A SUPER ADVANTAGE

JANICE ZOELLER

TROY, Mich. -- The setting is familiar. The pharmacy department is located up front near the grocery aisles. The rationale is familiar, too: to provide a convenient location for customers and for the pharmacy business to benefit from the exposure to the high-frequency grocery shopper.

The format, however, is a Super Kmart Center operated by Kmart Corp., based here. All 67 of Kmart's supercenters contain pharmacies, which are located on the grocery side of the store. On the other side is Kmart's typical merchandising mix, ranging from apparel to sporting goods to an auto service department.

"In the Super K, the pharmacy is over with the food area, which, to me, makes perfect sense," says Cathy Polley, director of pharmacy operations for Kmart's 1,674 pharmacies, including those in the Super Kmarts.

"It just seems to be a natural fit if people are coming in weekly for groceries to once a month drop off a prescription and then continue shopping while we're filling their prescription. Then it's complete for them when they are done with their groceries," says Polley, a University of Michigan pharmacy graduate.

Indeed, says Polley, Super Kmart customers pressed for time can not only have their prescriptions filled while grocery shopping, but can also simultaneously have their film developed, eat lunch and have the oil in their car changed.

"People don't have as much time as they used to," says Polley. "Drug stores and grocery stores are destination departments. To have both of them in the same location seems to be a natural fit."

The up-front location for Kmart's newest pharmacies is intended to make shopping for prescriptions convenient even for customers not shopping the rest of the store on that visit. "There are times when customers are going to shop the whole store," says Polley. "But there are times when they just want to come in and out, either because they don't have time or they are not feeling well. We help them get in and out quickly."

With prescription departments now in three-quarters of its 2,350 stores, pharmacy has also moved up front in the minds of Kmart Corp. executives.

"We've experienced tremendous sales growth," says Alice Wachol, divisional vice president of merchandising. "We are one of the bigger departments at Kmart. Pharmacy has gone from being very technical and probably not front-of-mind to a lot of executives half a decade ago to being something that's very important to the future of the corporation and central to all we do," she explains.

"We're trying to deliver health care, including not only pharmacy but also over-the-counter medications, in a convenient, quick and friendly service-oriented fashion," says Wachol. "The whole thrust over the past four years or so has been to create a store within a store, to create almost a drug store environment within the Kmart arena."

The Super Kmart strategy was formed a few years ago, "when Kmart started realizing how powerful the combination of a regular Kmart store could be along with a grocery store," recalls Wachol. With Super Kmart, "there are differences in merchandise selection, quantities and display, tailored to the slightly different customer you get."

A Kmart will tend to pull customers from up to 15 miles away, says Wachol, compared with a supermarket, which will typically draw from up to five miles.

The most important difference, though, says Wachol, is the frequency of visit. People will typically shop a grocery store or food-drug combo six times a month, compared

with three times a month for a mass merchant, she explains..

"There's a real key in saying that when you have food in your store, you can get that customer in twice as much," says Wachol.

Kmart's supercenter format would seem to have the best of both worlds. "A customer will shop a supermarket for convenience," says Wachol. "The mass merchandiser tends to appeal more on price."

Kmart's broad array of products and services has enabled it to take advantage of synergies simply not available to supermarkets. These have proved particularly useful in marketing to third-party payers.

"We are the only national drug chain out there," says Polley. "We are in 46 states. We offer an advantage for third-party carriers seeking geographic coverage over many states.

"We can offer third parties discounts on other products in the store, such as sporting goods, private-label vitamins or other OTCs, or, in a Super K setting, healthy foods," says Polley.

Third-party has become an important part of the business, says Wachol. "As recently as four or five years ago, Kmart processed contracts as they came in. There was no marketing to third parties. We have changed that dramatically over the last several years."

Indeed, Kmart has launched a full-scale campaign to seek contracts with benefit managers, employers and insurance companies, says Wachol. "We have a complete sales force," including five key account managers, all pharmacists, she says.

"Third parties look for a certain quality standard, and then within that quality standard, I'm sure price is what wins them over," adds Polley.

Kmart also pursues third-party business by participating in 13 or 14 managed care conventions annually, says Wachol, having recently sponsored a luncheon at one such meeting.

"If you think about a Kmart store, we have so much to offer, even more than a chain drug store," says Wachol. "We certainly believe that our service, assortment and pricing are as sharp as anybody's. Our pricing is probably a lot sharper than most chain drug stores, probably sharper than some supermarkets. We have that message to deliver.

"Beyond that," says Wachol, "we can offer other health care and overall daily living needs. We can put together programs to offer employees incentives to exercise and keep healthy. Home health care can be part of a program too," she says. (See sidebar on Page 9.)

