Drugstores
The drugstore core is very much alive and beating strong. The pharmacy is still the channel’s strongest life force — and everything else sold in-store seems to benefit from the association with prescription meds, remedies and treatments.
The numbers paint a healthy picture for Rx sales. Prescription sales in chain pharmacies increased by 9 percent to $96.1 billion in 2006, according to IMS Health. This is roughly 66 percent of total chain drug sales. Chain pharmacy prescription volume was also robust — growing 5.8 percent to 1.95 billion scripts.
But while prescription dollars and volume rack up solid
gains, margins are being squeezed as never before, thanks to benefit
managers and insurers reining in costs for the companies, unions and
government entities that pay for the benefits.
And that’s where the “other stuff,”
comes in — or what is known in the industry as
“front-end” sales, with considerably higher margins than
prescriptions. On target to compete with, well, Target, Wal-Mart and other
discounters, as well as grocery stores that now peddle prescriptions at a
discount, chain drugstores have nestled into neighborhoods all across the
nation — morphing into miniature “superstores,” sans the
crowded aisles and long checkout lines.
In the past decade, the number of chain drugstores has
climbed 17.5 percent, according to the National Association of Chain
Drugstores (NACDS). The three leaders — Walgreens, CVS and Rite Aid
— operate roughly 29 percent of America’s drugstores. All are
“bulking up,” either by adding stores or via alliances.
Walgreens, for example, has made selective purchases on behalf of its
Health Services division, as well as sticking to an aggressive
store-building program. CVS beat out stiff competition to acquire Caremark
RX. Rite Aid’s Brooks/Eckerd acquisition has given it more girth.
Channel Leaders* | |||
Chain | 2006 Annual Sales (in billions) | % change (2005-2006) | |
1. Walgreen Co. | $47.4 | 12.3% | |
2. CVS | $43.8 | 18.4% | |
3. Rite Aid | $17.5 | 1.4% | |
4. Long’s Drug Stores | $5.0 | 9.1% | |
5. Medicine Shoppe | $2.6 | 1.3% | |
Source: Company reports and STORES magazine |
But beneath all the pharmacy/store power focus, these
three and others in the industry that want to emulate them, are consciously
keeping their customer base hungry for the promotions and sales of general
merchandise and particularly, consumables.
Beating others to the quick
So while prescriptions still account for approximately
60 to 70 percent of chain drugstore sales, the major players’
advertised pitches center around convenience, speed and low prices —
with food, snacks, beverages and candy as a regular highlight. It could
even be said that drugstores have become the new “convenience”
stores — but with a much more expanded/perhaps even more upscale
— quick drink/snack focus.
When it comes to picking up snacks and drinks, women in
industry focus groups have even claimed to feel safer in drugstores, vs. a
gas station mini-mart, for example, with the option for
“cleaner” and “fresher” selections; many men have
touted the “speed shopping” and expanded selection of a
drugstore vs. a convenience store in those same focus groups.
Proof of the phenomenon comes from one industry source
that tracks CPG growth. The drug channel was recognized by the latest Times
& Trends report, “2006 CPG Year in Review,” from
Information Resources, Inc. (IRI), for its “strong performance in
core categories,” including “food-related categories, such as
deli, frozen and snacks.” The report made note that the channel is
increasingly fulfilling consumers’ “quick-trip
needs.”
In fact, nearly three-fourths of drugstore trips are
quick trips, according to another Times & Trends report,
“Shopping Trip Missions: A New Avenue for Growth,” from IRI.
Consumers seem to use drugstores for quick trips in part because of their
convenient locations and pharmacy services, but also because drugstores
don’t carry the variety of foods and perishables necessary for pantry
stocking.
Despite the fact that quick trips, on average, include
only one to three items in the basket totaling around $10, they are
critical because they provide the most frequent opportunities to drive
incremental purchases for the channel. Drugstores must continually develop
innovative store layouts, merchandising practices and advertising, as
competition for quick trips will intensify, predicts IRI.
Forward-thinking drug chains are considering
“quick- trip solution centers” that are strategically placed in
the front of the store, as well as the placement of secondary displays on
the shopper’s path between the door and the pharmacy to build
higher-ring quick-trip baskets.
