New Global Middle Class and Digital Lifestyle Converge at Walgreens 

New Global Middle Class and Digital Lifestyle Converge at Walgreens 

A few days ago we ran across a story that probably didn’t make headlines in too many places. Here at Tematica, however, it was quickly shared with the team because it perfectly depicts the coming together of two of our investment themes: The New Global Middle Class and the Digital Lifestyle. Here is part of the story from Mediapost.com:

Walgreens is adding the Alipay mobile payment platform to more than 7,000 Walgreens locations nationwide. Alipay, operated by Ant Financial Services Group and used by 1 billion people globally, will allow shoppers at Walgreens to use the same payment system commonly used in China. More than two-thirds of Chinese tourists used smartphones for payments abroad last year, according to Nielsen.The Alipay deployment will allow Walgreens to offer the payment system to more than 4 million Chinese travelers in the U.S. at any given time, and Walgreens is the largest U.S. drugstore chain to deploy Alipay, according to Walgreens. “Walgreens is focused on making shopping more convenient for our customers. This collaboration has particular significance for our Chinese customer population, who now has a new way to experience Walgreens,” stated Richard Ashworth, Walgreens president of operations. “Not only can they buy our products via our dedicated store on Alibaba’s Tmall Global marketplace, but they will now also be able to shop in the U.S. using Alipay as they would in China.”

Source: Walgreens Starts Accepting Alipay Payments Nationwide 02/19/2019

 

So here we have a U.S. retailer adding a mobile payment option specifically to cater to tourists coming from China.  The global leader in mobile payments is mainland China, where 61% of worldwide users are based, and Alipay has emerged as the dominant provider, boasting over 850 million active users. In 2018, there were reports of apparel brand Guess adding Alipay as a payment option in 50 of its U.S. stores. That move by Guess followed on the heels of brands such as Lacoste, GNC, Rebecca Minkoff, Holt Renfrew and Harry Rosen offering up Alipay at checkout.

What we will be monitoring closely at Tematica Reseach is whether the use of Alipay can gain a foothold in the U.S. market beyond Chinese tourists. With over 189 million active iPhones in the United States, and most of those Apple (AAPL) devices equipped with the Apple Pay feature, a 2018 survey by CivicScience showed only 1 percent of respondents used mobile payments as their primary payment method over credit and debit cards or cash. With the average Chinese tourist spending over $5,000 on overseas trips, anything retailers can do to reduce the friction of a transaction is well worth it and U.S. consumers witnessing the ease of checkout for those tourists might just tip the balance across other apps as well.

Amazon + PillPack = Pharmacy Disruption 

Amazon + PillPack = Pharmacy Disruption 

This week Amazon finally did what it was long rumored to do — enter the pharmacy space with its acquisition of PillPack, an online pharmacy that lets customers buy medications in pre-made doses. From my perch, I see the long expected move by Amazon into the pharmacy space as putting pressure on the prescription drug business, especially for repeat prescriptions. Why go to the pharmacy when I can have Amazon ship it to me? It’s pretty much the same problem that brick & mortar retailers have been facing, with some exception.

While details are few, from a strategic perspective we see this as a logical entry for Amazon to continue to target further consumer wallet share gains, especially those to be had with our Aging of the Population investing theme. As the baby boomers have aged, with the first ones now turning 70 years old, Peterson-Kaiser’s Health Systems Tracker has found that on a per capita basis, inflation-adjusted retail prescription drug spending in the U.S. increased from $91 in 1960 to $1,019 in 2016. Based on the current domestic population that equates to a market size of more than $300 billion and for Amazon that is greenfield opportunity.

While it’s still early days, the reaction has been devastating to shares of CVS Health, Walgreen Boots Alliance and even Rite Aid.

Odds are the acquisition of PillPack is just the beginning of Amazon’s larger plans that could include Prime two-day or same day delivery as well as voice ordering via Alexa. It certainly looks like Amazon is poised to once again up-end yet another industry.

Bank of America Merrill Lynch says investors should avoid Walgreens Boots Alliance shares as Amazon enters the pharmacy business.

Shares of drugstore companies are tumbling Thursday after Amazon announced it signed an agreement to acquire online pharmacy PillPack.

The newly-introduced Amazon threat, even if it doesn’t have an immediate financial impact on WBA, will create longer-term competitive questions as well as uncertainty around the multiple,” the analyst added. “In the interim we see WBA as particularly under pressure as it works through its partnership plans. Because of this, we expect the stock to remain range-bound (even with today’s intraday stock move).”

Source: Sell Walgreens because of Amazon online pharmacy ‘threat’: Bank of America 

Walgreens and the morality of taxes

Walgreens and the morality of taxes

 

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There’s been quite a bit of chatter on Facebook and in the investment community concerning Walgreens’ (WAG) announcement that it does not intend to take advantage of the tax breaks its potential acquisition of Alliance Boots in the UK would allow under the tax code, a strategy which could save it and thus its shareholders hundreds of millions of dollars each year. The announcement has been met with much moral posturing from all sides and has subsequently sent shares tumbling, loosing as much as $5 billion in market capitalization.

Many on Facebook have professed support for this position. Walgreens has two options:

1)   Take advantage of the legal tax breaks afforded to it through this potential acquisition, retaining more income for its shareholder, which are primarily Americans. This would result in more money in the private sector.

2)   Take money away from their shareholders and give it to the federal government in the form of taxes.   This would result in more money in the public sector.

Which option is better, 1 or 2? Depends on what you are looking to achieve. If what you are looking to achieve is more growth in the economy, then you simply choose the option that generates greater growth. So far, the evidence is fairly clear that the private sector generates more growth per dollar spent than the public sector, you can read about this here, here, here and here, (there are countless more, but I think you get the point.)

This is fairly intuitive if you think about it.

In the private sector, a company has a finite amount of money to invest in order to generate growth. By definition, if a company wants to remain in business it has to generate more money that it uses to operate. If it fails to do so, it will go out of business, thus will no longer be able to siphon money away from those ventures that do generate more than they consume.

In the public sector there is no such feedback loop. Programs within the government grow by garnering themselves more and more attention and by convincing those who hold the purse strings that they need more funds. There is no weighing of value generated vs value consumed. In fact there is more of a negative feedback loop by which a program that is shown to be failing miserably is more likely to get significantly more funds if it projects the impression of impending doom than one that is showing efficacy with the funds it already has been allocated.

Before cheering on Walgreens for taking money out of the pockets of its shareholders, think about whether you or Congress make better decisions with the money in your pocket. Given that according to a recent NBC/WSJ poll, Congressional approval rating is down to a staggering 14%, I’m guessing most believe that the money is best served in your pocket.

That being said, the main problem here is the ludicrously complicated tax code and excessively high tax rates which incentivize the private sector to seek out ways to minimize taxes. The Laffer Curve illustrates how lower tax rates, (and a simple tax code) would ultimately result in higher tax receipts and less money wasted in utterly non-productive pursuit of means to minimize taxes. Money spent on lawyers and accountants could instead be spent in ways that would productively grow the economy.