He decided to check the price. I walked over with him. There it was: $2.99.
He had an explanation. "That sale price ended yesterday." He refused to let me buy it for $2.99.
The tag did not indicate a time limit.
I told him: "This is my first experience with Walgreens. It is also my last." He walked away. He did not bother to pull down the sale price tag.
What's wrong with this sales strategy? Let me list the ways.
THE BASICS OF MARKET COMPETITION
I have learned over the years that very few companies systematically and relentlessly honor the fundamentals of marketing. That's because all of the rules of marketing come back to the same free market principle: the economic authority of the consumer.
Sellers resist this principle, right up to the "going out of business" sale. Sellers are in business to feather their own nests. Most of them regard customers as a necessary evil. Their sales policies and practices reflect this.
So, for the benefit of sellers everywhere — and if you earn a living, you are a seller — here are the basics of successful selling. They all are an extension of this principle: "The customer, possessing money, holds the economic hammer."
- Word of mouth is the most cost-effective form of marketing. (With the Internet, it's word of mouse.)
- The customer is always right, unless he is trying to cheat you, and even then you probably ought to go along with him anyway, once.
- Identify your ideal customer, and structure everything that your company does to meet his/her demands.
- If a price is listed, honor it — no bait and switch, no "that sale ended yesterday."
- Offer a money-back guarantee or "we'll fix it free of charge" (risk-reversal).
- The value of a customer is the profit generated by the number of repeat sales (the lifetime value of the customer).
- The first sale is the most expensive one for a seller to generate.
- Profitability is in repeat sales (the back end).
- Repeat customers are more forgiving.
- Don't carry a product line that repeatedly alienates customers.
- Keep all sales records in a data base.
- Use the data base to spot successes and problems.
- Use the data base to make special offers to the ideal customers you want to return.
- The customer evaluates the entire company through the people he deals with in the store.
- Train your entire staff to understand these principles.
- Create a system of ongoing rewards and punishments that reinforces this training.
- Implement this system.
- Begin at the top.
WHAT WALGREENS FORGOT
That lowly manager made a mistake. He saved Walgreens $1.30 ($4.29 $2.99). But he reduced the lifetime value of this customer to the profit margin involved a single $4.29 sale.
As for word of mouse. . . .
Should he be disciplined? Not until after David Bernauer is disciplined. Mr. Bernauer is Chairman and CEO of Walgreens. He sets the standards. He sets the pattern for every other employee. He evaluates the company's policies. He approves or disapproves the company's in-house training. On his desk should be the sign that Harry Truman had on his: "The buck stops here."
In a press release dated September 27, 2004, Walgreens provided a standard happy face report. It focused on numbers — lots and lots of numbers. Walgreens is spending a lot of money on infrastructure.
Walgreens is budgeting approximately $1.5 billion in capital investments for fiscal 2005. This reflects expenditures for new stores (including more planned real estate purchases), technology and a new distribution center in South Carolina scheduled to open in 2007. The company anticipates a fiscal 2005 net increase of about 365 stores after closings and relocations. The goal for total openings in the year is about 450.
"Our growth created 9,000 new jobs in fiscal 2004, and we'll create a similar number of new jobs in fiscal 2005," said Rein.
At Aug. 31, Walgreens operated 4,582 drugstores in 44 states and Puerto Rico, versus 4,227 a year ago.
Here are some more numbers. Since its peak price in 2000, Walgreens share price has gone nowhere, except down, then up. It is back where it was five years ago. This is not too bad when compared to other companies, whose share prices are lower, but it is hardly anything to write home to mom about.
The company has spent billions on real estate and capital development. But it did not spend nearly enough on in-house training. I have a $4.29 bottle of Visine as proof.
Here is what I found fascinating: Walgreens profitability is in selling prescriptions.
Prescriptions, which accounted for 63 percent of sales in fiscal 2004, climbed 16.4 percent in the fourth quarter and 17.8 percent for the year. Prescription sales in comparable stores rose 12.5 percent in the quarter and 14.0 percent for the year.
Here are these large stores, built on high-priced corner lots on main streets, that are filled with non-prescription stuff to buy, yet the core business remains prescriptions.
Chairman and CEO David Bernauer said, "Though there was some softening industry-wide this year in prescription demand because of higher co-pays, we continued to record strong gains. In the long term prescription growth will be fueled by aging baby boomers and new drug development, and will become more important to controlling overall health care costs."
Despite this, at least 90% of the floor space and inventory of a Walgreens store is devoted to ancillary sales items. Even its online store sells these low-profit-margin items.
Why? Because Walgreens has a marketing strategy: to get old, sick people to come back, again and again, to buy their prescriptions at Walgreens. Walgreens therefore fills a store with peripheral shopping items. "As long as you're here, buy something else."
The layout of the stores reveals the company's marketing strategy. The stuff on the shelves is bait. The hook is the pharmacy. That is where the profits are.
The stuff on the shelves has one overriding function: to persuade the aging boomers to walk, then hobble, into a Walgreens store and buy some pills.
My conclusion: Walgreens is a for-profit economic extension of Medicare. Everything else is for show.
With respect to shelf space inventory, the importance of any one item to the company's bottom line is minimal. It can barely be measured. What is crucial is the customer's overall experience in the store.
A customer can buy at rival warehouse-type drugstores. He can also buy at a true warehouse: a Wal-Mart Supercenter, which has a pharmacy. He can buy online.
Why should he buy at Walgreens? Location: a nearby corner lot. One-stop shopping. Low prices — though not compared to online pharmacies, especially in Canada.
