CORNER CONVENIENCE

MATTHEW W. EVANS

The face of the corner drug store has changed.

Chain drug stores have become convenience stores for women, some say, boasting conspicuous stand-alone locations and carrying an expanded selection of health and beauty care items as well as convenience foods.

And (supermarkets beware) price competition from the drug channel of trade is blurring the perception that shopping at the drug store is more expensive. These factors are working to maintain the drug store's leading position ahead of the supermarket when it comes to the business of health and beauty care.

"Traditional chain pharmacies are promoting the store as a consumer convenience center," said Phil Schneider, spokesman, National Association of Chain Drug Stores, Alexandria, Va. "And that's proven to be very successful so far because of the time pressures on today's consumer and the desire to try to accomplish as many shopping needs in one experience as possible."

Buyers representing more than 56,000 mass market retail outlets, including supermarkets, will gather in New Orleans this week, June 25-28, for the NACDS Marketplace 2000 trade show where they will look for new opportunities and ways to give them an advantage over their individual corner competition.

"That is why you're seeing many of the traditional chain pharmacy companies build more free-standing facilities that not only have a drive through capability for pharmacy services but have easier access, longer hours of operation and a much broader array of products and services," he added.

Among the top traditional drug chains, Walgreens, based in Deerfield, Ill., leads the way in terms of total revenues. The retailer reached $19.6 billion in revenue for the four quarters ending in February, according to Media General Financial Services, Richmond, Va. Right behind was CVS, with $18.6 billion in revenue for the four quarters ending in March.

With $13.8 billion for the four quarters ended August 1999, Camp Hill, Pa.-based Rite Aid placed third, according to MGFS. Rounding out the top four was Eckerd, Largo, Fla., a subsidiary of Plano,Texas-based J.C. Penny Co., with $12.4 billion in revenue for the four quarters ending in January. (The 141-unit metro New York drug chain Genovese, Melville, N.Y., was acquired by J.C. Penny early last year. Genovese is marketed as "an Eckerd company.")

In terms of total units, CVS leads with 4,098 stores in 27 states, followed by Rite Aid with 3,798 units in 30 states. Walgreens, which operates in 41 states and Puerto Rico, reportedly has about 3,000 stores. Eckerd maintains about 2,900 stores in 20 states. Duplicating the competition of gas stations, it is none too rare to see three out of the top four players facing off against each other with freestanding formats on as many corners of a major suburban intersection, observers noted.

"It is the format of choice," Debra Levin, principal, Morgan Stanley Dean Witter, New York, said. "It has been embraced by the entire chain drug industry."

The freestanding format has allowed the major drug chains to drive the front-of-store HBC and over-the-counter categories, according to Levin. For the 52-week period ended May 21, 2000, the drug channel of trade held a steady second in dollar volume behind mass merchandisers among mass retail outlets, according to numbers provided by Information Resources, Chicago.

Although they experienced nearly a 1% slip in dollar sales for the 500-plus HBC categories tracked by IRI, drug stores registered $15.8 billion in sales for that 52-week period. Mass merchants rung up $18.8 billion after a 9% jump in their HBC dollar sales. A 3.5% increase in dollar sales for HBC propelled supermarkets to $14.6 billion.

The expanded space this format allows compensates for the up-front costs of developing the new corner store, contended Mark Husson, managing director, Merrill Lynch, New York.

"Because they're much larger stores now, the front-end merchandising space is much larger," he said. This allows more room for a "rich gross margin mix and a big step up in sales.

"Taking an old in-line drug store that's in a strip mall and putting it out on the corner of Main and Main [works] pretty well," Husson explained. "It behaves much more like a convenience store for women. Guys are still 65% to 70% of the customers of an ordinary convenience store. So what they are trying to do is make themselves more appealing to the kind of markets the traditional convenience stores overlook.

Levin sees the freestanding format driving HBC sales in the chain drug industry. "They're doing well in building that business," she said. "Although pharmacy is growing faster than the front end, due in part to demographics and new drugs, the HBC margins are better than pharmacy." Levin added that drug retailers will continue to want to build their HBC business.

Seemingly hand-in-hand with the freestanding concept is the quick in-and-out provided by a drive-through pharmacy. The drive through has become successful and popular, according to Schneider, important in the minds of many consumers. "Perhaps you have a mother leaving the pediatrician with a sick child and doesn't want to bring the sick child into the store," he proposed. "Or the elderly consumer who may have difficulty walking long distances."

Stop & Shop, Quincy, Mass. has taken note of this popular convenience with two drive-through units. Officials at the Ahold-owned chain told SN it plans to expand its drive-through service.

Price is another area where traditional drug retailers are taking steps.

Traditionally, drug retailers have conveyed a premium-price image over supermarkets. However, in certain high-focus and hot categories, drug stores have cut prices, observers said. "Walgreens and CVS, over the last two years, have cut prices in specific categories such as skin care," said Levin. She also mentioned vitamins as a "high-focus item."

Husson added photo and diapers to that list. "What chain drug retailers have done, especially with OTC and HBC, is to try to get the prices down to where there is no longer an issue between themselves and food retailers over who's cheaper," he explained. "It used to be that food retailers were a lot cheaper than the drug stores. That's no longer the case.

"Although," he added, "both of them are more expensive than Wal-Mart."

Bolstering margins and selection for drug stores is private label. Over three consecutive months earlier this year, just as many chains expanded their private-label offerings with exclusive branded bath and body selections.

In March, Eckerd debuted "Comfy," a 34-stockkeeping-unit collection ranging in price from $4.99 to $7.99. In April, CVS launched "Essence of Beauty." Its 75 SKUs fall between $1.99 and $10. Last month, Longs Drug Stores, Walnut Creek, Calif., released "Spa essence," which retails between $1.49 and $6.99. Longs, which also sells gift sets from $13.99 to $15.99 under the new brand, ranked behind Eckerd in terms of revenue. For the four quarters ended in April, Longs tallied nearly $3.8 billion in total revenues.

Adding that private label in this sector is nothing new, Husson said he believes development of controlled brands produced exclusively for a particular retailer is a positive trend. "Good retailers are starting to see themselves as brands in their own right rather than just passive boards of shelf space," he explained.

"Stores that decide to do private label do so in part to build on the consumer's perception of the value and quality of that store," Schneider added.

"Private label is a real positive because the gross margins are higher than the branded lines and it helps build customer loyalty," declared Levin. "It continues to be an opportunity for both the drug chains and the supermarkets."

Comparing grocery stores directly to drug stores is difficult, Levin said. Generalization about price and selection aside, "different operators do different things, even with different items in the [HBC] category. It depends on the operator and it depends on how competitive the environment [is]."

Taking a stab at a general comparison, Husson ventured that drug stores have a greater range of HBC offerings. However, "a lot of drug retailers are trying to sell household but food retailers do better on household than they do on the touchy-feely-healthy stuff." Success in the latter, he said, goes to drug stores.

Where leading drug stores may not be having success, Husson added, is in three challenge areas: manpower on different levels, customer service and inventory management.

"Eckerd and Rite Aid have had a problem attracting and retaining talent," he said. Additionally, "a shortage of pharmacists combined with a surge in prescriptions has meant plummeting customer service levels in stores."