Drug-store giants move beyond filling prescriptions to filling bellies.
If CVS’ in-store slogan of “What You Want, When You Want It” sounds remarkably similar to Burger King’s “Have It Your Way,” it’s no coincidence.
Soon enough these two companies could have much more in common than like-sounding catchphrases: Assuming early prepared-food tests pay dividends, CVS may well become the newest combatant in the ever-widening, channel-blurring battle for the consumer’s share of stomach.
Along with fellow drug-channel chain leader Walgreen Co., Woonsocket, R.I.-based CVS Caremark Corp. is busy tinkering with convenient meal solutions it hopes are good enough to compete with the low-priced, on-the-go food offerings of quick-serve restaurants, supermarkets and convenience stores. This should come as no surprise, however, because drug stores’ lust for food dollars has been building for some time. “In the last three to four years, drug stores’ growth departments have all been in the food departments,” says Laura Miller, senior economist for the National Association of Chain Drug Stores (NACDS), Alexandria, Va. “Drug stores did something like $51 million in frozen pizza last year. I’m thinking: Frozen pizza in a drug store? Are you kidding me? … You see these departments expanding more and more, and it eventually snowballs.”
One such snowball came earlier this year, when CVS announced plans to test fresh salads, sandwiches and other prepared foods, in addition to beefedup grocery sets, at a select number of its more than 7,000 drug stores nationwide. The tests represent the drug-store industry’s latest and boldest attempt to bolster its pharmacy sales with high-margin products designed to increase basket size and, if done right, get visitors to stop in more than once or twice a month.
“Walgreens is almost trying to become a convenience store with a pharmacy,” says Ron Paul, president of foodservice consultancy Technomic Inc., Chicago. “I don’t think [foodservice] was recognized as a viable business for drug stores until now. Trader Joe’s helped. Whole Foods helped. Supermarkets jumped on and showed it could work.
“Customers are already in the store, so why not pick up something for dinner tonight?” he adds. “But are people going to go to a drug store just to buy a sandwich? Not likely.”
Even big-box brutes such as Walmart and Target (see sidebar, p. 108) have gained an appetite for fresh produce and other such consumables, so it makes perfect sense for small-box drug stores to enter the food fray. Like other retail channels, drug stores’ foodservice push has been driven by the need to look elsewhere in light of threats to their business model.
“The traditional drug store in some respects has an advantage over other retailers because they have this giant category called prescriptions,” says Miller. “Prescriptions tend to be resistant to an economic downturn because they’re covered by insurance. At the same time, for some people even the co-pay is too much. So to compete they have to make up for whatever they may be losing because of the downturn in pharmacy.” The drug-store channel, however, is by no means unhealthy. America’s aging population, accelerated by the graying of the baby-boom generation, has steadily ballooned into a multibillion- dollar business opportunity. NACDS figures show the industry’s average number of prescriptions per pharmacy climbed from 44,600 in 1997 to nearly 60,000 in 2010. Add in expanded Medicare enrollment and a wider net of insurance coverage in the aftermath of President Obama’s healthcare plan, and this number is likely to multiply in years to come.
But the industry has also been under siege from big-box retailers with an itch to fill prescriptions, leaving drug retailers looking for ways to not only drive up the average basket size—$24.96 per trip, according to NACDS—but also the number of trips, clocked at 1.15 per month vs. grocery stores’ 4.9 trips per month.
“It’s all about managing or influencing trips,” says Jim Hertel, managing partner of consultancy Willard Bishop, Barrington, Ill. “You can see that much more with drug stores because they’ve really been positioning themselves as a sort of quasi-convenience store for some time. No doubt [foodservice] represents a way to promote a net extra trip.”
Packaged foods and beverages were an early success story in terms of giving shoppers a good reason to spend more dollars in drug stores, according to Miller (see chart, p. 110).
“Follow the circulars and see what’s on sale [in drug stores] this week,” she says. “You see food items on sale, particularly beverages. Traditional drug stores are now very competitive on beverages, even with grocery stores. … It’s the location of the drug store that’s driving a whole lot of traffic, and the No. 1 reason why people stop is always convenience.”
