DRUGSTORE CHAINS: PAST, PRESENT AND FUTURE

May 20, 2008
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A number of grocery and mass merchandise retailers have invaded the turf of traditional drugstores. This drug/grocery store convergence has caused a bit of an identity crisis for traditional drugstores as they search for new ways to expand their capabilities in an effort to differentiate and outperform grocery stores and each other.


Gone are the days of mom-and pop drugstores on the corner in which the most enticing customer amenities included a soda fountain and rock candy. Although soda fountains and rock candy have been relegated to drugstore nostalgia, today’s version of the neighborhood drugstore still resides on the corner - albeit a four-way corner, as prime real estate is quite crucial in today’s drug chain sector.

When chain drugstores first arrived on the scene, they wowed consumers across the country with innovative products, stellar service, affordable prices and unparalleled convenience. (No wonder they were an immediate hit! Sorry, Mom and Pop.)

Today, Walgreens, CVS/Caremark, Rite Aid and Longs Drug Stores are the nation’s largest and most influential drugstore chains, according to Fortune magazine’s 2007 rankings. And, for the most part, chain drugstores are experiencing substantial success. In fact, 2007 Rx sales reached $259.4 billion, up 3.5 percent from 2006, according to the National Association of Drug Chain Stores (NADCS), Alexandria, Va.

But as current consumer shopping patterns indicate, the fickle tide of drugstore retail is not finished turning. Today’s local drugstore chains (located on those familiar four-way corners) are now in jeopardy of losing ground to the likes of Wal-Mart, Kroger, Safeway, Publix Super Markets and SuperValu.

Indeed, a number of grocery and mass merchandise retailers have invaded the turf of traditional drugstores. They offer many of the same front-end products, as well as inexpensive and convenient prescription drugs - all while masquerading under the classification of “community retail pharmacies,” according to NADCS.

This drug/grocery store convergence has caused a bit of an identity crisis for traditional drugstores as they search for new ways to expand their capabilities in an effort to differentiate and outperform grocery stores and each other.


If You Can't Beat ‘Em ...

Bentonville, Ark.-based Wal-Mart - the world’s largest retailer - has been turning retail on its head for quite some time now. After making tremendous inroads in the grocery segment, Wal-Mart now is making its presence known in the drugstore/pharmaceutical arena. And just recently it created an enormous commotion in the drug retail industry with the introduction of its $4 generic drug program.

The program was so revolutionary, and so well-received by consumers, that many drugstores and “community retail pharmacies” (i.e., grocers with pharmacies) soon developed their own discounted prescription drug programs. For example, Kroger and Target now offer $4 generic prescriptions; Costco offers 100-pill prescriptions for $10; and Albertsons will match any competitor’s price … on customer request, of course.

But the $4 generic drug program is just the tip of the proverbial iceberg when it comes to revolutionary ideas for luring customers from drugstores to retail pharmacies. However, drugstores aren’t going down without a fight. Instead, they’re fighting back by highlighting what makes them unique to the marketplace.

“In the drug industry, convenience is still something that is sought by consumers,” says Phil Park, research analyst for U.S. retailing with Euromonitor International, Chicago. “And ‘local’ has been utilized well by drugstore chains. Walgreens and CVS, in particular, have done a good job at putting themselves in high-traffic areas.”

And because drugstores are conveniently located, Park explains they’re equipped to appeal to a more targeted shopper. These types of shoppers go into drugstores knowing they need something specific, and they want the purchasing process to be as convenient as possible.

For the most part, customers are coming into these conveniently located drug chains to pick up their prescriptions. This is great for the pharmacy section, but front-end performance in drug retail has been waning a bit as customers are choosing to buy their shampoos, soaps and other beauty care items at grocery stores and mass merchandisers. What’s more, Park explains, prices of prescription drugs are putting pressure on the front-end sales. Therefore, retailers are having to innovate throughout the store - they have to offer quality products that can’t be found anywhere else and at a price that will attract consumers.

The table is set for private label.

“In terms of the front end, there’s an increased focus on store brands and proprietary brands that are exclusive to their chains,” observes Jan Sumner, director of business development, key accounts for ASO Corp., Sarasota, Fla. “In terms of private label partnerships, drug chains are asking their store brand suppliers to bring them innovative products. They’re not saying, ‘The national brand has an innovative product; can you copy it?’ Instead they’re asking, ‘What can you give me that the national brands don’t have?’

“Store brands are acting as the innovators in some of the drugstore categories, whether it’s through packaging or product innovation or product delivery innovations,” Sumner continues. “And the store brands are doing it in partnership with the drug chains.”

