Prescription for Success
From expanding their presence into fresh to connecting consumers with their private brands via social media, chain drugstores have been up to quite a bit in the past year.
Within grocery, mass/supercenter and club channels, the predominant trip mission is the pantry stock-up mission, according to The CPG Basket: Fostering Growth in Time of Conservation, a December 2011 SymphonyIRI Group Times & Trends report.
However, “quick trips are a strength of the drug channel, and it is these need-it-now purchases that drive a majority of dollar sales and trips,” the report states. So, purchase and consumption habits are shifting in a way that is favorable to these retailers. Their nearby locales make it convenient to swing by for a few quick items without significant time or gas outlay. Simultaneously, retailers in the drugstore channel are shifting their models to capture an increasing share of consumer spending.
Several major drug chains, including CVS and Walgreens, are adjusting their store formats with a focus on bringing in more consumables, particularly in urban areas of the country.
Adding food and fresh products is a brilliant strategy to give shoppers another reason to visit the drugstore and increase the frequency of store visits, says Jon Hauptman, partner at Barrington, Ill.-based Willard Bishop.
“Shoppers are now accustomed to finding food and fresh products in a wide range of channels, so there is no longer strong perception barriers to purchasing food in a non-traditional format such as a drugstore,” he says. “Adding food and fresh opens the drugstore to capturing more types of shopping trips including for fill-in groceries, snacks and meals.”
“I think that we will see drugstores continuing to add food as they look to drive traffic to their stores,” agrees Neil Stern, senior partner at the Chicago, Ill.-based research firm McMillanDoolittle LLP.” Not all drugstores will pursue the same strategies—they are also driving growth in health and beauty areas as well.”
Although drugstores are going after that convenience factor, they do need to err on the side of caution, says Ben Ball, senior vice president, of Deerfield, Ill.-based Dechert-Hampe.
“Drug has pushed pretty far into convenience food already,” he says. “It has been a good move for them and increased trips, which was their primary goal. If they push too much further into staples, they are going to wind up where C-stores did 20 years ago—with one box of Cheerios and one bag of Gold Medal flour taking up shelf space and gather dust. Drugstores must remember that they are in the business of serving quick trips and maybe some fill-in trips in a pinch. Stick to the sodas and the snacks, and maybe the milk and bread.”
The Big Three
Deerfield, Ill.-based Walgreens has publicly stated that in the coming years, store brands will play an even greater role and become more prominent.
“From a brand transition, we’ve transitioned everything from old to new, and now we’re into the product development stage where we’re now going to start to create additional items,” says Moe Alkemade, Walgreens vice president of retail brands and global sourcing. “The first phase was to convert everything…that played within consumables and household, we’ve now converted all of that into Nice! Now, phase two, which consumers will start to see come out in the back half of this year and early next year, is a slew of innovation and product modifications which just continue to enhance that product. That side is doing better than planned. You’re going to see us do a lot of very mindful, branded campaigns.”
Walgreens rolled out its flagship private label brand, Well at Walgreens, in mid-May after two years of putting it together. Alkemade says the company had at least two previous programs and looks for Well at Walgreens—which will handle all health and wellness private label products in the portfolio—that were scrapped before deciding on its current look.
And with decisions like that in place, Walgreens really is raising the bar on store brands in the drugstore channel, Willard Bishop’s Hauptman says.
“I think that other major drugstore retailers will be forced to enhance their store brand offerings to neutralize Walgreens’ competitive advantage,” he says. “Shoppers increasingly trust store brands and are actively seeking more store brands than ever in an attempt to stretch their shopping budgets. A strong store brand offering is now table stakes in the drugstore channel, and all key players will need to put significant effort and focus into sourcing and merchandising a robust assortment of store brand options or risk losing shoppers to stores that do.”
Walgreens also has said that it plans to consolidate its store brands into three tiers: differentiated brands, price point, and price value brands.
“The luxury is that Walgreens has been the name anyways, so we have the ubiquity of that name, that’s great,” says Alkemade. “What’s more important with this launch is that we don’t alienate consumers because they’re used to seeing the package in a certain way, and this is a major departure. This is moving many years forward on the look and the feel and when you see this on shelves, you’ll see how differentiated, and also how modern and upscale it is.”
The goal initially is to ensure that Walgreens does not alienate the consumers, so it will be doing a lot of in-store campaigning, Alkemade adds. The goal is to continue to communicate to customers that the same product is there, with the packaging just changed, he says.
Walgreens’ three-tier brand segmentation makes a lot of sense, according to Carol Spieckerman, president of newmarketbuilders, a Bentonville, Ark.-based marketing firm.
“Their strategy is based on what the brands accomplish for Walgreens and its customers, and they are not limited by category,” she says. “The segmentation establishes missions and outcomes, and I see that driving internal clarity in terms of brand purpose and, in the end, clarity with Walgreens’ customers.”
“This makes a tremendous amount of sense,” Stern agrees. “Chains need to develop strong brand management tools and tiers to manager an increasingly complex business.”
Earlier this year, Walgreens opened its flagship store in downtown Chicago.
The organization is interested in developing flagship types of stores where it makes sense, says Alkemade.