Drug stores now want to migrate core customers—females and senior citizens (see sidebar, p. 107)—toward on-the-go foods or meals in need of little preparation. Deerfield, Ill.-based Walgreen Co. as early as September began testing chilled foods—sandwiches, fresh-cut fruit, soups, wraps, etc.—in as few as 12 stores or as many as 50, depending on published reports. (Walgreens did not respond to requests for interviews before press time, nor did CVS.) But the company appears to have been quietly gearing up for a food fight, amassing much-needed ammunition along the way.
Earlier this year, for example, Walgreens hired supermarket and convenience- store veteran Jim Jensen as its divisional merchandise manager of fresh foods. Jensen came to Walgreens from Fresh & Easy Markets, the U.S. supermarket division of British food retailer Tesco, where he was director of fresh foods. Before joining Fresh & Easy in 2006, he served Dallas-based 7-Eleven Inc. for 14 years in the company’s freshfood division.
Furthermore, Walgreens’ February 2010 acquisition of 258-store metropolitan New York drug-store chain Duane Reade Holdings Inc.—the price tag: $1.075 billion—was reportedly influenced by the allure of Duane Reade’s line of to-go foods and a private-label food line called DR Delish. Sure enough, Walgreens CEO Greg Wasson said in an analyst call earlier this year that Walgreens stores chainwide would get their first taste of DR Delish by August.
“The fresh component is the latest addition, and that’s really to add convenience, to drive trips and to stimulate sales of high-margin merchandise at the front end,” says Jennifer Halterman, senior consultant with Kantar Retail, Columbus, Ohio. “In the same way that convenience stores may have benefited from consumers trading down from QSRs, I think drug stores can also position themselves as convenient but affordable.”
Add quality to the mix and the drug stores have “a real opportunity here,” says Kevin Higar, director of operator consulting services for Technomic: “Compared to 2007, a larger percentage of consumers said they will pay $5 for something if the quality is there. So it becomes a matter of what you saw with fast-casual restaurants: It has a certain high quality but is priced below what you might expect. “If I’m a drug chain,” he continues, “I’m thinking: What do I need to do price-wise to say, ‘This is a better option’ [than a convenience store or QSR]?”
Then again, cautions Neil Stern, partner with Chicago-based retail consultancy McMillanDoolittle LLP, the history books are riddled with examples of ballyhooed foodservice entrants whose offerings didn’t pan out quite as expected.
“Whether it’s in grocery or takehome prepared foods, there’s been a lot of experimenting over the years,” he says. “When [Tesco’s] Fresh & Easy opened up, everyone thought it was going to blow everything else away. I think everyone still believes in the viability of a small-box location that’s going to work. … It doesn’t mean you don’t take every threat seriously if you’re a retailer, but no one’s figured it out yet.”
TOOTH AND NAIL
Drug stores’ appetite for prepared foods comes at a curious time, considering other foodservice channels—specifically white-tablecloth restaurants—are coming off their worst two-year period in recent history. The economic recession hit restaurants harder than almost any other industry. The U.S. restaurant unit count declined by 1% last year, for a loss of 5,204 restaurants, according to marketresearch firm The NPD Group, Port Washington, N.Y. NPD data collected from April 1, 2009, to March 31, 2010, shows that the number of QSRs dropped 2,521 units, while full-service restaurants shed 2,683 units.
But analysts suspect drug stores’ timing was well intentioned: Consumers are not eating less, just eating out less often, which opens the door for high-volume retail outlets with a captive audience.
