Walgreen Gets Greener With Ology

Eric is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Health food stores recognized the potential of green consumer products, and now Walgreen wants a piece of this market. In a Nov. 5 press release, Walgreen (NYSE: WAG) announced the rollout of Ology, a new private label line that includes compact fluorescent light bulbs, green cleaning products, and a few green body care products. An income boost from green product sales could help Walgreen recover from a difficult year. Other grocers and drugstores have their own private label green consumer products so Walgreen could be in for a fight here.

Another Tough Month

Another Nov. 5 Walgreen's press release explained that the drugstore's 2012 troubles continued into October, announcing 2.1% weaker sales for the month. Although Walgreen mentioned that the catastrophic Hurricane Sandy did affect its October results, the drugstore also mentioned that its monthly sales figures showed weakness even before the hurricane hit. Comparable store prescription fills fell 4.6% between Oct. 1 and Oct. 25, and Sandy didn't affect sales in this period according to the Walgreen press release. Walgreen's main rival CVS (NYSE: CVS), as well as grocery stores like Kroger and Safeway (NYSE: SWY), continue to attract pharmacy patients who switched stores during Walgreen's dispute with Express Scripts earlier this year.

Making a Choice

Walgreen could have just ordered green products from United Natural Foods, (NASDAQ: UNFI) which would save the drugstore the costs of developing a new product line and possibly make its short term results look better. United Natural Foods already supplies grocery stores with baby shampoos, environmentally friendly household cleaners, and green laundry detergents. Supplying a drugstore wouldn't be a stretch. By creating Ology, Walgreen showed its willingness to invest in private label goods, which could improve its future earning prospects. Reuters explained that CVS also expanded its private label lineup recently, as both drugstores realize that private label products could boost their margins.

Challenging the Grocers

Walgreen's Ology line could compete with both Safeway's Bright Green brand and Whole Foods' (NASDAQ: WFM) 365 Everyday Value brand. Safeway has its own store pharmacies and Whole Foods sells lots of health supplements, so both Safeway and Whole Foods could be considered Walgreen competitors. As a supplier for both Whole Foods and Safeway, United Natural Foods could also lose some sales if Ology convinces shoppers to shop at Walgreen. Scott Condon, at the Aspen Times, reports that Whole Foods worked toward making its 365 Everyday Value brand, which includes green consumer products, more price competitive recently. Pricing alone might not convince shoppers to buy green products at Walgreen.

Challenging CVS

CVS offers private label environmentally friendly napkins, paper towels, and other paper goods under its Earth Essentials label. My Private Label reports that CVS recently updated the packaging on Earth Essentials products, displaying pictures that show that the Earth Essentials brand now appears more prominently on the packaging than the CVS label. Walgreen also gave the Ology brand top billing on its packaging, as the pharmacy's web site shows. The Earth Essentials redesign could mean CVS feels confident about the green product market itself, and suggests Walgreen picked an appropriate branding strategy.

The Stakes

These drugstores' financial figures show what capturing part of the green product market means. A ReportsnReports.com press release at PRWeb estimates that the United States green household cleaning product market was worth $640 million in 2011, more than double its 2007 size of $303 million. Walgreen reported sales of $71.6 billion in the last year and CVS reported sales of $116.5 billion, according to Yahoo Finance, so green cleaning products won't provide a major boost to either drugstore's sales figures. With Walgreen reporting a 2.97% profit margin and CVS reporting a 3.15% profit margin, potential margin improvements look much more important for these drugstores.

Takeaway

Walgreen really needed to give former patients a reason to come back, as its October financial results show that the Express Scripts fallout hasn't ended. Ology could help Walgreen gain some goodwill with shoppers and improve its income at the same time. Walgreen's decision to introduce a separate private label brand also makes sense. Although Ology might take some time to show results for Walgreen, the drugstore's future looks better now.

Dig Deeper

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Eric Novinson owns shares of Whole Foods Market and CVS. The Motley Fool owns shares of Whole Foods Market. Motley Fool newsletter services recommend Whole Foods Market. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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