Channel Strategies: Drug stores make fill-in trip gains
August 15, 2008
Consumers are changing their shopping patterns to cut costs and save gasoline. As a result, total shopping trips are down nearly 3 percent, trips are shifting across channels, and trip missions within all channels are evolving, reports Chicago-based Information Resources Inc.’s “Times & Trends: Snapshot of Trends Shaping the CPG and Retail Industries.”
While total trips are down, drug stores are expanding their role as a “fill-in” trip destination, and are securing major share gains across healthcare categories. Beverage sales play a smaller role in drug stores compared to other channels, but they benefit from the convenience aspect of the channel. In 2007, drug stores accounted for 3 percent of beverages sales, compared to supermarkets’ 61 percent share, according to IRI’s Consumer Network for the 52 weeks ending May 19, 2007. But beverages should expect to profit from drug stores’ new fill-in trip role and the major drug store chains’ focus on front-end sales.
Because of their ability to meet consumer needs as a fill-in trip destination, drug stores have a tremendous opportunity to rethink what they offer to the shopper for those fill-in trips, says Thom Blischok, president of IRI Innovation and Consulting. Changes may range from offering new beverages, alcohol or even fruit and other perishables, he says.
“We’re seeing a little bit of emergence from the center store category in drug stores, and that’s a very good strategy,” Blischok says.
“The drug store itself is the new convenience store of tomorrow,” he adds.
Drug stores’ fill-in trips are growing for a couple of reasons. “With the stress [of the economy] comes a whole degree of illness, and, of course, the pharmacy is there,” he says. “While you’re there, it’s ok to fill in from the drug store.”
A few overall consumer trends are affecting shopping habits and drug store offerings. One shift in consumer habits is the move to self-treatment at home. “This is where drug stores can play very, very well, so we’re seeing things like self-treatment around allergies and fundamental illnesses,” he says.
Another major consumer trend is the interest in self care and home beauty. “In home personal care, there is a movement toward a change in the daily rituals, maybe from ‘my personal rituals,’ to more family rituals,” Blischok says.
In the consumer resurgence of dining at home, beers and wines are also coming back into the home. Drug stores provide a convenient channel for pick up, Blischok says. In the shifting economy, IRI also sees increased opportunities for lower-priced wine in the drug store channel.
“Remember, we are trying to recreate the dinner experience at home, so therefore, when you are going out for a nice dinner, you have a bottle of wine,” Blischok says. “There is no reason to not have a couple of bottles of wine and a couple of bottles of beer at home. The same applies with drinks in general.”
Drug stores are also an important channel for energy drinks. “One of the major things that have occurred is when we look at the growth of products, we find that energy drinks are one of these things that are basically an affordable indulgence,” Blischok says.
Overall, the drug store channel is positive for beverages.
“Generally speaking, we’re very positive on the selective growth of beverages,” Blischok says. “Now, it’s not every category and not every price point, but you know for those products that haven’t taken significant price increases, like sports drinks, people are recognizing that they are affordable indulgences.”
Drug stores are faring well so far in the transitioning economy, and the channel’s move toward private label has helped sales as well. “Today, it’s all about what’s the value for the consumer,” Blischok says. “The consumer is stretching their dollar.”
During this economic period, drug stores’ front-end and pharmacy sales are going to continue to grow quite nicely, he says. “The real chess game that’s going to be played here is about, ‘how can I really help serve the customer a little better both as a convenience trip and as well as the overall health and wellness trip?’” he says.
Poised for gains
Drug stores find themselves well positioned despite the slumping economy. One potential contributor is drug stores’ ability to provide convenience.
“I’m sure they are not going to be able to compete with price like a Wal-Mart, but the convenience of being able to go in quickly, grab a couple of things that you need, and the diversity of products now within a drug store, and be able to walk out rather quickly is something,” says Phil Park, a U.S. research analyst at Euromonitor International, Chicago. “In this economy, maybe people are budgeting and trying to shop in one location such as a Wal-Mart, but definitely the aspect of convenience that drug stores provide is beneficial to consumers who are often pressed for time.”
Another factor contributing to drug store success that piggy-backs off of convenience is that major chain retailers, such as Walgreens and CVS/Caremark, are placing stores at locations that are highly populated or strategically located.
“They are popping up in urban areas as well, because they are smaller and they don’t demand the big size that a hypermarket, like Wal-Mart, or a supermarket needs,” Park says. “They are able to fit within a corner of a city block, and people can walk, bike or drive cars really quickly and conveniently.”
As pharmacy sales continue to increase for drug stores, the real differentiation between the major chains will be finding an optimal product mix within front-end sales, including beverages, Park says.
Walgreens, Deerfield, Ill., is one drug store chain that is experimenting with several new offerings and formats this year, including Café W. Two years into its pilot program, Café W features a self-serve counter that typically offers one or two coffee machines, fountain soda and Icees, and are reminiscent of a convenience store display. Café W’s snack displays can include single-serve cookies, crackers, breakfast-type bars, nuts and candy.