Tom Blischok, president of consulting and innovation at Information Resources Inc., Chicago, agrees, saying the real role of private label in the drugstore is not to copy the national brands, but to innovate new parts of the drugstore equation.

“Within drugstores of the future, you might find things like private label cough medicine packaged with nasal spray,” he says. “There’s a pretty strong future for the bundling of products in the drugstore to provide wellness-based solutions.”

The forward thinking to which Blischok refers already is taking place in some drugstores with regard to innovative private label offerings. Deerfield, Ill.-based Walgreens, for example, has done some re-branding and is trying to find its optimal product mix in private label. According to the Chicago Tribune, Walgreens created a 10-person department last year, known internally as the “private label police,” that reduced the number of store brands by half. Some of the retailer’s more popular labels are getting a makeover, while others are cued to expand.

Walgreens also created a couple of new brands, including its “W” label for commodity items such as shampoo, wax paper and baby lotion, the Chicago Tribune reports. And most recently, the retailer introduced a clothing line called Casual Gear into most of its 6,000 stores. The collection of cotton capris, sweat pants, quilted vests and t-shirts for men and women will be priced between $7 and $15, the company says. 

As important as product assortment is to private label, it often is a tricky thing to manipulate. Park uses Walgreens’ new line of private label clothing as an example.

“It’s a very curious move on the part of management,” he says. “I see them imposing it on the store versus the stores’ coming to management and saying, ‘Our customers are looking for clothing.’

“In drugstores, shoppers are a lot more targeted when it comes to their shopping. They want to get their shampoo or body wash and get out,” he continues. “They might pick up one or two impulse buys, but drugstores don’t have the appeal of stores like Target, where customers go there to browse and see what’s available.

 
“I don’t know if they’re having an identity crisis now, or if they’re hearing a customer want and they’re adding it based on that,” Park adds. “Regardless, finding the optimal product mix in private label is vital to their growth strategy, especially if they want to increase front-end sales.”


The New Offering

The changes taking place in drugstores today are substantial - even though some people might see them as an identity crisis while others might view them as a retail revolution.

Drugstores are venturing beyond prescription drugs, OTC offerings, health and beauty care products and even clothing to be the community provider of overall health management. According to Blischok, the movement in drugstore retail is focused on understanding customer behaviors based on their needs.

“There are four types of consumers who come into a drugstore: those who are sick and want to get better; those who would like to prevent an illness; those who have experience with an illness and want to continue learning about it and treating it; and those who look for items to help them become better in their lives,” he says. “Overall, I’m seeing in this drug industry a movement not just toward the treatment of an illness, but management of an illness. And I think this is marvelous.”

For many of the country’s largest drugstores, the approach to health management translates into service offerings such as the increasingly popular walk-in clinics. Staffed by nurse practitioners licensed to diagnose and treat common conditions such as allergies, bladder infections, bronchitis, ear infections, the flu, heartburn, muscle pain, pinkeye, minor burns and rashes, walk-in clinics are changing the face of drugstore retail - not to mention healthcare.

More than 1,000 retail health clinics now operate in the nation, according to a study conducted by Verispan, Yardley, Pa. And that number is expected to rise dramatically in the next several years as retailers such as Wal-Mart, CVS, Walgreens and Target add more clinics. Wal-Mart alone announced plans to open 300 store-based medical clinics across the country within the next three years.

A Trendwatch report conducted by The Nielsen Co., New York, says walk-in health clinics are designed to help the nearly 40 million uninsured Americans who represent the largest target audience for this format. Walk-in clinics are physically easy to access; they usually are close to a customer’s home or work; they offer evening and weekend hours; and many also rely on electronic patient files that can be transmitted easily to doctors with a referral.


In-store clinics provide obvious advantages to retailers, including driving traffic to the store, raising trip counts and creating the opportunity for incremental sales. But they possess a great deal of “untapped” potential as well.

“Typically, 70 percent of drugstore sales are through the pharmacy, and people refer to their pharmacist for product recommendations in the drugstore,” says ASO’s Sumner. “In-store clinics provide a wonderful opportunity for store pharmacists to suggest store brand products to customers.”

Walk-in clinics also offer room for advances with regard to new kinds of care delivery. As Euromonitor’s Park explains, Walgreens recently noted the potential growth for what the company calls “specialty pharmacy” - drugs that need to be administered by way of injection.

“Clinics are going to be a natural draw for this kind of medical delivery because patients need a technician to inject these medications into them,” Park says. “And Walgreens is forecasting pretty strong growth in this area.”

But the concept of in-store clinics is not exclusive to drugstores. Many large grocery retailers and mass merchandisers such as Safeway, Wal-Mart and Target offer the service as well. So again, drugstores are forced to think outside the box - or should we say clinic?

