CHICAGO — Pharmacy is a large and growing business that can play a starring role in increasing store sales, said David Fong, senior vice president, pharmacy, Safeway, Pleasanton, Calif.
Pharmacy is challenged by numerous issues, such as low margins on certain reimbursed prescriptions; increased competition, including chain drug expansion and the very strong growth of mail-order programs; and a pharmacist shortage, he said. However, there are many other opportunities to increase business by responding to an aging population and tying in with other store categories, he said.
Fong spoke at a seminar jointly held by the FMI Show and the co-located FMI Pharmacy Conference here last week.
“A smart retailer recognizes that if you understand what the issues are, you understand where the solutions are as well,” he said.
“Pharmacy continues to be one of the fastest-growing segments of the retail sector,” Fong said. Overall U.S. health care spending is now about $1 trillion, with pharmacy accounting for $200 billion. Both numbers will continue to grow in years to come, he said, but prescription spending will represent a greater percentage of the total.
Aging Baby Boomers and drugs that will enable them to grow older more gracefully will help fuel this growth, Fong said. The Medicare Part D prescription drug benefit also is contributing. “Aging Baby Boomers are really a driver in terms of growing our script and sales volume,” he said.
Consumers 65 and older spend more than twice as much on prescriptions than those in the 45-to-54-year-old bracket, he noted. With Medicare Part D, 29 million were signed up in 2006, the first year of the program, and 41 million are signed up this year, he said.
While reimbursements can be low with such programs, increased use of generics helps offset pressure on margins, as well as on the capital investment in the pharmacy, since the inventory costs less. “Almost 60% of scripts are now filled with generics,” Fong pointed out.
Drugs switching to over-the-counter status may be newly categorized as health and beauty care rather than pharmacy, but because of the adjacency and the need for pharmacist consultation, they also contribute to overall sales and margins. Citing the coming switch of the weight-loss drug orlistat, Fong noted that there will be many more OTC launches in the future.
The pharmacy customer also tends to be the best customer in the store as a whole, Fong said. “There is a material store [sales] lift that is driven by the pharmacy customer.”
One of the biggest opportunities in pharmacy that supermarkets are in a unique position to take advantage of is tying in with other departments to boost sales across the store, he said. “Within supermarkets, there is an opportunity to integrate with the total store so you are not only growing total store sales, but also basket share and customer loyalty,” he said.
When consumers are asked why they choose a particular pharmacy, the top reason by a wide margin is not price, but convenience and location, Fong said. This gives supermarkets a natural advantage in attracting customers, and then the store can sell the customer other products. For example, he noted that shoppers age 65 and up, who are frequent pharmacy customers, now account for 23% of total Center Store spending, up from 18% in 2003.
Linking the health-and-wellness initiatives of consumer packaged goods companies with the growth in OTC and the demand for pharmacy services is a formula for increased sales, Fong noted. However, these customers “need access to good health information,” he said. The pharmacy and pharmacist becomes a key destination for this, he added.
“There is an opportunity to leverage the trust of the pharmacist to help meet the growing demand of the public for health care guidance,” Fong said.
He urged the audience to “understand that the pharmacy is another opportunity to complete the total shopping experience for the customer.”
However, one department working with another in a large chain is far from being a natural occurrence. “If I sit and wait for the rest of the store to come to me, it isn't going to happen,” Fong said. As a result, Safeway's pharmacy operation usually is the first to initiate cross-departmental contact, he said.
Also, at Safeway “we are getting more actively involved in the rest of the store,” he said. “Part of it is category management. We are involved in understanding the assessment process of category directors.” In turn, category personnel are rotated into pharmacy so they can better understand that department, he added. “So, we are a little more cross-pollinated.”
One example he cited was the chain's flu shot program. “The relationship gets really personal when someone is sticking a needle in you,” and that could be an opportunity to talk about the rest of the store, he said. “Hopefully, as they are leaving, there may be some cross-promotional opportunities that you can take advantage of,” Fong said.
Safeway's ongoing conversion of stores to its “lifestyle” format represents another chance to make the connection between supermarket and pharmacy, he said. “When one walks into the store, the experience isn't pharmacy and the rest of the store as much as it is a total store.”