“You won’t see this expanding aggressively, but those flagship stores are a great example of what we can do from a private brand perspective,” he says. “You see how we change how we communicate and face up private brand, and it’s been extremely successful. That becomes an example of how far we can push it and in those types of stores the numbers have been phenomenal. We’ve had significant growth in private brand versus the average store in the chain. So it’s a great example from a private brand perspective of where we’re going.”
Woonsocket, R.I.-based CVS has been focused on personalizing the retail experience for its customers.
“We are continually exploring new and different ways to deliver personalized value to customers,” says Erin Pensa, spokesperson for CVS/pharmacy. “Most recently, we launched an updated mobile app that allows shoppers to digitally store their ExtraCare card in their smartphone, eliminating the need to carry an ExtraCare card when shopping. This newest mobile feature for ExtraCare makes it easier and more convenient for shoppers who prefer not to carry their ExtraCare card to take advantage of ExtraSavings and ExtraBucks Rewards.”
CVS has stated that one of the major growth avenues that will see further development this year is its portfolio of store brands, which have been a key front-end sales driver.
“We are always exploring new and different ways to deliver personalized value to customers, and our line of store brands is one way we provide this value,” Pensa says. “For example, the Just the Basics product line co-exists with other CVS brands to offer grocery, household, and personal care items that offer no-frills, low-price options on many everyday essentials throughout the store. Additionally, CVS/pharmacy Earth Essentials is a line of eco-friendly products that provides high quality, green alternatives to everyday household items. The brand has been received extremely well by shoppers and CVS/pharmacy continues to evolve the line based on the needs and feedback of our customers.”
Last year, CVS launched its Nuance beauty brand, and already has seen tremendous success.
“We have found that women have been turning to CVS/pharmacy with increased interest in store brands, as they are seeking out effective products at a greater value,” Pensa says. “Both our exclusive offerings, like Nuance Salma Hayek, and store brand offerings, like Essence of Beauty, help set us apart from other retailers and make CVS/pharmacy a beauty destination.”
Consumers are looking for appealing options to which they can comfortably trade, save money and feel like they’re “working the system” and being a “smart” shopper, Hauptman says.
“CVS’ new line of beauty products provides shoppers such options to trade and save money in categories with relatively high branded price points,” he says. “Today’s challenging economy is encouraging shoppers to make such trade-offs and CVS is well-positioned to meet shoppers’ needs for more budget-friendly beauty care.”
Beauty is a hot category right now, and one that arguably will become oversaturated as everyone from grocery to dollar stores accelerate their beauty programs, Spieckerman says.
“That said, I think that the creation of an owned beauty line makes particular sense for CVS on the heels of its closure of the Beauty 360 concept,” she says. “Nuance will help CVS maintain its prestige beauty differentiation within its mainline stores.”
Camp Hill, Pa.-based Rite Aid had success with growing its Rite Aid brand program and will look to continue down that path of growth.
“Private brand is one way for Rite Aid to showcase the value it offers,” says Eric Harkreader, Rite Aid spokesperson. “We’ve made significant progress already in rebranding nearly 3,000 products in our new private brand architecture, but we believe there is still opportunity for growth by expanding depth and variety of items within our private brands.”
Rite Aid has done some interesting things when it comes to marketing its private brands this year, such as the Sweet Escapes Sweepstakes and the Tugaboos 2nd Anniversary Sweepstakes.
“We’ve seen customers react very emotionally to some of our private brands,” says Harkreader. “The best example of this is probably Tugaboos, where we’ve had everything from customers calling to order it in bulk to blog testimonials to the effectiveness of the product. As we continue to engage Rite Aid followers and fans in the social media realm, private label is a natural fit, because of the emotional reaction it elicits and also because it is a great way for Rite Aid to differentiate itself as a store offering great value.”
There had been some speculation in the past as to whether a company, such as Walgreens or CVS, would step up and buy Rite Aid or do something with it. Furthering that speculation was the recent selling by Jean Coutu of a chunk of its Rite Aid stake. Still, analysts say it’s very unlikely.
“My number one candidate was Walmart and it appears they are going to be distracted for a while,” says Dechert-Hampe’s Ball.
The two big chains, Walgreens and CVS are so big that an outright acquisition would be very difficult, Stern says.
“If something does happen with Rite Aid, we would expect to see something happen on a market by market basis,” he says.
What’s To Come?
As far as what we’ll see from chain drugstores the rest of this year and going into next year, “there will be a lot of focus on front-end innovation, as the channel continues to be challenged on the pharmacy side by benefits providers, shrinking margins, etc.,” Stern says.
Drug stores will be fighting “traffic wars” on two fronts,
“One is the battle for quick trip traffic at the front end. They initiated this battle several years ago, primarily with supermarkets, and it won’t go away. The second is to hold onto the Rx trip. Drugstores have owned this trip with the exception of Walmart/Target for years. Now, drugstores are going to have to contend with other convenience driven brick & mortar retailers (primarily dollar stores) on that front as well.”
Spieckerman agreed with Ball on the future of drugstores.
“I see the competition in pharmacy continuing to heat up as Dollar Tree enters the pharmacy fray and as everyone from Sam’s Club to Target double down on their pharmacy business,” she says.