Channel Strategies: Drug and Convenience Stores get creative
Convenience store sales and the number of stores each grew by 1 percent in 2009, according to Euromonitor International, Chicago. The channel remained a draw for consumers in search of only a few items or discretionary purchases, which include beverages, the firm reports. However, many consumers have reduced purchases of discretionary items, diminishing convenience visits last year, Euromonitor says.
Despite some challenges, beverages remain a strong traffic driver for convenience stores, and many outlets have enacted creative concepts to make their stores a stopping point. Some outlets have opted to increase health and wellness products for the calorie-conscious consumer, while others have improved their coffee programs to compete with Dunkin’ Donuts and Starbucks, Euromonitor says.
Alcohol also represents an opportunity for drug stores. Chain drug store Walgreens is expanding its alcohol presence, according to news sources. The Deerfield, Ill.-based company also is rumored to be mulling a move into fresh food, which would present an opportunity to bundle beverage purchases, experts say. The company also continues to expand with its recent purchase of New York-based Duane Reed drug stores, which would expand the store’s presence in the New York metropolitan area. The purchase includes 257 Duane Reed stores, corporate offices and distribution facilities.
Overall, drug stores continue to struggle with opportunities for beverage sales, says Jim Hertel, managing partner at Willard Bishop, Barrington, Ill. The category performed better than many retail channels, but the prescription end of the business drove performance, not front-of-the-store sales, he says. The channel also struggled with consumer perceptions, Hertel explains.
“Shopping for value has affected chain drug stores as it has many other channels,” he says. “Chain drug does not have as strong a price image as other channels like super centers do.”
Experts agree drug stores represent an opportunity for beverage-makers and retailers.
“The opportunity exists to really drive traffic because beverages are purchased by nearly everyone, consumed quickly, and can be highly impulsive if well-merchandised,” Hertel says.
The upside also is that the drug store channel can play to a higher end demographic than convenience stores, but it still has a broad opportunity for demographic growth, says Nick Lake, vice president, group client director beverage alcohol at The Nielsen Co. When making assortment choices, Lake says, a store’s local market and its preferences should be taken into account.
As with convenience stores, drug stores also face challenges when it comes to merchandising opportunities and space allocations, explains Willard Bishop’s Hertel.
“The big challenge for merchandising beverages in drug stores lies in space constraints,” he says. “The cold vault may not be large enough to adequately address the immediate consumption opportunity, resulting in sub-optimal variety and high out-of-stocks, and there’s not enough floor space to adequately merchandise future consumption packs on display and certainly not adequate space on-shelf.”
While space remains an issue, functional beverages might have the best chance in drug stores, says Allison Lipson, U.S. research analyst for Euromonitor.
“Drug stores present a unique opportunity for marketers of functional beverages,” she says. “Functional beverage marketers can educate consumers about product benefits while they are in drug stores, when health and wellness is top of mind. Marketers can explain the benefits of certain products in meeting health and wellness needs, and can position products as a solution to treating or maintaining health conditions.”
Creating new shopping occasions
Both drug and convenience stores are known for their grab-and-go options, but the downturn has spurred creativity in merchandising for both channels. These new strategies also are opening new avenues for beverage purchases.
The possible implementation of fresh food sales, such as what Walgreens is rumored to be considering, also would create a new sales occasion for beverages. In January, news sources reported that the chain is in talks to create a line of private label and branded fresh food products, such as salads, cut fruits, ready-to-bake pizzas and sandwiches, in its stores. This move into fresh food might translate into beverage sales, Willard Bishop’s Hertel says.
“Many supermarkets are successfully creating ‘Meal Deals’ that combine branded and store brand items at an attractive savings,” Hertel says. “Beverages are included in nearly all meals, so it would seem there’s an opportunity to create value by leveraging branded packaged beverages with retailers’ foodservice offerings at a great price.”
Walgreens hopes fresh food sales would combine with sales of beer and wine to boost revenue, according to news reports. The drug store chain offers private label wine in about 1,500 locations. Merchandised under the Southern Point name, the wine is available in Chardonnay, Cabernet, Zinfandel and Merlot varieties for $2.99 a bottle. The bundle approach is one Nielsen’s Lake agrees with.