While a third-party prescription drug customer may not be as price-conscious as a cash-paying customer, the third-party customer's main concern is "they want the pharmacist to be familiar with their [eligibility] card," says Polley. "They don't want the pharmacist to look at the card like they've never seen it before."

To help that process along, Kmart is rolling out new pharmacy software. Information is cross-referenced to make it easier for pharmacists to recognize cards for third-party plans. Pharmacists will be able to find a plan in the system listed under the insurance carrier's name, or under the employer or union's name, in addition to the patient's name.

While it is better equipped than most pharmacy retailers to seek third-party business on its own, Kmart is hedging its bets, having joined Pharmacy Direct Network as a charter member. "We're very supportive of PDN and we thought we needed to be a part of it," says Wachol. She described the formation of PDN as "very timely, the right thing to do. We've been saying all along that we need to cut out the middleman."

Kmart also is building patient counseling areas. All of the new Super Kmarts have such areas, consisting of a window that opens onto a waiting area. In Texas, where it is mandated, Kmart has built counseling rooms. "It's been Kmart's policy to counsel all patients," says Polley.

Another sign of pharmacy's increased importance to Kmart is that pharmacy items are promoted more often. "We're now featuring products for diabetics in our national circular. We typically will have a full page on drug store-type items at sharp prices. You would not have seen that a year ago," says Wachol.

"We've done a lot of cross promotions in the last year with the food and service departments," adds Polley.

During the first week in October, for example, customers presenting a new prescription at most Super Kmart pharmacies received a case of cola. Other promotions have been tied to its restaurant, film developing, sporting goods and auto service departments.

The Super Kmarts also have been promoting pharmacy during store openings to local physicians' offices with deliveries of pizza from the restaurant or muffins from the bakery for the nursing staff.

One Super Kmart pharmacy has been open on a 24-hour basis for the last year in Jackson, Miss. "The Super Kmart Center gives us a great opportunity to run a 24-hour department," says Polley. "I imagine there will be a few more locations. It's nice to have that option in a market area for customers who may have left the emergency room with a prescription that needs to be filled."

Since August, Kmart has operated a mail-order service for its own employees from the 24-hour location. "We may expand beyond employees," says Polley.

The Super Kmart pharmacies tend to be busier, doing a "significantly increased volume" of business compared to a regular Kmart pharmacy, says Wachol.

"Because of the traffic in a Super K, we get a good head start on those pharmacies," says Polley, "and they typically open up to a busier volume." In some cases, Kmart has opened a Super Kmart after having closed two regular area Kmart stores, she adds.

Pharmacists are encouraged to talk to customers, says Wachol. Increasing pharmacist-customer interaction "is an overall goal for us," she says.

To that end, pharmacists receive continuing education on vitamins, eye care and other subjects, and are encouraged to recommend OTC products, including private label. "Our pharmacists tend to score higher than the national norm in recommending private-label OTCs," says Wachol.

"Having the pharmacist come out from behind the counter and talk to customers is something we are striving to do," says Wachol. "It's a natural," she says, for pharmacists to be involved in recommending prescription-to-OTC switches as they were with Aleve, for example.

"On products such as vitamins, pharmacists should be looking at what is recommended for a particular prescription patient," says Wachol. "The pharmacist could say something like, 'It would really help you if you picked up a bottle of such and such.'

"We are really one integrated unit. Pharmacy is a part of the division, and moreover, a part of the store," says Wachol. "The idea of having pharmacists involved beyond legend drugs," she explains, originated with her boss, Kevin Browett, who recently resigned his position as corporate vice president in charge of all hard lines. "To some extent, pharmacy has a mystique to it," she says. "We have tried to break down the barriers."

The key challenge for Kmart's 4,000 pharmacists is to give the best customer service possible, says Polley. To help keep its pharmacists focused, Kmart has improved its communications links with corporate headquarters. A satellite network is used to send continuing education programming and other messages to stores.

Kmart's pharmacy computers also allow pharmacists at one location to pull patients' records from another store in the event that a customer from another Kmart pharmacy presents a prescription. "It's real convenient for employee groups that do a lot of traveling, like truck drivers," says Polley. "Patients don't have to carry their records."

Polley began her career with Kmart 12 years ago as an intern. She became a pharmacy manager and rose through the ranks as pharmacy district manager, systems analyst and manager of field operations before being named pharmacy director in July.

In hiring, Polley says Kmart looks for pharmacists who have good communications, promotional and management skills. "We have always stressed to our pharmacists that they should operate their pharmacy like they own it. People who are excited about their profession will relay that to the customers," she explains.

"Pharmacy will become more important to Kmart, no doubt," says Wachol. She notes that pharmacy is now considered to be "a top performer" at Kmart. "We want to maintain that."