PRESCRIPTION FOR CHANGE

Amanda Chater

Fifteen years ago, consumers bought nearly all their groceries in supermarkets. Today, they're spending nearly half their grocery budget in other channels. Drug stores account for a small but growing piece of that budget.

Drug stores used to limit their food assortment to candy, chips and cookies. Now, many offer shoppers perishables including bread, cheese and yogurt, canned meats and produce, frozen dinners and ice cream, and dry goods like coffee, cereal and condiments. Walgreen, Sav-on, Rite-Aid and CVS are on the forefront with these offerings. Some have expanded their product lines with private-label groceries ranging from popcorn and cookies to nuts and herbs.

This channel accounted for 4.4% of the grocery and consumables market in 2003, or $33.2 billion. That figure is expected to grow 20% to $44.6 billion by 2008, or 5.2% of all sales, according to Willard Bishop Consulting, Barrington, Ill. Meanwhile, conventional supermarkets' share of the grocery and consumables market will decline from 12.9% to 11.6% in the same period, the firm predicted.

The growth in drug stores' grocery sales hasn't gone unnoticed by traditional supermarkets. "We consider any retailer for whom grocery is not a primary function to be a non-traditional competitor, and the growth of this competition has been tremendous in recent years," said Lori Willis, spokeswoman for Schnuck Markets, St. Louis. "We just have to work harder than ever to stay on top of our game, and we work hard to differentiate ourselves in every market we serve."

For Schnuck and other retailers, differentiation means offering more variety, consistency and services than a typical drug store. Schnuck's associates can cut meat to a customer's specifications, for example, and special-order items that aren't in the store, Willis said. Price Chopper, Schenectady, N.Y., pointed to its scratch bakeries, high-quality meat and services, such as cooking classes. Other retailers said their employees help differentiate them. "Establishing a rapport with customers is key," said Jeff Lowrance, spokesman for Food Lion, Salisbury, N.C.

Clearly, some retailers recognize service and quality aren't enough for time-starved shoppers. Some are trying to make themselves more attractive to shoppers who might otherwise make a quick stop at a drug store. Schnuck puts convenience items like milk and grab-and-go foods near the cash registers, while Price Chopper offers prepared foods at the front of its stores with dedicated cash registers, as well as self-registers.

Food Lion took this idea further one year ago when it opened its new format, Bloom, A Food Lion Market, where everything is geared toward convenience. Inside the store entrance is a section containing high-frequency grocery and prepared food items.

Demographic changes are helping drive the drug channel. Aging Americans buy more prescription drugs and, thus, visit drug stores more frequently. An ACNielsen study, "A Senior Moment for Grocery Retailers?," showed that while younger consumers prefer supercenters, mass retailers and supermarkets, older shoppers are more likely to fill their grocery needs at drug stores and dollar stores. As millions of baby boomers enter their 50s and 60s, they're expected to fuel this trend.

There's also convenience. If a drug store sells the grocery essentials consumers need, they won't need to make a second stop in a supermarket.

A 2004 study by Chain Drug Review magazine showed consumers spent less at drug stores than supermarkets, but they were visiting the former more than they used to. In 2003, shoppers visited drug stores 2.2 times per month (up from twice a month the previous year) and spent $31 per trip; the number visiting supermarkets held steady at once a week, and those shoppers spent $60 per trip.

"It all revolves around convenient locations," said Steve Perlowski, vice president for industry affairs, National Association of Chain Drug Stores, Alexandria, Va. Drug stores are opening up more locations in busy downtown areas, he said. "They're fast, in-and-out, and chances are, if you present something in them to customers, they'll buy it."

Drug stores are growing the fastest in urban areas, where grocery stores are rarer, and in suburbs, where they serve consumers looking to fill their pantries on the way home, he said.

Brooks Drugs, Warwick, R.I., has been selling food for almost 30 years. In recent years, drug stores have replaced convenience stores as places for people to make a quick food stop, said Matt Kirk, senior director of purchasing for Brooks, parent of Sav-on Drugs, Osco Drug and Eckerd.

Brooks only offers grocery in its bigger stores -- those larger than 4,000 square feet -- and includes more items if there's no supermarket nearby. Otherwise, Kirk said, "we only carry the top-selling items, but it's mostly convenience items. Everyone is in a hurry these days."

Food items are priced at or close to those offered at area supermarkets, Kirk said, "because consumers would never make us a destination for grocery." The stores have little space for cross-selling, so they rely on the circular to push food.

Kirk contended that drug stores have a bright future for food sales. "The smaller towns with no supermarkets are the best. When the supermarket has gone, people use us as their general store. And, the more superstores there are, the more opportunity there is for drug stores because of convenience. So long as you're fair-priced, they'll shop with you."

Drug store operators haven't figured out who their core shoppers are, though, said Jim Hertel, a senior vice president at Willard Bishop. Clearly, shoppers aren't using them to stock up. "It's a fill-in trip when the consumer looks at the value of their time," he said.

Supermarkets need to concentrate on recapturing the HBC dollars they've lost to drug stores, Hertel said. "I think that's going to be more of a challenge than getting back the food dollars. They need to take a broad look and leverage the pharmacy and figure out how to connect it to the rest of the store."

Drug Store Food Sales by Department

in millions

Dept.: 2001 Sales; 2004 Sales; % change

Dairy: $358; $493; 28%

Deli: $14; $26; 86%

Dry Grocery: $6,015; $6,831; 14%

Fresh Produce: $13; $8; -38%

Frozen Food: $214; $295; 38%

Source: ACNielsen

Drug Store Sales Gaining

Drug Stores -- Sales (in billions) of grocery and consumables

2003: $33.2

2004: $34.6

2008 (e): $46.6

Traditional Format -- Sales (in billions) of grocery and consumables

2003: $97.0

2004: $96.7

2008 (e): $102.9

Drug Stores' share of the grocery/consumables' market

2003: 4.4%

2004: 4.5%

2008 (e): 5.2%

Source: ACNielsen (e)=estimated