“Consumers are looking for convenience, so a strong and well-balanced fresh food approach might present a tremendous meal opportunity and those sales could translate into an opportunity to sell people a bottle of wine or six-pack of beer,” Lake says.
The convenience store channel already has proven food can help sales, according to Euromonitor’s data. Over the years, offerings in the channel have progressed from hot dogs to fresh sandwiches all the way to pre-packaged sushi in some locations, which would keep beverages top of mind, Euromonitor says.
“As convenience storesincrease their foodservice offerings, there is an opportunity to enhance beverage sales,” Euromonitor’s Lipson says. “Many convenience stores are revamping or expanding their foodservice programs to include more gourmet or premium offerings as well as healthier menu items. If convenience stores are successful in promoting foodservice and offering beverage specials to accompany food, they will be able to encourage additional beverage consumption occasions.”
Alcohol sales also increased in convenience outlets for the 52 weeks ending Jan. 9, 2010, according to data from The Nielsen Co. Beer saw the smallest increase at 0.7 percent to $15 billion in sales. Both spirits and wine increased, though from a smaller base than beer, Lake says. Spirits sales grew 5 percent to $318.9 million, while the wine category expanded 10.1 percent to $336 million in sales. The increase in sales shows promise, Nielsen’s Lake says.
“It demonstrates the value of beer and, quite honestly, wine and spirits to retailers,” Lake says. “This dovetails nicely to the significant growth in private label. How successful it will be, I’m not 100 percent certain, because it has not been tried before. But I think major brewers have segmented the category and tiered price points that consumer choice has been affected by price point, so private label might give them more choice.”
Convenience store chain 7-Eleven also is rumored to be considering a move into private label beer. Last year, the store known for its Slurpee and Big Gulp beverage brands, released two varieties of Yosemite Road wines to its stores in the United States and Japan. The introduction of a private label beer could have various advantages, Hertel says. These include the opportunity to enhance price image, to build store loyalty and margin, he explains.
“Price image is enhanced when store brands have equal quality perception to manufacturer brands at a 20 to 30 percent discount,” Hertel says. “…Store loyalty is built when consumer-preferred brands are exclusively available at a retailer. And, store brand margins are frequently 10 to 12 points higher than manufacturer brand margins for the retailer.”
Maintaining the priority
While convenience stores have faced challenges, beverages remain a top seller in the channel and experts say it has room to grow.
“Convenience stores remain a destination for drinks,” says Jeff Lenard, vice president of communication for the National Association of Convenience Stores (NACS), Washington, D.C. “It’s the perfect test kitchen for new products. Consumers come to convenience stores for immediate consumption opportunities.”
Placement and assortment mix are a top priority to maximize exposure and sales, Lenard says. He highlights placement and displays that allow for ease of grab-and-go for the consumer. Convenience stores also present a good testing ground for new product launches, Lenard says.
“It’s a whole lot easier to consumer test in a convenience store,” he says. “Consumers can see your product through the cooler doors, and if it’s new and has a catchy name, it’s likely to become an impulse purchase, which is an easier way to try something new than buying a case at a big box store.”
However, the small format of a convenience store means with every new product, something else must be sacrificed, Lenard says.
Nielsen’s Lake agrees that identifying the right product mix is necessary.
“The major opportunity is to continue to focus on getting the assortment mix right across all segments,” he says.
Euromonitor’s Lipson also identifies functional drinks as an emerging category in the convenience channel.
“Energy drinks and other functional drinks, primarily functional waters like Vitaminwater, have the most opportunities in convenience stores,” she says. “The functional beverage category remains one of the fastest growing beverage categories. Consumers can count on finding functional beverages in convenience stores.”
Overall, Lipson foresees a respectable year ahead for the channel.
“Convenience stores are expected to maintain minimal sales growth in 2010,” she says. “Consumers are seeking convenient solutions and quick shopping trips, but are still very cautious of overall spending. It will take them some time to become more willing to loosen their budgets and allow for discretionary purchases.” BI
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