August 20, 2007
IRI: Consumers Choosing Drugstores Over Food and Mass
Drugstores seem to be doing things right these days, according to a recently released IRI study, Channel Migration 2007: A New Cross-Channel Battleground Emerges. The channel is apparently proving itself better than food or mass when it comes to attracting customers, increasing product sales, and building transaction size.
The jury is still out, however, on whether drugstores can sustain this level of performance relative to supermarkets and mass merchandisers. In a recent store opening blitz, Target has just rolled out some new merchandising concepts in core drug store areas such as beauty, personal care and seasonal. Wal-Mart, too, is hardly a sleeping giant. In the supermarket arena, a number of innovative formats have been rolled out or are in the pipeline including H.E.B. plus!, Publix GreenWise, Giant Eagle’s Express and Tesco’s Fresh & Easy.
According to the IRI study, consumers have been steadily decreasing their total number of shopping trips over the last five years as the effects of higher gas prices and other factors have taken a toll. For example, the growing attractiveness of one-stop shopping at sparkling new retail outlets has contributed to the reduction in trips. Indeed, according to IRI, the all-outlet decline in average trips per shopper per month was –3.1 percent in the rolling 52-weeks ended May 13, 2007, the biggest drop in the past four years. Drugstores, on the other hand, were able to increase shopping trips by 1.2 percent in the same period. Compare that to the –2.8 percent falloff in supermarket trips and the –4.4 percent of mass. Even Wal-Mart experienced a decline (-0.8 percent).
Drugstores have also been able to enlarge the average basket at a rate triple that of other channels’ combined average. All channels (with the exception of clubs) increased dollar sales per purchase year-over-year in 2007, but the drug store gain was truly outstanding at 6.9 percent, or nearly $16 in absolute terms. In contrast, the average for all channels was a 2.4 percent gain. Wal-Mart showed a 3.8 percent increase while grocery managed a sub-average 1.9 percent increment.
According to the report, drug store increases were broad and deep and included nine of the top ten non-foods categories with the largest share shifts. In addition, said IRI, the gains appeared to flow from an emphasis on health and beauty care, as well as private label development. Drugstores have apparently been able to leverage pharmacy to the benefit of the whole store. Some of the key categories with major drug store share growth included cold/allergy/sinus, in which 2.2 share points were garnered at the expense of grocery, and internal analgesics with a 3.1 share point increment, here at the expense of both grocery and mass. In beauty/personal care, drug, in part due to the halo effect of drug store additions of upscale European beauty lines, grabbed 5.9 share points in hair conditioners, taking them from grocery, mass and supercenters as well, while in shampoos, drugstores gained 4.5 share points.
Discussion Questions: What do you see as the major factors in drugstores’ success? What strategies and tactics could be adopted by grocery and mass to offset the current advantages of drugstore competitors? What other strategies could drugstores activate to stay competitive, in addition to health, beauty and private label?
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The #1 factor in drugstore market share success: many more new drug stores are being built, proportionately, than supermarkets or mass merchants. It’s not clear that on a per-unit comp basis, drug stores are increasing their non-prescription market share. The drug store location growth will surely slow down when the state and federal governments start to effectively reduce the prescription dispensing fees. The drug store business has a significant government subsidy, and that subsidy is sure to be reduced in the future. Just as MDs and hospital government reimbursements have been squeezed for years, the drug stores will have their turn.
I agree with Mark, convenience and speed are very important. But another factor is individualization. Buying your prescriptions and health beauty aids from a local hometown pharmacist that knows you by your first name and is personable, often times gives a perceived comfort level.
Broadening the food line and having essentials like many have done will also enhance the convenience shopper spend level.
Two words: speed and convenience. Drug stores have done a great job of becoming a convenient option to traditional retailers in providing speed and convenience, something anything larger than 20,000 square feet can’t seem to replicate. Convenience stores have not been able to replicate it either, due to their image of being a “blue-collar dining room,” despite all of their efforts to become more female friendly.
It’s (nearly) all about Location, Location, Location. That, and basic human needs. In the hierarchy of needs, beverages and food are second only to air. So if you put more stores, with more of what people need, closer to the people with the need, you have a good chance of thriving–unless you really screw it up.
So drug stores are thriving because they have moved onto the C-stores’ turf. They still have far from ideal in-store designs, but shoppers are rewarding them for proximity to themselves and a growing amount of what shoppers need most often.
Nobody would try to build a C-store with concrete walls hiding their interior. I expect drug stores to eventually catch on to this, too. If they don’t, Tesco will be eating their lunch.
