What made Walgreens (US pharma company) generate cumulative stock returns from the end of 1975 to 2000 that exceeded the market by over 15X, beating companies such as Coca-Cola, GE, and Intel?
$1 invested in 1975 would have given $562 in 2000.
So to understand this, we have to understand the Hedgehog Concept. I have written an article that you can read to understand this concept in detail. For now, let’s understand it this way: “The fox knows many things, but the hedgehog knows one big thing.” In the parable, the fox uses many strategies to try to catch the hedgehog. The fox never learns that the hedgehog knows how to do one big thing perfectly: defend itself.
So the Hedgehog Concept asks you a very blunt, straightforward, simple question: “What’s that one thing that you are best at?”
That can make you attackable, defendable — in short, that’s your moat!
What separates people like Darwin, Marx, Einstein, and Adam Smith, who have created the biggest impact, from all others who are just as smart?
They are hedgehogs! Darwin and natural selection, Marx and class struggle, Freud and the unconscious, Einstein and relativity, Adam Smith and division of labor.
Similarly, businesses that create a fortune for their stakeholders have to be hedgehogs.
Coming back to Walgreens, what was the concept?
Simply this: the best, most convenient drugstores, with high profit per customer visit. That’s it.
That’s the only strategy that Walgreens used to beat Coca-Cola, GE, and Intel.
Under this strategy, it took this simple concept and implemented it with fanatical consistency. It embarked on a systematic program to replace all inconvenient locations with more convenient ones. They took all the corner lots where customers could easily enter and exit from multiple directions.
If a great corner location would open up just a half block away from a profitable Walgreens store in a good location, the company would shut the good store to open a great new store on the corner.
Walgreens pioneered drive-through pharmacies and built hundreds of them. In urban areas, the company clustered its stores tightly together, on the precept that no one should walk more than a few blocks to reach Walgreens.
Walgreens stores were as densely packed in some cities as Starbucks coffee shops in Seattle.
Walgreens linked its convenient concept to a simple economic idea: profit per customer visit. Tight clustering (nine stores per mile!) leads to local economies of scale, which provides the cash for more clustering, which in turn draws more customers. Store by store, block by block, city by city, region by region, Walgreens became more and more of a hedgehog with this incredibly simple idea.