Walgreens investing in nationwide network of micro-fulfillment centers

• Walgreens Boots Alliance plans to operate a total of 11 micro-fulfillment centers across the U.S. by the end of 2022, James Kehoe, the company's executive vice president and CFO, said on an earnings call last week.

• The first two facilities are already operational in Phoenix and Dallas. In January, Walgreens acquired a majority stake in the pharmaceutical fulfillment technology company, iA, that operates these facilities. The two facilities support prescription fulfillment at 550 Walgreens pharmacies.

• A spokesperson for Walgreens said the company is not disclosing the locations of its next nine facilities.

Each time Walgreens talks about its iA-operated facilities, the company emphasizes three things: the automation should save pharmacists time, the facilities will speed fulfillment, and the company sees the new infrastructure as an investment into the future of pharmaceutical fulfillment.

"I want to stress that this is Central Fill as a Service," then Co-Chief Operating Officer Alex Gourlay said when talking about the acquisition at the J.P. Morgan Healthcare Conference in January. Walgreens will own and be the anchor tenant for the iA-operated faciliites, but the company wants the facilities to be used by other U.S. pharmacies.

"Everyone can benefit. But clearly Walgreens, as a first mover, will be able to get even more benefit, we believe, in the short-term," Gourlay said.

The long-term ambition starts with investing in a national infrastructure of micro-fulfillment centers dedicated exclusively to filling pharmaceutical orders. Speaking to investors during a March earnings call, Gourlay said the iA facilities would create a "hub-and-spoke" model and operate in tandem with Walgreens stores. Walgreens expects its 11 micro-fulfillment centers will service 1,000 stores by the end of 2022.

"This center prepares maintenance medications for qualifying patients in the area which are then delivered to their local Walgreens pharmacy or to home depending on the patient's preferred routes," Gourlay said.

The strategy is similar to one being used by other essential-goods retailers in the U.S. looking to meet a greater demand for delivery options and a surge in e-commerce sales. Companies like Walmart and Albertsons are testing micro-fulfillment centers in several locations, and Kroger recently said a hub-and-spoke model in Florida would enable it to reach more consumers' homes directly.

Walgreens executives emphasize the effects of automating the labor it takes to dispense orders is the selling point for its strategy.

"Once we develop this new pharmacy operating model, this will really free up our pharmacists and take all that workload away, so they can do more," Gourlay said in March, referring to the work it takes to fill pharmaceutical orders compared to other more valuable labor, such as diagnostics and testing.

"The simple part of this is, how do you free up time so that the pharmacist [operates] at the top of their profession," Kehoe said last week. "It's clear now in the U.S. that pharmacists have played a huge role in the pandemic. And the question is how do we expand the testing and diagnostics role so that we're providing value added services?"

Kehoe teased the latter question would be addressed by another initiative Walgreens is working on, which the company would unveil this fall.