Walgreens announced today that they are acquiring Duane Reade, a 257 store pharmacy chain in New York City. The deal provides Walgreens a powerful position in New York, where Duane Reade locations seem to be on every other corner, particularly in Manhattan.
The articles written about the acquisition all note that Duane Reade has the highest sales per square footage in the industry. Let's consider that for a moment. What does that mean? Typically, we think of sales per square foot as a critical metric of retail success. However, in the case of Duane Reade, we have to proceed with caution. The New York City locations involve very expensive real estate. Thus, one needs a great deal more sales per square foot simply to cover the additional overhead costs.
Yes, the Duane Reade locations generate a great deal of revenue per square foot since they are in such a high population, high traffic area. In addition, Duane Reade perhaps has some market power given their dominant position in the geographic area. However, the appropriate way to assess Duane Reade, and really any retailer, is to understand the return on investment for a square foot of retail space. That number would incorporate the revenue per square foot, but it would also account for the investment required to pay for that space, institute capital improvements, and the like. By the way, capital improvements will be a key factor for Walgreens, as many of the Duane Reade locations are not in very good physical shape. Walgreens will have to make further investments to upgrade the appearance of the stores.