Walgreens' Transparency Issue

When the tax-financed share of an industry’s revenue approaches 50%, a company will often find that its financial statements are held to a higher standard. That higher standard is often labeled “transparency”. With the recent extension of Medicare to cover outpatient prescriptions of the elderly, it is expected that the tax-financed portion of expenditures on outpatient drug prescriptions will approach 50%. The purpose of this paper is to raise the transparency issue with regard to a major institution in the pharmaceutical supply chain – Walgreens – the dominant retail chain drugstore in the country. The key result is that in 2003, there was considerable disparity between the net profitability of Walgreens front store operations – 1.4 % -- and the net profitability of its pharmacy operations – 8.3%. The front store drives a disproportionate share of Walgreens labor and occupancy operating expenses – 61.5% -- versus 38.5% for the pharmacy operation. Even though the front store enjoys a higher gross profit margin than the pharmacy – 36.1% versus 21.6% -- it incurs an even greater operating expense margin – 34.6% versus 13.3%. This disparity may be interpreted as a cross-subsidy and that this may become an issue as Medicare is extended to cover outpatient prescriptions of the elderly.