Ask the pharmacist

Few areas of retailing have experienced greater change than the drugstore business in the last generation. The drugstore of today is separated into two kinds of retailing: stand-alone pharmacy chains, and pharmacies that are incorporated into other kinds of retail outlets, such as supermarkets. The opportunities in each are somewhat different, and it helps to understand these differences in order to manage item strategy, advertising and promotional budgets, and develop accurate forecasting.

Skyrocketing prescription usage has been driving traffic to all forms of pharmacies. This has jumped over the last few years as a result of both direct-to-consumer advertising and the proliferation of “lifestyle drugs.” These trends are reinforced by the projected increase in prescription usage for aging baby boomers, who are entering the life stage when prescription use spikes. While adults under age 44 average fewer than five prescriptions per year, this jumps to 7.5 ‘scripts per adult per year by age 45-54, and exceeds 11.5 for the ages 55 to 64. Prescription use continues upward, reaching an average of more than 22 prescriptions per year for the over-75 set, according to MVI Analysis.

However, the growth of prescription sales alone don’t drive profits. The high cost and shortage of pharmacists, low reimbursement rates, investment in expensive inventory, and competition from almost all other retail channels keep the gross margin and operating profit for pharmacies low, usually in the single digits — so retailers need to “make up” in the rest of the store. The challenge is to convert traffic generated by the prescription business into sales for other merchandise sold in the same store. As pharmacy sales continue to grow to be as much as 70 percent of overall sales within some drugstores, products sold in the front end of the store are under pressure to provide higher gross margins.

Drugstore chains, trying to capitalize on limited selling area, increasingly rely on convenience merchandise, including staple food products, to provide profitable sales, as well as trying to develop opportunities in general merchandise.

For supermarkets, club stores and other retailers that operate a pharmacy within a larger store, the primary role of the pharmacy is to drive traffic to the core business. More than 40 percent of new grocery stores nationwide include a pharmacy, and major chains such as Safeway and Kroger have placed pharmacies in about 70 percent of their stores. Keeping the pharmacy consumer within supermarket walls prevents trip loss and improves customer retention. The Albertson’s chain has taken this furthest with their dual-branded combo stores, which they claim are more effective at cross-selling customers between the grocery and the drugstore side of the store.

In both cases, the rapid growth of the prescription pharmacy creates misleading numbers for suppliers and analysts, as the low-margin Rx business drives dollar growth that can mask slow-to-no growth for other merchandise. Double-digit increases in prescription sales make the channel look healthy on the top line — but in recent years the remainder of the store has not shared in that growth, and retailers are feeling a margin squeeze as a result.

Location, location

Similarly, as this age group enters retirement, they will migrate in larger numbers to the retirement regions of the country, primarily in the Sunbelt. Drugstores have already started aggressive expansion to these areas as they prepare to fight for market share.

Over the last few years, successful new-product introductions that revolved around “ease,” “on-the-go” and “speed” are a good indicator of the time-starvation people feel. Retailers have tried to capitalize on this trend by offering more prepared-food merchandise, 24-hour locations, drive-thru pharmacies and ancillary services. Drugstores have an advantage over other channels in creating a convenient destination, with their thousands of small-box stores across the country, usually located at busy intersections.

Walgreens is the drugstore leader in terms of convenience. At the end of 2002, 75 percent of its stores had drive-thru pharmacies, while 98 percent included one-hour photo stations and 25 percent were open 24-hours, all format initiatives that are reflected by other drug chains as well. CVS has focused on making the in-store shopping trip and experience easier by testing “ClipFree” coupons, and has implemented a new inventory system to make sure products are in-stock.

Supermarkets also recognize the convenience factor for many pharmacy trips, and in some cases have acted to establish separate entrances for pharmacies in larger stores, allowing consumers to make quicker, focused visits driven by pharmacy needs. In either format, once the consumer is in the store, capturing the convenience trip is an important one, as shoppers typically do not shop through a circular and may be more inclined to make unplanned purchases in this mindset.

Healthcare branding

Both drugstores and large-format pharmacy operators try to capitalize on pharmacy customers by tying store branding and store marketing to healthcare and wellness themes. Many chains have moved beyond simple blood pressure screenings, and now provide consultation space in their stores where consumers can seek screening or advice on diabetes, asthma and respiratory ailments, women’s health issues, and other areas of health concern. For example, Giant Stores of Landover, MD, which is a part of Ahold’s supermarket holdings, have developed a series of wellness centers inside their stores where health care screenings, immunizations, and other services are available under programs run by U.S. Wellness. Ahold’s latest stores have also tied the pharmacy together with health and beauty care, natural foods, and food supplement sections into thematic programs under a “Relax, Renew, Revive” banner that positions their stores for a variety of consumer relationships.

Looking ahead, we see real growth in the drugstore business. Both stand-alone and pharmacies within other retail formats will continue to grow in numbers — Walgreens alone is projecting to have 7,000 drugstores open by the year 2010. While most of the growth is in the prescription side of the business, there are opportunities to capitalize upon the demographic and retail trends to grow sales in the front end of the store. Understanding the details and goals of the industry while strategically managing marketing, promotions and packaging of your own items for these retail outlets will become increasingly important.

John Rand is a senior analyst for Management Ventures, Inc., a Cambridge, MA-based firm that specializes in retail research, analysis, and training for suppliers that serve the world’s major retailers. He can be reached at [email protected]. Jenny Ng, a retail analyst and core capabilities manager at the firm, can be reached at [email protected].

Push down and twist…!!

PACKAGING AND PLACEMENT must be re-evaluated for aging consumers as a frustrated customer loses loyalty fast. Since strength and vision typically begin to deteriorate with age, larger fonts on packaging and smaller pack sizes that are lighter in weight may play a crucial role in the decision-making process. Similarly, some blister packs may be difficult for those with arthritis.

And with limited mobility a reality for some of the elderly, it may be easier for older customers to shop in a smaller-box store, like drugstores or dollar stores, rather than supercenters. Placement within the stores is also an important factor, as merchandise located on the lower shelves may be difficult to reach.