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At the end of the world, Walgreens will be open for another hour."

That remark came from an Orlando, Fla., disc jockey as the city battened down the hatches last year for Hurricane Charley. As the story goes, the local Walgreens was the last shop in town to stay open as the storm bore down on the city.

Walgreen Co. officials are understandably fond of repeating that story. It reflects perfectly the customer service image that the nation's top drug chain wants to project to the world--and the lengths to which the company will go to maintain that image. In terms of investments, the decision to keep stores open in the face of hurricane-force winds and possible flooding paid off handsomely in customer relations.

Walgreens has reached an unprecedented level of power. CVS has more stores. Brooks has become a power player with the bold acquisition of 1,549 Eckerd stores last year. Rite Aid is trying to become the comeback story of the decade. But no drug chain can match Walgreens for market strength, name recognition, profitability and supplier leverage.

Consider some benchmarks.

* Half the population of the United States now lives within two miles of a Walgreens--a startling market-penetration statistic.

* The chain is the industry's most profitable and has pushed its sales and earnings steadily higher for 30 straight years.

* Walgreens filled 443 million prescriptions last year, again making it the top U.S. pharmacy.

* In terms of technology, the company has some of the most highly automated forecasting and replenishment systems in all of retailing and can tailor its individual-store mix with ever-sharper accuracy to local consumer demand and demographics, while continuing to pare inventory costs by hundreds of millions of dollars.

Despite the superlatives, however, Walgreens is a company that may have to work harder in the future to achieve the same sterling results it has produced in the past.

For one thing, the company's ability to squeeze additional operating efficiencies and lower costs out of the business by leveraging technology may be nearing the point of diminishing returns, at least with the current generation of automation. That worry became apparent in fiscal 2004, when expense ratios crept up, despite the steady maturation of new stores and financial cost spreading.

"We need to take advantage of our economies of scale," said Chairman and Chief Executive Officer David Bernauer at the company's annual meeting early this year. "As we grow and spread costs over more stores, our ratio of expenses to sales should go down. That didn't happen in 2004."

Bernauer cited "some good reasons" why that didn't happen last year, including "payroll to improve customer service in the stores and more photo clerks to handle all the in-store photo work." Last year, Walgreens fully embraced the digital age at the photofinishing counter with the chainwide installation of Fuji processors that turn digitally stored photos into prints, quickly and cheaply. The move allowed the chain to bring more of its photo-processing business in-house versus shipping to outside labs, but it also came with an extra investment in store labor in the department that showed in its expense ratios.

Still, Bernauer promised shareholders, "We will not squeeze the life out of our store service just to lower the expense line.

I adamantly believe that investments in service, particularly in photo and cosmetics, pay dividends in sales and profits. But we can, and must, do a consistent and better job of everyday expense control." An even more fundamental question for Walgreens at 104 is this: How does a company that depends on prescription sales for an ever-increasing share of its total business maintain profit growth in an era of public and private third party payment plans, growing pressure from pharmacy benefit plans to shift patients into mail order for chronic care medications and extremely tight pharmacy reimbursements?

It's not an abstract concern. The pharmacy counter now accounts for 63.2 percent of Walgreens' business--nearly two-thirds of total revenues. Pharmacy automation has worked wonders in keeping the chain ahead of the third party cost-cutting curve, and a resurgent front end has helped shore up margins.

But Walgreens' ability to continue to thrive when its primary business is under constant gross margin pressure will be a challenge. Its continued success in its second hundred years will require constant innovation, new technological solutions and all the leverage that the chain can muster with suppliers, managed care contractors and the government.

There's also the issue of mandatory mail order pharmacy benefit plans, which are radioactive to all community drug stores.

Again, it may come down to the leverage Walgreens can apply in benefit plan contract negotiations and to its ability to influence its own customers so that they demand the right to continue getting their maintenance medications filled at Walgreens instead of only through the mail.

Walgreens executives themselves also point to another danger that lurks in the darker corners of any successful retail company: the danger of becoming complacent.

"If there's anything I worry about, it's that investors might think I'm overconfident about where Walgreens is heading," Bernauer admitted in January. "That's absolutely not the case. We have plenty of challenges ... [but] we just delve in and work at being the best in our business. We hire good people, find good store sites, develop good technology and execute."

'Old-fashioned service in a brand-new store'

To maintain its edge and its top drug store ranking, Walgreens isn't wanting for big ideas or big goals in 2005. Among other things, the company is in the midst of a billion-dollar stock buyback program; a relentless, internally driven expansion blitzkrieg that will put the company past the 5,000-store mark in fiscal 2006; and a $1.5 billion capital spending program for new stores, new distribution capacity and technology.