Why shouldn't he buy at Walgreens? "Find it yourself." "That sale ended yesterday."
For an extra $1.30, Walgreens guaranteed that this aging pre-boomer is not going to bring his Medicare-funded prescription to be filled at Walgreens. Ever. That is because of my first-time Walgreens experience. That experience told me this — not logically, but emotionally:
If Walgreens doesn't care enough about a customer's experience in its stores to train its managers to stand behind the "sale" signs on the shelves, then I why should I trust Walgreens' pharmacists? I've never spoken to one of the pharmacists, but I've spoken to a manager, and he was so poorly trained that he did not know that a sale sign is an offer to sell at a specified price. A poorly trained manager cost me $1.30. A poorly trained pharmacist could kill me. Next time, I'll go to Wal-Mart. They offer a money-back guarantee, no questions asked.
Mr. Bernauer forgot to implement what should have been obvious: a money-back guarantee. For all shelf items, this is crucial to the Walgreens experience. It will cost the company almost nothing to offer this benefit and then redeem the pledge. Furthermore, the data on refunds will alert the company to any looming problem. The underlying problem may involve a quality control failure with the product line. A pattern of refunds will reveal this. A money-back guarantee offers Walgreens an early warning alert for products that may jeopardize the Walgreens experience.
Yes, there are jerk customers. But the number of jerk customers is a small fraction of the number of run-of-the-mill repeat customers. Dealing with jerks is a cost of doing business. So is dealing with confused people. In Walgreens, so is dealing with people who can't find what they are looking for. These expenses have to be factored into the business plan. How to deal with them should be a section in the training manual.
The mistake made by that young man on the floor was not primarily his mistake. It was Mr. Bernauer's. Mr. Bernauer has not implemented a training program that made clear and nearly automatic the correct response of this store manager to a problem like mine. That response is simple to state: "I'll sell it to you at the tag price. The reason the computer charged you more is because the sale ended yesterday, but no one remembered to remove the tag." This explains why the computer charged a different price. Mistakes happen. He then removes the tag in front of the customer. Then he proceeds directly to the cash register to refund the difference in cash or else re-run the program at the sale price. Simple. Fast. And, in the long run, profitable.
My time was worth far more than the value of the refund. So was his, had he made the refund. But customers don't like to be tricked. They don't care that some clerk forgot to take down the sales tag last night. A deal's a deal. A seller who ignores a customer's commitment to not being taken advantage of will make less money.
Mr. Bernauer has not made this fact clear to every store manager, as I discovered. He has not cared enough about his customers to do right by his managers. He has not provided them with the guidelines they need, the training they need, and the in-store feedback mechanisms they need to be top-flight managers.
Meanwhile, someone in the marketing division put this message on-line under the rubric, "Marketing Systems."
You can bet your bottom $1.30, I won't!
The mission of our department is to improve Walgreens return on inventory investment, by providing systems and support services that measure merchandising and pipeline activities.
Pipeline activities? Walgreens is beginning to sound like OPEC — and act like it, in my case.
Employees here learn all facets of store merchandising, from store system preparation to product placement and ordering; everything that happens behind the scenes to improve customer satisfaction.
What happens on the scene matters a whole lot more than what the in-house computer gurus have set up behind the scene.
Here's the rule: "If you don't sell it, Walgreens' inventory return on investment on that item will be negative."
On the computerized sales receipt, there is a message, right under "Walgreens." It announces: "The Pharmacy America Trusts." This vapid, empty claim probably elicits no response by the customer, except possibly this one: "yeah, sure."
Here is a multibillion-dollar company that has adopted a useless slogan for itself. The slogan is ludicrous. Who is "America"? What scientifically valid survey was ever taken to find out whether "America" trusts Walgreens as "the" pharmacy? How recently was it taken?
If no such survey was taken, is it fair to say "The Pharmacy an Unknown Number of Americans Trust"?
If Walgreens responds, "That's just sales copy. We don't actually expect anyone to believe it," then I suggest that the company shell out a few thousand bucks and hire someone with expertise in direct-response marketing to come up with a meaningful benefit to offer customers. I offer the following, free of charge:
100% money-back guarantee, no exceptions, ever
$10 off on your next refill if your prescription isn't filled in 15 [or whatever] minutes
We pay prescription postage fees for our bedridden customers
Give the customer a good reason to shop at Walgreens again. Put this on his sales receipt.
Instead of the promise of a benefit, the company has offered a slogan. The slogan is just noise.
Why use advertising space for an unverified slogan that nobody is likely to believe? When the customer's mental response, if any, is likely to be "yeah, sure," it's better not to print the slogan. This is one of those rare cases where you really can beat something with nothing.
Better to keep a stack of brochures at the check-out counter. Have the counter lady put the item in a bag and insert a flyer, brochure, or discount coupon. Or make the shopping bag itself a discount coupon for the Walgreens Deal of the Month.
Instead, she handed me a slogan.
Walgreens isn't a bad company. No company that big is bad. But the company is facing tremendous competition on-line and from Wal-Mart Supercenters. To do such dumb cluck things as I have described sends a message: "We ignore the obvious. Our market share is vulnerable."
Whatever you do, do it better than Walgreens, beginning with this: Don't bet your future on Medicare.
P.S. As of 2006, I still get emails every month from Walgreens' managers telling me that I should not judge the company by one incident. But when I first published this essay, I received letters from ex-Walgreens' customers who said that the same thing had happened to them. This issue is training or the lack thereof, not "one bad apple." I now shop at Rite-Aid. So far, so good.
February 23, 2005
Copyright © 2005 LewRockwell.com