Drug Channel Performance in Confectionery
2006 Data Drug Store Candy Sales: $2.4 billion
Candy Sales Change (2006 vs. 2005): +4.6%
Share of $28.9 billion Confectionery Market: 8.3% (slightly up from 8% last year)
Sources: Sales figures are compiled by National Confectioners Association (NCA) based on input from Information Resources, Inc. NCA/CMA Monthly Shipment Reports and U.S. Department of Commerce |
SWOT Analysis
Strengths
The pharmacy is a trusted core
Quick in/quick out Consumables and candy are clearly in focus
Weaknesses Prescription margins are being super-squeezed
Channel has a bit of a “grandma” image Opportunities Quick-trip solutions centers
Introduce gift centers with more upscale candy Sampling, yes, sampling
Threats Discount script initiatives by many other mass players
Competition for quick trips is intensifying |
Making the candy connection
And candy will certainly be a big part of both
strategies. The channel has already impressed analysts as having
“some of the best merchandisers of candy out there,” despite
the fact that the channel accounts for less than 9 percent of total
confectionery sales. Walgreens, as well as the other two chain drug
leaders, is a master at making seasonal candy the promotional focal point
of the store. Confections are well-mingled in seasonal aisles, often making
up 70 percent or more of the selection. Walgreens also regularly features
candy and gum in newspaper inserts; every week there is at least one candy
coupon, typically on the front or back page. And drugstores are notorious
now for their movie candy selections — offering speed tables stacked
with 3 for $3 (or some similar promotion) of theater-box confections.
Drugstores have also traditionally been strong in gift
box candy, but that staid department has been one of the few declining
segments in the category lately. “Even before the phrase ‘quick
trips’ was coined, drug stores were all about meeting gift needs in a
matter of minutes,” says an anonymous industry observer.
“People would walk in, knowing they could walk out with a pretty nice
box of candy and a gift card to go with it.”
He says that the channel is still “a great gift
source,” but that it has to move away from the link to “your
grandmother’s candy.” This shouldn’t be too hard, since
even traditional gift candy player Russell Stover (and its Whitman’s
brand) is making great strides in offering new, more upscale, boxed candy
selections.
Take it up a notch
“So that means drug has the opportunity to
recreate their quick-solution gift-positioning with a selection of a lot
more upscale ‘giftable’ products,” he says. “And
that ultimately means a better selection of candy with the creation of
better gift sections with cards and fragrance and chocolate and flowers. It
could be more of a gift-department concept — this is very valid for
drugstores. It is another way to satisfy today’s consumers’
quick-purchase needs.”
That means the channel will have to pull itself up a
bit from a “mainstream” heritage and go with more
“prestige” brands in the candy and gift arena.
Tied in with a more prestige image in candy is the
opportunity for sampling. Drug store executives may think they don’t
have the room or the manpower for such an event, but experts believe any
efforts along these lines will be greatly rewarded; the thinking is that
sampling will produce exactly the kind of surprise and excitement needed to
get customers to notice a change in the store — and respond favorably
to the department and impulse outposts, ultimately resulting in higher
basket rings per trip.
The new confectionery focus should be about
celebration, according to Phil Lempert, a retail expert well-known in the
industry as the Supermarket Guru. “You go through a Godiva store,
they celebrate candy — it smells great, it looks great, customers
sample items,” he begins. “In mass channels, the whole idea of
sampling is forgotten in confection and snacks. Why not sample dark or
premium chocolate? It would be really cool to get people to celebrate it,
even in the local drug store — where so many candies are in plastic
bags on bottom shelves. There is nothing celebratory about that.”
While the idea of “celebration” is the
blossoming focus in consumables, health and wellness is a more obvious
opportunity for the channel in the category, and one that has been talked
about, but not necessarily executed to the best degree.
Grocery Store Number cruncher*
$144.8 billion — Total Drug Chain Sales
5 — Average No. of Turns
$570 — Average Sales per Square Foot 9.2% — Annual $ Sales Growth 27% — Average Gross Margin-Total Store
$42 billion — Drug Chain Front End Sales
3.8% — Annual Front End $ Comp. Sales Growth
35% — Average Front End Gross Margin
$9.3 billion — Annual $ Sales Edible Consumables
78 — Number of U.S. Chain Drug Companies (10+ stores)
21,820 — Number of U.S. Chain Drug Stores 83% — Household Penetration (down from 89% in 1997)
$19 — Average Dollars Spent per Trip (up from $14 in 1997)
14 — Average Number of Shopping Trips per Year (down from 16 trips in 1997)
*For 2006 Sources: Drug Store News Annual Industry Report ‘07, Chain Store Guides; NACDS Annual Report ’07; The Nielsen Company’s “U.S. Consumer Dynamics Across Channels & Categories,” April 2007/Homescan 2006 |
IRI research shows that future growth potential in the better-for-you space will likely be strongest among organics, products offering specific health benefits, convenient nutrition, and healthy products targeting kids. Sales of natural and organic products have been quite strong during the past several years, particularly in the grocery channel, and the segment is “expected to continue to enjoy double-digit to high single-digit growth through the end of the decade,” the study said.
Cross-merchandising opportunities also abound. CVS is
reportedly in the process of having a “personal care” attendant
on staff at some of their stores — almost like a concierge to help
women select the right makeup, skincare, and other HBC items. Experts see
this as a tremendous opportunity for more “crossover” with
candy. Similar to the idea of cross-merchandising gifts and cards with
chocolate, it makes a lot of sense to position chocolate in an area where
women are perhaps waiting and contemplating ways to spend money and indulge
themselves or others with little gifts.