HEALTHY SWITCHES

CHAPIN CLARK

NEW YORK -- Among wholesalers, retailers and industry experts, there is disagreement about how effectively supermarkets are capitalizing on the large -- and growing -- market for prescription-to-over-the-counter switch products.

Despite stiff competition from drug chains and mass merchants, however, there is no question that the market is worth going after.

According to a study conducted earlier this year by Kline & Co., Fairfield, N.J., switch products account for more than 30% of the total amount spent on nonprescription medicines in the United States, which was $16 billion in 1996.

The Food and Drug Administration has approved 23 prescription products for OTC use in the last five years alone, with approval pending for as many as 29 more, according to the Nonprescription Drug Manufacturers Association, Washington.

Most important, perhaps, is a Kline & Co. finding that Americans save almost $13 billion a year in health care costs by using prescription-to-OTC switches. Self-medication, or at least the perception of its effectiveness, is at a high.

"It's probably the most exciting source of nonfood products in the entire retailing universe," said Don Stuart, a partner at Cannondale Associates, a Wilton, Conn.-based consulting firm. "We're talking about a lot of incremental volume."

Stuart put supermarkets' share of the entire switch market at 20% to 25% but noted that the channel as a whole was lagging.

"They're getting less than their fair share," he said. "Health and beauty care departments are not the primary focus of grocery stores, and the business they do is tilted toward the beauty side. Sometimes Rx-to-OTC can get lost in the fray."

Stuart stressed the importance of building consumer awareness of a switch product early, getting the product on the shelf as soon as it is available and promoting the product over the long term through advertising and prominent in-store placement.

Wholesalers and retailers contacted by SN agreed, some adding that they are already reaping the benefits of these strategies.

"The key thing to learn from all the switches is commit early, be first and promote often," said Steve Lauder, HBC category manager for Supervalu, Minneapolis. "The need to commit to these products is critical. Can you imagine someone saying, 'I just don't think I want to carry Tylenol'?"

Lauder cited Bristol-Myers Squibb's Vagistat-1, approved by the FDA for OTC use in February of this year, as a textbook case of an effective switch-product launch.

"We made an early commitment to that product, and now we're enjoying the success," he said.

Barrett Moravec, pharmacy director of Abco Foods, Phoenix, said the chain, in addition to featuring switches in its weekly newspaper supplements, promotes them through in-store signs, shelf talkers, coupons and special-price offers in conjunction with manufacturer offers.

"You have to keep bringing your message out; it's an ongoing process," he said. "It's going to be repetition in getting the message across to the consumer in the OTC world.

"Based on our market share in our area, I think we're doing well," Moravec added, although he could not give a percentage.

"It's very important to have the product first," said a vice president for nonfood at a large Southeastern chain. He said his company can get a switch product from the warehouse to the shelf in three days. For two weeks beforehand, though, the company runs an advertisement in its circular announcing the arrival of the product. Once the product is made available, the chain runs an ad in the circular every other week for up to six months.

In-store, the executive said, the chain has had "three or four displays at one time" for certain switch products.

The company's strategy, he contended, had garnered it a "healthy" market share for switch products, but he was uncertain about being able to remain competitive over the long term.

"The only thing we can beat [mass merchants and drug stores] on is in getting the product first," he said.

David Spohr, health care category manager for Randalls Food Markets, Houston, commended drug stores for being more aggressive in merchandising switches, regularly using endcaps, special displays and more sophisticated theft-deterrent systems.

He added that another advantage drug stores enjoy is a built-in market for switch products: where consumers buy prescription items is where they are likely to continue buying them once they are made available over the counter.

"Drug stores, because of their ethical imagery, their ability to work with manufacturers, the continuous, aggressive support they put behind the product, provide an example supermarkets can learn from," said Stuart of Cannondale Associates.

The supermarket pharmacy, say industry executives, is where stores can offer shoppers the education and sense of security they may think available only in drug stores.

"The supermarkets that have done best are stores with pharmacies," said Lauder. "The pharmacy is just a natural draw for those kinds of products."

He mentioned McNeil Consumer Products' Nasalcrom, an allergy treatment approved for a switch by the FDA in January of this year, as an example of the importance of education: users are supposed to begin taking the medication before the onset of symptoms, something they might not be aware of without consulting a pharmacist.

"We encourage people to come to the pharmacy for more information. Our signs say come talk to the pharmacist for more information," said Moravec. "Even though it's two different departments, it's still the same store, and it's important for the store to make that sale."

In setting prices for switch products competitive with those at mass discounters and drug chains, supermarket retailers have to decide just how important it is to make that sale.

"Unfortunately, you have to go with what the big guys are dictating," said Rick Channell, general merchandise manager at Riser Foods, Bedford Heights, Ohio. He said that margins on promotionally priced switch items are typically in the mid-teens.

"You may want to put a retail of $20 on a product, but if the rest of the world is at $15, you best be close to $15," said an HBC buyer for Hannaford Bros., Scarborough, Maine.

He added, however, that on switches "the food stores are usually lower priced, day-to-day, than a drug store competitor would be."

"Pricing isn't really an issue with the most recent switches," said Supervalu's Lauder. "[Mass merchants and drug chains] haven't taken a predatory pricing stance on these items yet. No one has decided to make any of these products a loss leader yet."

Lauder said that, for supermarkets, making the consumer aware there is some kind of savings is more important than keeping up, discount by discount, with the mass and drug channels.

"It's good to be competitive, but you don't have to price match," he noted.

For retailers, simply having access to ample supplies of new switch products seems to be a more pressing concern than pricing.

Because many switches require repeated use over a period of time -- hair-growth treatments like Pharmacia & Upjohn's Rogaine, for example -- consumers often are more willing to purchase in bulk. Being able to stock increased-count packages can mean the difference between solid long-term profits and a hemorrhaging of customers.

Channell said he had not heard about a buy-20-get-10-free bonus-pack promotion on Zantac, Warner Wellcome's stomach-acid reducer approved for OTC use in December 1995, until he saw it in Wal-Mart.

"We don't think we see the bonus in the promotional floor displays as some of the big guys do," he said. "Perhaps the manufacturer's sales force for supermarkets is prejudging, saying, 'Aw, they wouldn't be interested in this.'

"You have to keep pounding your vendors to make sure you get your fair share."

The Hannaford Bros. buyer praised manufacturers for their extensive initial support of switch products but said they are not always so good in following up with adequate, on-time shipments.

"Probably 80% of the time the manufacturer screws it up somewhere along the line," he said.

"It's tough for us little guys to compete with a $105 billion concern like Wal-Mart. But I would say to manufacturers that it doesn't mean they should get any more product than we do. I say that because I've seen it happen."