Walgreen Ups The Ante

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

Walgreen (NYSE: WAG) just opened its 8,000 flagship store location. The store is located in Los Angeles, California and it has all off the everyday essential items that the normal Walgreens store offers -- plus more. In recent months, Walgreen formally introduced its' 'Up Market,' which embarks on Starbucks (NASDAQ: SBUX) territory with specialty juices, smoothies, frozen yogurt, and coffees. Walgreen has a similar super-store location in Chicago, Illinois.

Granted, Walgreen may not appeal to the higher-end customers that the Seattle, Washington coffee icon can attract. Plus, fresh juice and coffee are probably the last thing customers expect when they walk into a drug store. Nonetheless, Walgreen couldn't ignore what Starbucks describes as a $1.6 billion market opportunity in premium juices. Walgreen has been testing its Up Market offering on the road via a large tour bus that features fresh food and specialty beverage items.

Change is Afoot

You can't walk into a Walgreen in recent months without noticing that change is on this company's mind. It has rolled out the welcome mat for returning Express Scripts customers to its pharmacy department after a hiatus in that relationship regarding payment issues. The company has also signed up millions of customers for its Balance Rewards program, which is a way for Walgreen to offer special discounts to customers in exchange for some personal information.

Hopefully Walgreen's push into healthy living will juice-up its sales. Last month, for instance, Walgreen sales fell 4% compared with the year ago period. Customer traffic similarly declined by 4% while prescriptions at its comparable stores declined about 2%. February was the only month in 2012 in which Walgreen monthly sales increased overall. In recent weeks, the stock has seen a pop as the winter and flu seasons commenced, but the road for 2013 appears unclear.

Getting Crowded

Juice has been causing a stir of late ever since Starbucks shelled out $30 million in cash for the Evolution brand and entered the juicing business. Starbucks picked a good time to do it in that volume for premium juices increased 25% in the 2Q of last year, according to Beverage Digest cited in a USA Today article. Retail sales volume for oranges in particular, however, fell about 3% in 2012 amid weaker pricing.

If Walgreen really wanted to compete with the big boys, it might have considered at least partnering with Jamba (NASDAQ: JMBA), which has been synonymous with juice for decades. Indeed, with its juice offering, Walgreen is entering an expanding market that Jamba had a hand in creating. Jamba, with a market capitalization of just under $120 million, is a small player.

A recent Bloomberg article suggests that with the pace of deals in the coffee and restaurant sector, Jamba, along with Krispy Kreme Doughnuts (NYSE: KKD) -- which has a market cap of $716 million and which recently expanded into coffee -- are just waiting to get scooped up. Shares of Krispy Kreme have similarly been on a tear of late trading near their 52-week high amid recent industry consolidation.

Nonetheless, Jamba chief executive, James White, wouldn't address the possibility of a takeover in a recent CNBC interview. Instead, he noted that all that new entrants into the juice market did was "elevate the importance" of healthy living. Incidentally, taken as a whole, the health and wellness sector is a $50 billion market opportunity, according to Starbucks' annual report.

Jamba has been in restructuring mode over the past several years, and it seems to be paying off. Shareholders have enjoyed a more than 75% increase in the stock over the past year. Of course, with that type of growth it's hard to imagine that 2013 could be similarly strong but Jamba has some things working in its favor.

For instance, same store sales at Jamba have been rising over the past two years. The company has an expansion plan in mind that includes the addition of 50-75 new units this year and has its sights set on overseas expansion, as well. Jamba, not to be outdone by its peers, is also entering new markets and recently launched its 'healthy meals for kids' offering, which includes four new menu items for children. The company is forming new partnerships with dozens of schools.

Buy, Sell or Hold?

For its part, Walgreen isn't shrinking into a drugstore mold or in any way letting its brand grow stale. It is acting aggressively by expanding into unexpected markets in an attempt to improve its margins. The Walgreen expansion is not unheard of considering discount retailers started offering fresh produce in their stores. The new juice and cafe offerings at Walgreen should drive some interest and perhaps help sales at certain locations. The revived partnership with Express Scripts should help, too. Walgreen may have had some missteps and investors may need to be patient, but this company is not falling into mediocrity without a fight.


GerelynT has no position in any stocks mentioned. The Motley Fool recommends Starbucks. The Motley Fool owns shares of Starbucks. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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