While the concept and product offerings are still evolving, Café Ws are in several hundred of the chain’s 6,252 drug store locations, says Carol Hively, Walgreens corporate spokeswoman. Walgreens also can customize the display to the location.
“We have one store in Hawaii now, and as we open more there, they will have Café Ws serving Kona coffee,” Hively says.
In addition to Café W, this year Walgreens announced it will offer a private label clothing line called Casual Gear. In January, Walgreens also began the release of a “W” label for about 800 private label items, such as shampoo, waxed paper and baby lotion. Walgreens also added DHL delivery service and Red Box DVD rental kiosks at certain locations.
“There are some pressures in terms of the front-end sales to increase their margins,” Park says. “Private label is something that can be very beneficial, if done well. That still remains to be seen if those services are exactly what the customers are looking for, especially clothing, which is a little bit shocking.”
“You are definitely seeing again with the competition, two big players, Walgreens and CVS, and, to a lesser extent, Rite Aid trying to find that right optimal opportunity to attract customers besides those which are shopping for pharmaceuticals,” he continues.
Drug stores though will continue to focus on the “targeted shopper,” a shopper who is looking for specific items, rather than just browsing the aisles, Park says. “In the mass merchandiser or even the hypermarkets, like a Target, people often go there to browse and pick up different goods as needed, whereas a drug store shopper tends to be a little bit more targeted,” he says. “They want their shampoo, their toothpaste and a birthday card.”
While the economy may be dragging some retailers’ sales down, non-traditional shopping formats, such as drug stores and supercenters, are continuing to steal market share away from traditional grocery.
Supercenters are the real victors of changing consumer shopping patterns, but drug stores’ food and consumable product sales increased 8.4 percent to $45.8 billion in 2007, and maintained a relatively flat market share of 5 percent, reported Willard Bishop LLC, Barrington, Ill., in its June 2008 “The Future of Food Retailing” report. Last year, grocery and consumables comprised 34 percent of drug store sales, the market analyst says.
By 2012, the market share for traditional grocery will decrease from the 48.9 percent it held in 2007 to 43.3 percent, and share for non-traditional will increase from 35 percent to 39.6 percent, Willard Bishop reports. At this rate, non-traditional grocery will surpass traditional grocery by 2013. Among the non-traditional retailers, drug stores are expected to perform well with an annual growth rate of 4.4 percent, the analyst says.
Today, Walgreens, CVS/ Caremark, Rite Aid and Longs Drug Stores are the nation’s largest and most influential drug store chains, according to Fortune magazine’s 2007 rankings. In 2007, prescription sales reached $259.4 billion, up 3.5 percent from 2006, according to the National Association of Drug Chain Stores (NADCS), Alexandria, Va. Last year, chain and independent drug store retail sales reached an estimated $198.9 billion, up 5 percent from 2006, NADCS reports.
“Although most of the drug retailers would like to tilt more of the business to the front end because of the opportunity to drive margin, with the growth in the prescription end of the business they just are having a hard time keeping up with that growth,” says Jim Hertel, Willard Bishop’s managing partner.
Drug stores also have evolved to use food offerings strategically, he says. “It appears, as you do the industry research and shop the store, that a lot of the chain drug outlets are using the front end of the store almost like a convenience store, but almost like a convenience store for women â€” quick in and out,” Hertel explains.
Examples of drug stores catering to woman can be seen in the aisles of cosmetic offerings and the number of “care-for-family” products, he says.
“The chain drug has folks who have done a really artful job of creating themselves as destinations, especially for a lot of the [health and beauty categories], and have done that despite having higher prices than many supermarket retailers, which galls supermarket retailers,” he continues. “I would think though, in general, as folks are struggling, as food and fuel prices are going up at rates that are so much faster than incomes, it’s putting a squeeze on a lot of consumer spending. I think that people are going to become a lot more price sensitive, and so I suspect that there is a lot of impact that is yet to be felt.”
Hertel believes drug stores will be lucrative going forward, but in addition, “the chain drug retailers have a pretty strategic need to grow the front end.”
“The fact that the shift keeps going toward the pharmacy is less that they have become unsuccessful in the front end, and it’s more that they just haven’t been able to keep up with the growth in the pharmacy end of the business.”
Drug stores have not only a need to grow front-end store sales, but several opportunities for growth.
“If they look at their food offerings specifically, a lot of retailers have spoken about how pleased with their front-ends that they are in general,” Hertel says. “I still think they have opportunities to develop a more cohesive, coherent food offering and probably get more out of it. Right now there is some mix between the dry grocery section of a supermarket with the packaged meats snacks, salty snacks and carbonated offerings of a convenience store. It kind of looks like it’s a convenience outlet for a lot of different things, and it’s less cohesive and coherent.” BI