Overall, Walgreens will invest over $1 billion over the next several years in various ways to grow a retail business anchored in digital healthcare.

If Walgreen Boots Alliance Inc. hasn’t made it clear yet that its future lies in leveraging ecommerce and digital healthcare to turn its retail drugstores into virtual healthcare malls, that certainly is clear now.

On Tuesday, Walgreens announced its second quarter earnings for fiscal 2019. For the quarter ended Feb. 28, Walgreens grew total sales year over year 4.5% to $34.50 billion from $33.02 billion, but net earnings dropped to $1.156 billion from $1.349 billion. For the first six months of fiscal 2019, total sales are up 7.2% to $68.32 billion from $63.76 billion in the first six months of fiscal 2018. Net earnings were $2.279 billion compared with $2.170 billion in the previous year.

On the company’s recent earnings call with Wall Street analysts, Walgreens CEO Stefano Pessina told analysts about what he calls the worst quarterly results since Walgreens merged with British retail drug chain Boots in December 2014.

“The market challenges and macro trends we have been discussing for some time accelerated, resulting in the most difficult quarter we have had since the formation of Walgreens Boots Alliance,” Pessina told analysts. “During the quarter, we saw significant reimbursement pressure, compounded by lower generic deflation, as well as continued consumer market challenges in the U.S. and UK. While we had begun initiatives to address these trends, our response was not rapid enough given market conditions, resulting in a disappointing quarter that did not meet our expectations.”

This builds on our existing highly successful customer-facing platforms, including our 55 million downloaded apps and our 85 million active Balance Rewards members.

On the call Pessina and other Walgreens executives made it clear that Walgreens, while looking to cut its annual operating expenses annually by up to $1.5 billion—including between $500 million and $600 million for information technology—is putting a priority on rolling out a more aggressive approach to ecommerce and digital healthcare.

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Despite cost-cutting measures, Walgreens could spend as much as $300 million on various initiatives related to digital healthcare. “We will be putting in $300 million to boost the partnerships and to boost our capabilities on digitalization of the company,” Walgreens chief financial services officer James Kehoe told analysts, based on an earnings call transcript from SeekingAlpha.com.

In January, Walgreens announced it would begin working with Microsoft to design new “digital health corners” for its stores, beginning with a 12-store pilot project this year. As part of the deal, Walgreens will begin using Microsoft’s Azure cloud-computing software, moving applications and data to retailers’ data centers, the companies said.

That partnership in particular will accelerate Walgreens’s focus on digital healthcare, the company says. “The partnership with Microsoft is a clear acceleration of the digitalization of our company along with recruiting internally a lot of (people), particularly a chief digital officer,” Walgreens president and co-chief operating officer Alex Gourlay told analysts. “And there’s more people coming in to really drive the modernization of our platform and processes to become a new retail and healthcare company.”

Last year Walgreens generated estimated online sales of about $1.70 billion, according  to research in the recently published  67-page Healthcare E-Commerce Report produced by Internet Health Management and Internet Retailer, both members of the Digital Commerce 360 family of e-commerce editorial and research products.

But now Walgreens needs to accelerate ecommerce and digital healthcare and leverage its already significant base of mobile customers and its rewards program. “The work we are doing on digitalization of our business will deliver an enhanced customer experience and the tools and analytics to drive customer loyalty,” Gourlay said. “This builds on our existing highly successful customer-facing platforms, including our 55 million downloaded apps and our 85 million active Balance Rewards members.”

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Overall, Walgreens will invest over $1 billion over the next several years in various ways to grow a retail business anchored in digital healthcare. “We have the right investments, $300 million a year, which – it adds up to $1 billion of investments behind partnerships and digital,” Kehoe said. “We’re investing to make sure especially that the U.S. business has the ammunition required to create that omnichannel experience in both pharmacy and in retail.”

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