Of the major drugstore chains, Walgreens has led the charge toward walk-in clinic innovation. This past March, the company purchased I-trax Inc., a Chadds Ford, Pa.-based company that offers workplace clinics, wellness centers and pharmacies for more than 160 companies. According to Walgreens, the current potential market for worksite health centers and pharmacies includes more than 7,600 corporate campuses consisting of 1,000 employees or more.

Walgreens then took the concept of in-store clinics on the road, literally. The company recently announced the kickoff of its 2008 Take Care Health Tour, which will hit 300 cities, cover more than 240,000 miles and provide more than $35 million in free health and screenings, the company says.

“I’m very impressed with the movement toward in-store clinics,” Blischok says. “I think that the concept of providing supportive health advisory services in the store is absolutely spectacular.”

But, he continues, “The challenge will be in finding enough healthcare professionals who can provide paramedical support, which makes customers feel good and comfortable.”


And the Beat Goes On

Even with the increased innovation taking place, chain drugstores have many additional areas in which to expand and succeed in a venture to distinguish the format, as well as their individual stores.

In terms of product offerings, ASO’s Sumner predicts the drugstore market will see more penetration in private label.

“I don’t think we’ve reached any kind of a plateau,” she says. “There definitely is potential for growth in private label for drugstores.”

Roman Shuster, research analyst for OTC healthcare with Euromonitor, agrees, noting that drugstores are predicted to increase their presence in the private label beauty sector, particularly in the area of ethnic products.

“If it were my nickel,” Blischok adds, “it would be in integrated healthcare offerings and beauty care offerings for men and women. There are many people missing the concept of men’s vanity.

“A new category will be in ‘down aging,’” Blischok continues. “This will include items that make the boomer feel and look younger. It will be an unbelievable category in the next five years.”

See the sidebars on pp.18 and 22 for more about drugstores and the growing health and beauty market.


Going forward, drugstore chains also are predicted to patch over some of their rough spots, one of which is the format’s tendency toward price gaps. A number of industry professionals note that drugstores need to watch their pricing between private label and national brands.

“[Drugstores] price private label too high because they don’t want walk-aways. But if the gap is too large, they may be leaving money on the table,” comments an anonymous industry source.

Moving beyond pricing strategies, Blischok suggests the industry should re-think its consumer and then evaluate how products are developed, merchandised and sold.
 
“One of the big mistakes that drugstores are making is that they’re focusing on ‘marketplaces’ instead of focusing on market ‘spaces,’” he says.

According to Blischok, drugstores shouldn’t focus only on how to deliver services such as cholesterol prescriptions, but instead on how to provide products and services for this type of consumer as he or she changes to handle their cholesterol differently.

The future of drugstore retail will require stores to focus on shopper marketing in addition to shopper loyalty. According to Blischok, the concept of first to market isn’t sustainable in today’s drugstore arena. Instead, drugstores should work toward being best to market.

“We’re going to see a new level of competition in the market space,” he adds. “This is a time when the bold in marketing need to come out and start making themselves well-known because the mediocre are going to fail in this space within the next five years.”


Sidebar: Drugstores: The Epicenter for Beauty Care

 You might have noticed lately that - for the most part - folks today are walking around with a little more sheen. They’re well-groomed, sweetly scented and increasingly wrinkle-free.
 
These days, people everywhere are taking better care of themselves. In the grocery segment, consumer attention toward personal care means they’re making better food choices. And in the drugstore, it means consumers are showing more interest in health and beauty care items.

And drugstores are positioning themselves to be the epicenters of beauty care in an effort to differentiate themselves from grocery and mass-merchandise stores. Drugstore chains are offering innovative beauty care products and services, many of which are chain-specific.

Tom Blischok, president of consulting and innovation at Information Resources Inc., Chicago, uses Walgreens as an example of the drugstore format’s new position in the beauty care category.

“[They’ve] done a nice job of elevating the whole concept of beauty in a way that I’ve never seen before,” he says. “The stores feature a beauty counter that is designed to help customers with personal appearance, which is becoming exceptionally important for men and women. This is especially true for the boomer guys and ladies who really want to ‘down-age.’”

For many consumers, being healthy means looking good; and looking good means looking younger. Therefore, age-defiance arguably is the hottest trend in personal care. And for the first time, men are taking part in many of the age-defying beauty rituals made popular by women. For example, an April 14 USA Today article says facial anti-aging products aimed at men were almost non-existent prior to 2005, citing research performed by Chicago-based Mintel International Group. However, by 2007, these types of products accounted for 20 percent of the $46 million men’s skin care product market.

