Expanding Into the German MarketA Report for the Executive Board of Walgreens

Development Planning Consultants

Iyad ElaydiJonathan EmensPhilip DeGroatJose EsparzaAdama Coulibaly

Points of Focus

Profile of GermanyOverview of the Drugstore Industry The Walgreens CompanyWhy Germany?Why Franchise?Business PlanConclusion/Recommendation

Profile of Germany

Profile of Germany - BackgroundEurope’s largest economy and most populous nationThe Cold War created two German StatesUnification occurred in 1990

Western Germany is more technologically advanced

Considerable efforts have been made to bring productivity and wages up to Western standardsJoined with other EU countries to introduce a common trading currency, the EuroFifth largest economy in the world

Profile of Germany - At a Glance

Area - 221,842 square miles (slightly smaller than Montana)Population - 82,424,609 (2004 est.)Growth Rate - .02%GDP per Capita - $27,600 (2003 est.)Unemployment - 10.5% (2003 est.)Inflation Rate - 1.1%

Profile of Germany - Production

Leading industries - iron, steel, coal, cement, chemicals, machinery, automobiles, machine tools, electronics, textilesAgriculture - potatoes, wheat, barley, sugar, beets, fruit, cabbage

German EconomyCurrently, the German economy is going through a period of development. The traditional dominance of domestic banking groups is decreasing as large foreign investment management groups enter the German investment marketGrowth rates have been slow over the past several years mainly due to weaker exportsRecent high oil prices and a strong euro have made it difficult to emerge from period of stagnationThe government is starting long-needed structural reforms designed to revitalize the country's economyCorporate restructuring and growing capital markets are setting the foundations that could allow Germany to meet the long-term economic challenges

Profile of Germany - Major Companies

BASFBAYER AGBOSCHBLAUPUNKTBMWDHLGRUNDIG

HENKELLUFTHANSASAPSIEMENS AGTHYSSENKRUPP AGVOLKSWAGEN

Overview of the Drugstore Industry

Industry Profile - Drugstores in Germany (as of 2002)

Company No. of Stores Change in %

Schlecker 10,150 7

Dm 617 12

Muller 353 9

Ihr Platz 885 -11.4

Rossmann 670 10

Competition

The competitive landscape

Schlecker is the biggest competitor but lacks quality of serviceThe main reason people shop at Schlecker is because they have a large number of storesLarge number of “mom & pop” owned stores

Drugstores in Germany

Germany is the world’s third biggest drug market behind U.S. and JapanProfit Margin - Drugstores make 18 cents of every Euro spent on medicineGerman population is aging, causing greater demand for medicineLaws currently prohibit importing drugs via mail or internet

Characteristics of German Businesses

High product quality and high service qualityPrice is not necessarily the competing factorHigh premium on customer satisfaction

Competition is based on excellence of product and serviceCooperation and coordination with government is very strongLitigation is not as prevalent as in the US

The Walgreens Company

Company HistoryIn 1893 Charles R. Walgreen, Sr. arrived in Chicago, IL curiously interested in the drugstore industryMore than 1,500 drugstores competed for business at that time in ChicagoWalgreen worked for one of these and followed several others

Walgreen constantly found three things missing in Chicago drugstores:

Customer serviceConvenienceValue

In 1901, the first Walgreen’s was foundedToday, 425 stores are opening each year with 7,000 planned by 2010

The Walgreens Company

Our StrategyEnter new markets“Dense up” existing marketsRelocateRemodelInvest heavily in high tech innovations which drive service up and costs down

Why Have We Been Successful?

Nobody Waits at WalgreensIn Your Aisle, Gets a SmileIt’s No ProblemThe Phone’s for YOU!Company’s ComingSee You SoonSurprise!

Changes in U.S. Drugstore Industry

International expansion is attractive because:

Over-the-counter switches (Claritin)Higher co-paysCanadian mail order and Internet fillingUncertainty about Medicare reimbursementIntense competition in the US

Walgreens’ Strengths

Store growth is strongest in industryListed among Fortune’s most admired corporations for 11th straight year1st in food and drugstores29 consecutive years of record sales!Paid a dividend every quarter since 1933

Why Germany?