Walgreens also is waging a concerted campaign to shift the momentum among public and private third party prescription plan payers away from mandatory mail order programs and back toward retail pharmacy through its in-store 90-day prescription savings program, Advantage90.

At the front end, the chain is busy regaining lost ground in its photofinishing business, thanks to a massive crash program to install digital photo-processing machines in all 4,700 of its stores nationwide.

In the broadest sense, the company that Charles R. Walgreen Sr. founded in 1901 appears determined to add to its growing list of customer conveniences and services.

* Nearly 1,400 of its stores are now open 24 hours.

* Drive-through pharmacies are a given at virtually every new Walgreens.

* Pharmacy transactions are being simplified and speeded up through a recently launched automatic billing system called ExpressPay.

* Seniors with diabetes can now access a comprehensive, easy-to-use Medicare Part B service program at Walgreens stores, and every library in the country has been provided with Walgreen-sponsored information about Medicare drug discount cards.

* And although it has been operating on the West Coast for several years, the company has gone Hollywood in a manner of speaking. "Walgreens Health Corner" airs nationally on WGN Superstation.

As much as anything, Walgreens owes its 30-year record-charting run to a culture that embraces change and renewal. The chain has hardwired the constant drive for self-reinvention to its daily business strategy, and that restless need to innovate and reinvent plays out at many levels.

One big one: the company's store modernization program. This is a 104-year-old company whose average store is just five years old. Somewhere in the United States, a new Walgreens is opening every 19 hours, while hundreds of older units undergo renovation at any given time. "Walgreens is an old company under constant renewal," noted Bernauer. "We believe there's more innovation going on here today than at any point in our history."

"It's hard to resist old-fashioned service in a brand-new store," the company recently pronounced. In Walgreens' case, this is much more than some hollow corporate platitude. Its stores are new, but the people who run them day to day are seasoned vets. Coupled with a field management structure that encourages longevity and coming up through the ranks, those stores are run by managers who average 12.5 years of management experience. Their mantra: Keep customers coming back--and spending more on impulse when they're in the stores--by making the shopping experience as easy and pleasurable as possible.

That strategy plays out in ways big and small. The company's organic-growth philosophy, for instance, means virtually every new store is built from the ground up, in the most easily accessible high-traffic locations a metro area has to offer and with plenty of access and good parking. One rare exception to the chain's ground-up growth policy was the acquisition last year of 11 Hi-School Pharmacy stores in the Pacific Northwest because that company's culture "was similar to ours," according to Walgreens President and Chief Operating Officer Jeff Rein.

On a more subtle level, the appeal to customer convenience plays out in a host of applications, from printing prescription labels in 14 different languages--depending on store location--to large-type drug labels and prescription information and serviced cosmetics counters.

'Preservation' retailing

As in past years, Walgreens' strategy in 2005 also will hinge on the company's strong cash position, low debt load and rich capital spending plans. Despite its billion-dollar stock buyback program, Rein said the chain would spend another $1.5 billion this year on expansion and improvements.

"We ended the year with nearly $1.7 billion in the bank and project strong cash flow for the next five years," he noted in the company's 2004 annual report. "We can well afford a buyback, even as we accelerate investment in new stores, distribution centers and technology."

Company leaders also remain bullish about the future of Walgreens' core business. Demand for prescription drugs, they say, will only go up as the population ages and new drug therapies become available, and this will continue to drive Walgreens' new-store development. While some have questioned whether the chain pharmacy industry is nearing the point of oversaturation, the company remains undaunted in its pursuit of 7,000 stores by 2010, and executives have mentioned on several occasions that it could go as high as 10,000 stores without hitting the ceiling. There simply is that much business to go around.

"The over-65 population is growing four times faster than the population as a whole," Bernauer observed. "Our attitude is: Why shouldn't they all have a Walgreens pharmacy? "As for the front of the store, we've learned that the closer we get to the people, the more folks shop our front end for convenience," he added.

Walgreens managers also are buoyed by the demand trends being displayed by aging baby boomers. Over the next decade, said Rein, "We'll have evolved more and more into what I like to call the 'preservation' business."

The reason: "As we baby boomers age, I see our desires changing from acquiring stuff to staying healthy and finding solutions that make life easier and more enjoyable," Rein continued. "The most important preservation we want is physical. We seem to believe we have the right not to age; we want to feel and look 10 to 15 years younger than what it says on our drivers' licenses.

"Convenient drug stores will be at the center of preservation retailing for years to come--from prescriptions that counter once-debilitating health conditions to anti-aging creams, exercise equipment and healthy snacks," he added.

The drive to stay ahead of retail complacency and keep itself front-and-center to meet those consumers' demands has made Walgreens "the bumblebee of American business," in the words of one Chicago journalist.

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