The growing interest on the part of males has inspired drugstores, grocery stores and mass-retailers to offer an assortment of innovative beauty care products geared toward men. But drugstore have cornered the market in this segment, so to speak, simply because they have positioned themselves as THE place to purchase beauty care products. 

Some drugstore chains, including Rite Aid, Camp Hill, Pa., are using in-store promotions to further help consumers equate beauty care products with drugstores. The retailer recently took part in the Maybelline New York Great Beauty Tour, an upbeat educational program that helps women take the guesswork out of choosing and using skincare products and cosmetics, according to Maybelline. Customers in the tour’s route receive beauty tips and personalized one-on-one consultations, all in the caring confines of their local Rite Aid store. 

Now that’s building store (and format) loyalty! Imagine what similar in-store promotions could be done using private label!


Sidebar: New in Private Label Health and Beauty

There’s a major movement in drugstores today toward offering customers innovative health and beauty care products. Although these types of items are nothing new to drugstores, health and beauty care products today encompass a broader range of needs. They’re better-customized for individual beauty and health regimens, and they’re more approachable than they’ve ever been, inviting trial usage based on the merits of innovative functionality.
 
In most categories, private label typically is considered the “follower” when it comes to product innovation. But in the health and beauty segment, drug chain store brands are making inroads. Below is a sampling of new and innovative products available from some of the country’s leading drugstore chains.

  

Rite Aid Corp., Harrisburg, Pa.:
Professional Skin Care Line*
Rite Aid now offers its c.booth derma professional skin care line designed for healthy skin. The c.booth derma products cleanse, exfoliate, clarify, hydrate and soften skin, resulting in “unmatched nourishment and rejuvenation.” The products meet the needs of three different skin types: derma 36 for mature skin; derma 17 for problem skin; and derma 24, which is designed for everyday healthy skin maintenance and protection. All c.booth derma products are priced below $20 and are available only at Rite Aid. 

 

EasyFit Teeth Whitening Trays*
The new Rite Aid EasyFit teeth whitening trays are a once-a-day treatment that promises a visibly whiter smile in just three days. The pre-filled whitening trays feature a comfortable fit that allows the whitening gel to completely surround teeth for optimal whitening, even in the spaces between teeth. Rite Aid EasyFit teeth whitening trays cost less than the leading national brand and are backed with the Rite Aid satisfaction guarantee.

 

CVS/Caremark Corp., Woonsocket, R.I.:
Hair and Body Wash*

CVS Pharmacy’s Extreme Energy Hair & Body Wash features a refreshing double-gel action for hair and skin. The wash is said to rinse clean and has a fresh scent.


Cleansing & Makeup Remover Towelettes*

CVS Cleansing & Makeup Remover Towelettes now are available with added texture. The deep-cleaning and impurity-removing wipes are said to nourish and moisturize with a chamomile, vitamin E and triple tea antioxidant complex to tone facial skin and minimize the appearance of pores. The product is alcohol- and oil-free, hypoallergenic and both dermatologist- and ophthalmologist-tested.

 

Arthritis Heat Wraps*
New CVS brand Arthritis Heatwraps are specifically designed to remedy neck, shoulder and wrist pains. The ultra-thin, odorless wraps are said to provide 12 hours of pain relief and muscle relaxation. The wraps also provide temporary relief of minor muscle and joint aches and pains associated with overexertion strains, sprains and arthritis. Each pack contains three one-time-use, air-activated heat wraps.

 

Longs Drug Stores, Walnut Creek, Calif.:
Tools for Kicking the Habit

Longs Drug Stores is using its private label offering as part of an in-store program to help customers quit smoking. The store’s Commit to Quit smoking program is a partnership with Dr. Lowell Kleinman and Deborah Messina-Kleinman, founders of the Quit Smoking Center, Danville, Calif.


In addition to an informational CD that provides advice to smokers on kicking the habit, the Commit to Quit smoking program also includes the Longs Nicotine Transdermal System - a three-step, patch-based anti-smoking program offered exclusively at Longs Drugs Stores. 

 

Walgreens, Deerfield, Ill.:
Extreme Hair Gel*
Eccentricity is the idea behind Walgreens’ new Spiking Glue hair gel. The product is water-resistant and is said to provide a strong, long-lasting hold. 

 
Eye Health Formula*
The Pharmacist’s Support Eye Health formula from Walgreens is designed to support healthy vision with DHA, vitamin C and lutein. The line also includes a Men’s Prostate Health formula, which is gluten-, wheat- and sodium-free. PLB

 

*Source: Mintel’s Global New Product Database, Mintel, Chicago

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