Variety and location are working in the drug stores’ favor in the current marketplace. Many new chain drugs offer a different atmosphere in which to shop than convenience stores with much the same merchandise. Toss in the variety of health and beauty aids that the Boomer generation wants and has the income to buy and you have a recipe for success. Typically you can’t find the variety in supermarkets and even some mass marketers that you can find at a modern drug store. The combination of pharmacy, convenience foods, variety in HBA and location is working.
Chain Drug has benefited in some ways from the mergers and acquisitions within, however, the grocery channel is making some huge mistakes in judgment where HBC is concerned. For example, the grocery channel seems constantly intent on carrying only the top “volume” producing IRI SKUs in their POG assortments which means that whenever the consumer desires to purchase the more profitable, niche, or premium assortments, they need to take their business–and their shopping cart–to the drug channel of trade. The grocery channel needs to completely re-think the way it views its HBC business, and the impact it has on the shopping basket, overall.
Many reasons: (1) There are many more Walgreens and CVS stores than other stores (in Chicago, for example), so one is always close at hand. (2) Many drug stores are open 24 hours, so they are the option when Target is closed. (3) Customers at drug stores buy fewer items, so check-out lines move more quickly. (4) Drug stores have a smaller footprint and fewer SKUs, so customers can find what they want more quickly. (5) Drug stores are more likely to have hardware, automotive or other items, so they function more like a one-stop-shop than grocery stores. And oddly enough, (6) for some reason, customers bring their children less often to drug stores than other stores, so the shopping experience is FAR more peaceful.
Drugstores are moving in on supermarket/C-store turf and I think the damage in certain areas is more than apparent. In my area, the density of drugstores is far greater than C-stores, with C-stores relegated to second-tier locations serving less affluent, occasional customers.
For groceries, the greatest threat is that drugstores are more convenient to shop. Aside from better (and more) locations, drugstores also tend to have small parking lots that facilitate “in and out” shopping trips. Additionally, most customers don’t buy more than 2-3 items, keeping the lines short and checkout times even shorter.
Drugstores take advantage of the simple fact that consumers don’t really care where they get their Coke/Pepsi/Snapple/Water as long as it’s convenient and cheap. Since most conventional groceries can’t compete on location, they either need to shape up in terms of speed-to-shop (i.e. smaller stores with quicker lines) or develop an assortment that will offset the convenience factor.
Some of my BrainTrust peers state speed and convenience are the keys here. In reality, it is location, location and location.
Most drugstore chains have a tremendous number of locations and by correctly positioning a good selling product at a good price, they can appeal to a broader customer base who then make the drugstore a destination location. This is one of the keys to the drugstore’s shift in success as they start to think like a discount store, combined with the locations of a c-store. Drugstores can then finesse the marketing appeal that this creates and use this to build a new customer base.
The most interesting question posed in the discussion is whether or not these gains are sustainable. As many have pointed out, there are a number of overlapping “firsts” here for drug. “First number one” is the new store expansion. No doubt about it–there WILL be a Walgreens on every street corner in America. The biggest question is whether there will be a CVS or a Rite-Aid on the opposing corner. “First number two” is expanded assortment of the front end. Drug stores have indeed learned that they can sell sundries, snacks and other “rapid consumables” to shoppers who are already in their stores. A closely related “first number three” is the realization that if they price and promote these items competitively, drug stores can take business from supermarkets and c-stores–it’s working very well. (Note: when is the last time you saw Loreal or Nyquil on the marquis of a Walgreens? It’s all about $2.99 milk and 2/1 Lay’s potato chips!) “First number four”–the boomers are needing more health and much more beauty in our lives! And finally, “first number five” is the merger movement, which has effectively removed and replaced or upgraded poor performing outlets with good ones.
So, how much of this will continue and for how long? Well…Ryan Matthews is the futurist, not me.
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The #1 factor in drugstore market share success: many more new drug stores are being built, proportionately, than supermarkets or mass merchants. It’s not clear that on a per-unit comp basis, drug stores are increasing their non-prescription market share. The drug store location growth will surely slow down when the state and federal governments start to effectively reduce the prescription dispensing fees. The drug store business has a significant government subsidy, and that subsidy is sure to be reduced in the future. Just as MDs and hospital government reimbursements have been squeezed for years, the drug stores will have their turn.
I agree with Mark, convenience and speed are very important. But another factor is individualization. Buying your prescriptions and health beauty aids from a local hometown pharmacist that knows you by your first name and is personable, often times gives a perceived comfort level.
Broadening the food line and having essentials like many have done will also enhance the convenience shopper spend level.
