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USE OWN BRANDS TO AID PROFIT, DRUG CHAINS TOLD

CHICAGO -- Chain drug stores may look to stem the profit erosion they are suffering today in pharmacy by expanding store-brand programs far beyond health and beauty care categories. Expansion of store brands into general merchandise, snack foods and drinks can strengthen chain drug stores' strategic position as a convenience stop and help retailers win back front-end business lost to alternative formats,

CHICAGO -- Chain drug stores may look to stem the profit erosion they are suffering today in pharmacy by expanding store-brand programs far beyond health and beauty care categories. Expansion of store brands into general merchandise, snack foods and drinks can strengthen chain drug stores' strategic position as a convenience stop and help retailers win back front-end business lost to alternative formats, according to a panel of industry executives gathered here for the opening of the Private Label Trade Show, sponsored by the Private Label Manufacturers Association, Nov. 12 to 15. "We aren't just HBC private label. Anything that is a convenience item is being looked at as potential private label, whether it's batteries, lightbulbs or convenience foods, which drug stores are just getting into," said James Devine, president of the Chain Drug Marketing Association, Deerfield, Ill. The panelists -- who included Ken Banks, president of Fahlgren Benito Advertising, Tampa, Fla.; David Biernbaum, president, David Biernbaum Associates, Chesterfield, Mo.; and Ted Gladson, Gladson Associates, Lisle, Ill. -- discussed retailing trends affecting the chain drug industry. Many of the trends outlined, such as store consolidation and growth of pharmacy, have taken place within the supermarket channel as well. Consolidation among chain drug companies is expected to continue, with 15% fewer chain drug companies operating today than five years ago, according to statistics presented by Marie Griffin, editor of Drug Store News, who hosted the session. The rapid growth of pharmacy, in which third-party providers

now comprise about 60% or more of chain drugs' business, is causing retailers some concern as their pharmacy business grows but margins shrink.

Overall, the industry appears to be healthy. Chain drugs' sales, which stood at $59.8 billion last year with $2.2 billion in private-label products, have increased cumulatively 50% over the last five years. Although last year total sales were up 8%, private label increased 11% and pharmacy grew 15%, chain drugs' front end grew modestly by less than 5%. This presents a problem for chain drugs as third parties, which now represent a large portion of their business, put pressure on retailers to keep health care costs down. Chain drugs' shrinking pharmacy margins are not being offset at the front end, where retailers traditionally have made their money. "The growth of Rx and third-party business is a fact of life," said Banks of Fahlgren Benito Advertising. "The challenge is how do we redo the front end to get margins up and offset margins we are losing to third parties? Certainly private label will do it. The only way to increase business is by marketing to consumers. Create a niche with them. Create a personality," he added.

Biernbaum pointed out that the function of private label within chain drugs should move beyond simply being a margin booster to the more important role of projecting the store's image to its customers.

To remain a competitive force in today's retailing environment, chain drugs have implemented strategies such as positioning their stores in convenience locations, emphasizing health care through disease management programs and expanded home health care sections, and by taking advantage of scanner technology.