Will a New Loyalty Program Help This Drugstore?

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At recent shareholder events, Walgreen (NYSE: WAG) talked up its newly introduced Balance Rewards program.  Designed to encourage loyalty towards Walgreen, this program resembles those already provided by its competitors -- but this one's late in coming.  Can Walgreen's program entice customers to shop more frequently, and thus juice the company's bottom line?

Stemming the Exodus

Walgreen has been putting in extra effort to stem the customer exodus that followed it 2011 contractual dispute with Express Scripts (NASDAQ: ESRX).  That spat has cost the country’s largest drugstore chain dearly.  The two companies apparently patched up their differences in 2012, and Walgreen was admitted back into some of Express Scripts' networks.  However, that deal appears to have been struck on terms that Express Scripts dictated. 

Rite Aid (NYSE: RAD) and CVS Caremark (NYSE: CVS) have been picking up Walgreen customers who had been forced to fill their prescriptions elsewhere.   From a glance at the earnings releases of these Walgreen competitors, it is apparent that these customers have been slow to return.  Customers cannibalized from Walgreen continue to result in increased revenue over recent quarters for Rite Aid and CVS.

Loyalty Programs

Walgreen did not have a loyalty program, unlike Rite Aid and CVS, which both had robust programs of their own.  Rite Aid has the Wellness+ program, and CVS has the Extracare program.  Both have incentive segments that allow members to earn reward dollars that can be used towards future purchases.  These programs are extremely important to both companies' bottom lines, as seen from this letter from Rite Aid to its investors.  

Walgreen has sought to transform the shopping experience at its stores by introducing its own new loyalty program.  In its most recent quarterly earnings release and conference call, Walgreen boasted that 45 million new members have signed on to the program.  That’s impressive!  Compare that to the roughly 69 million members at CVS, where a program has existed for over a decade.  However, will Walgreen's growing program translate into additional business?  Earnings results from the next quarter will tell the story.

Drugstore chains have always attempted to capitalize on foot traffic into the store generated by customers who came in to fill prescriptions.  Apparently, the sales generated by merchandise, grocery items, and beauty and healthcare products were previously too insignificant for Walgreen to consider a loyalty program.  But after the fallout with Express Scripts, Walgreen has gone out of its way to generate foot traffic with store items other than prescriptions.  The new loyalty program is its most recent initiative.

Benefits to Walgreen

It is well known that generally, drugstores are more expensive places to shop for daily necessities, but somewhat more convenient for immediate needs due to more choices.  Drugstore chains target certain products for promotions every week as a way to earn rewards points, and thus encourage shoppers to visit the store when they otherwise wouldn’t.  Many items are loss leaders that stores use to entice customers in with the hope of generating more regular-priced sales.

Drugstore loyalty programs might work; in fact, they resemble the mileage accrual loyalty programs used by airlines, in that they allow customers to accrue points outside of its stores.  One such example is the Walk With Walgreen program, which awards points for walking. 

Loyalty programs also allow these chains to monitor customer behavior and tailor their marketing to drive more repeat business.   There is a certain loss of privacy when customers sign up for loyalty programs, but it's usually not a deterrent.  CVS for example, actively seeks to capitalize on this by offering a more “personalized experience.”

Future Prospects

The new loyalty program at Walgreen is definitely a step in the right direction.  However, it is not entirely clear at this point that this will make up for the loss of customers to Rite Aid and CVS.  Wall Street obviously feels optimistic.  According to Walgreen Investor Relations, 19 analysts have a consensus rating of Outperform.  Although it might be tempting to write off the stock due to the setback it received from the Express Scripts fiasco, this new program could offer investors hope for its future.