Why Germany ?Growing trend: In 1992 there was 370 franchisors with 16,430 franchisees in Germany. In 2002 there was 658 franchisors with 35,800 franchiseesFranchising might be one of the best options to enter the German market and compete with Schlecker The German drugstore sector is undergoing a major comprehensive structural change that can benefit our company

Highly advanced logistics (transportation, distribution, etc.)Ease of starting new businessesGovernment programs to help stimulate foreign investmentGermany is the world’s third biggest drug market behind U.S. and JapanProvides a base from which to expand into the rest of Europe

Why Franchise?

Franchising - Attractive for the Investor

Lower RiskEstablished Product LineName RecognitionManagement AssistanceStart-up AssistanceMarketing Assistance

Proven System of OperationGroup Purchasing PowerProven Business PlanFinancing AssistanceOperating EfficiencyExperience of Franchisor

Franchising - Attractive for the Parent

Faster Market PenetrationReduced StaffCost SavingsBroader Advertising

Obtain RoyaltiesIncrease KnowledgeCultural FamiliarityManagement Effectiveness

Benefits of franchising

Ability to enter a new market without large outlays of resourcesHomogenous goods can be offered in a large quantity under the same brand nameFranchising is a more modern marketing system than the traditional distribution system Large number of distributors are using a common name, symbol, or trademark

Franchising TrendsIt is estimated that about 85% of U.S franchise businesses in Europe, originated in England or Germany

This is mainly due to cultural similarities between those countries but also because of positive American culture perception

U.S market trends have spread throughout the world even more so in such countries as Germany, England, Japan etc.

Approximately 300 of about 2000 U.S companies have international franchises according to the IFABuilding of brand outside the U.S is also a reason for franchisingIt is estimated that about 80% of new business fail whereas only 20% of new franchised business fail

Challenges in Franchising

Operational structure isn’t always easy to defineRestricts the ability of a firm to take full advantage of market potentialCan result in conflict between franchisee and franchisorReduced control over the quality of service

Costs

Payment of franchise fee On-going royalty fees Conformity to standard operating procedures Inability to make changes readily Underfinanced, inexperienced, weak franchisor Duration of relationship Dependent on franchisor's success

Business Plan

Product DefinitionWe will market a drugstore that provides high quality products and service in a friendly atmosphere while offering the benefit of convenience through extended hours, short lines, and large product selection

Our Customers

Elderly who need medical suppliesCustomers who like the convenience of having a broad selection of food, household, and medical products in the same placeIndividuals who have busy schedules (Our stores have extended hours, some 24/7)Consumers who appreciate better service

Business PlanPartner with German manufactures to supply products and/or produce products under the Walgreens nameBuild distribution center in Frankfurt to supply all other storesOpen two stores initially in Frankfurt and Munich as models

Once the stores are settled and distribution channels are running, expand corporate owned stores to 20 in largest marketsBegin offering franchise stores to highly qualified investorsProvide training to managers and employees

Schedule3 year schedule highlightsGoal

Increase our number of corporately owned stores and franchised locationsEstablish distribution centerEstablish distribution center

Open additional storesOpen additional stores

Begin franchisingBegin franchising

Open two storesOpen two stores

MarketingDirect marketing

Direct mailing of flyers, sales ads etc. to our target marketProvide free first aid supplies to schools and other businesses to promote name recognition

Third-party marketingCo-marketing arrangements with other companies and local associations

MediaNewspapersRadioTelevisionBillboards

PublicationsMagazinesMedical Journals

SponsorshipsSports teams

DistributionDistribution strategy of a centralized warehouse providing products to all storesChannels of distribution

Capitalize on existing infrastructureBuild new channels where needed

ConclusionsGermany’s aging population will provide a large customer base for drugstoresFranchising methodology has continued to take hold in GermanyWalgreens model of drugstore, household goods, and convenience store products under one roof has had success in the USOnly a few competitors in this industry. One large dominant force to contend with

ConclusionsSolid infrastructure, centralized in Europe, state of the art transportation, and advanced logistics are all favorable characteristics of GermanyEase of inventory distribution throughout Germany and the rest of EuropeWhile the economy has been stalled over the last few years, new government actions could help turn things aroundGerman laws favor new businesses. Multiple programs to assist owners in getting started

Recommendation

The consultants unanimously agree to proceed with the implementation of the previously illustrated 3-year business plan