Two words: speed and convenience. Drug stores have done a great job of becoming a convenient option to traditional retailers in providing speed and convenience, something anything larger than 20,000 square feet can’t seem to replicate. Convenience stores have not been able to replicate it either, due to their image of being a “blue-collar dining room,” despite all of their efforts to become more female friendly.
It’s (nearly) all about Location, Location, Location. That, and basic human needs. In the hierarchy of needs, beverages and food are second only to air. So if you put more stores, with more of what people need, closer to the people with the need, you have a good chance of thriving–unless you really screw it up.
So drug stores are thriving because they have moved onto the C-stores’ turf. They still have far from ideal in-store designs, but shoppers are rewarding them for proximity to themselves and a growing amount of what shoppers need most often.
Nobody would try to build a C-store with concrete walls hiding their interior. I expect drug stores to eventually catch on to this, too. If they don’t, Tesco will be eating their lunch.
Variety and location are working in the drug stores’ favor in the current marketplace. Many new chain drugs offer a different atmosphere in which to shop than convenience stores with much the same merchandise. Toss in the variety of health and beauty aids that the Boomer generation wants and has the income to buy and you have a recipe for success. Typically you can’t find the variety in supermarkets and even some mass marketers that you can find at a modern drug store. The combination of pharmacy, convenience foods, variety in HBA and location is working.
Chain Drug has benefited in some ways from the mergers and acquisitions within, however, the grocery channel is making some huge mistakes in judgment where HBC is concerned. For example, the grocery channel seems constantly intent on carrying only the top “volume” producing IRI SKUs in their POG assortments which means that whenever the consumer desires to purchase the more profitable, niche, or premium assortments, they need to take their business–and their shopping cart–to the drug channel of trade. The grocery channel needs to completely re-think the way it views its HBC business, and the impact it has on the shopping basket, overall.
Many reasons: (1) There are many more Walgreens and CVS stores than other stores (in Chicago, for example), so one is always close at hand. (2) Many drug stores are open 24 hours, so they are the option when Target is closed. (3) Customers at drug stores buy fewer items, so check-out lines move more quickly. (4) Drug stores have a smaller footprint and fewer SKUs, so customers can find what they want more quickly. (5) Drug stores are more likely to have hardware, automotive or other items, so they function more like a one-stop-shop than grocery stores. And oddly enough, (6) for some reason, customers bring their children less often to drug stores than other stores, so the shopping experience is FAR more peaceful.
Drugstores are moving in on supermarket/C-store turf and I think the damage in certain areas is more than apparent. In my area, the density of drugstores is far greater than C-stores, with C-stores relegated to second-tier locations serving less affluent, occasional customers.
For groceries, the greatest threat is that drugstores are more convenient to shop. Aside from better (and more) locations, drugstores also tend to have small parking lots that facilitate “in and out” shopping trips. Additionally, most customers don’t buy more than 2-3 items, keeping the lines short and checkout times even shorter.
Drugstores take advantage of the simple fact that consumers don’t really care where they get their Coke/Pepsi/Snapple/Water as long as it’s convenient and cheap. Since most conventional groceries can’t compete on location, they either need to shape up in terms of speed-to-shop (i.e. smaller stores with quicker lines) or develop an assortment that will offset the convenience factor.
Some of my BrainTrust peers state speed and convenience are the keys here. In reality, it is location, location and location.
Most drugstore chains have a tremendous number of locations and by correctly positioning a good selling product at a good price, they can appeal to a broader customer base who then make the drugstore a destination location. This is one of the keys to the drugstore’s shift in success as they start to think like a discount store, combined with the locations of a c-store. Drugstores can then finesse the marketing appeal that this creates and use this to build a new customer base.
The most interesting question posed in the discussion is whether or not these gains are sustainable. As many have pointed out, there are a number of overlapping “firsts” here for drug. “First number one” is the new store expansion. No doubt about it–there WILL be a Walgreens on every street corner in America. The biggest question is whether there will be a CVS or a Rite-Aid on the opposing corner. “First number two” is expanded assortment of the front end. Drug stores have indeed learned that they can sell sundries, snacks and other “rapid consumables” to shoppers who are already in their stores. A closely related “first number three” is the realization that if they price and promote these items competitively, drug stores can take business from supermarkets and c-stores–it’s working very well. (Note: when is the last time you saw Loreal or Nyquil on the marquis of a Walgreens? It’s all about $2.99 milk and 2/1 Lay’s potato chips!) “First number four”–the boomers are needing more health and much more beauty in our lives! And finally, “first number five” is the merger movement, which has effectively removed and replaced or upgraded poor performing outlets with good ones.
So, how much of this will continue and for how long? Well…Ryan Matthews is the futurist, not me.