“If you look at drug stores, you can almost look at the battle convenience stores have had to fight, with the same kind of angst and trouble c-stores had,” says Higar. “Consumers understood that maybe, ‘I can get a hot dog and a soda in your store, but now you’re telling me you’ll have sushi in that case? I’m not sure.’ “The consumer is getting over that hump, and now drug stores find themselves in a similar position,” he continues. “Now, what has a drug store done that has made you think you’re going to [get] a good club sandwich in that store? There has to be something else happening from a drug-store perspective that says, ‘Yeah, we can handle fresh very well.’ ”
Drug chains will likely limit instore preparation in favor of freshdelivered options, and Higar believes it could work. Many convenience stores have succeeded with commissary- delivered sandwiches, for example. He also cites two international companies—grab-and-go sandwhich chain Pret A Manger and drug-store chain Boots UK, both based in London— that have conditioned consumers to consent to purchasing high-quality foods not necessarily made on site.
“You go to a Boots store over there and see a very large selection of readyto- eat and heat-and-eat options,” he says. “It gets back to the idea of what consumers will accept as OK for fresh- ness. There’s a level of trust as far as the integrity of the program is concerned, and that’s something that didn’t exist five, six, seven years ago.” There remains a potential danger, however, as the U.S. economy emerges from an extended slumber.
“The first thing people say they’ll do once the economy turns around is use less private-label grocery items, so instead of Kroger ice cream maybe they’ll return to Häagen-Dazs or Ben & Jerry’s,” says Higar. “The second thing they say is, ‘I’m going back to more restaurants,’ ” meaning they will be less likely to purchase prepared-food items from supermarkets, c-stores and, presumably, drug stores.
If Walgreens and CVS succeed in moving their foodservice offerings past the experimental stage and into full-fledged rollout, the nation’s leading drug retailers pose a formidable threat to other retailers vying for a piece of the consumer’s food budget.
Store count alone makes the drugstore chains immediate contenders. Walgreens, for example, has more than 7,500 drug stores nationwide, with the most units in Florida (817 stores), Texas (663), California (574), Illinois (564) and New York (453). The company continues to open new stores and grow organically but has scaled back the pace of its openings from 9% in recent years to approximately 4.5% to 5% in 2010, according to its 2009 annual report.
“The biggest challenge is going to be to deliver a credible offering in a brandnew context for regular shoppers,” says Willard Bishop’s Hertel. “They’re just not expecting to get quality foods in a chain-drug outlet. … If you ask 100 people, ‘What’s the next thing Drug-Store Retailer A should get into?’ I’m not sure prepared food would be one of the top 10 answers that would leap to mind.”
Paul of Technomic agrees that the drug chains face a tough battle, not only against consumer expectations but also against a raft of cagey, well-positioned competitors. “The important thing to remember is that just because they’re trying it, it doesn’t mean it’s going to work,” says Paul. “They’ll probably start a little too ambitious. They may find that sandwiches are not a good place to start. If at the end of the day you’ve got to throw sandwiches out, there goes your margin.”
Who’s Shopping Drug Stores?
Drug stores have long been referred to as “convenience stores for women.” The National Association of Chain Drug Stores provides a more intimate portrait of the customers who shop in the more than 63,500 U.S. chain and independent drug stores each month.
Sex: 60% female, 40% male
Age: 57.8 years
Marital status: 60% married
Education: 50% college graduates
Basket size: $24.96 per visit
Shopping frequency: 1.15 visits per month
Prepared Food: In Target’s Sights?
Perhaps following the lead of its big-box rival Walmart, Minneapolis-based Target Corp. has made fresh food an increasingly important part of its business. Expanded grocery sets have served as the jumping-off point, though some signs point to Target becoming a bigger player in the prepared-foods business for the dinner day-part.
In 2009 Target launched its so-called “PFresh” initiative to add more fresh produce, meats and baked goods to store sets, and has since decided to expand the initiative—an investment of $1 billion, according to published reports—into more than 300 U.S. stores this year. Adding in-store food preparation to the mix would be a massive step forward.
“With PFresh, they’re trying to steal the fill-in grocery trip,” says Jennifer Halterman, senior consultant with Kantar Retail. “The one thing that is difficult for them is the convenience factor, because you still have to walk through the big box to get there. There are still some things they can do to enhance the convenience factor. … I’m thinking of an easy endcap for everything you need to make dinner, like a prepared salad, dessert, a bottle of wine and some marinated chicken—all grab and go.”
Target spokesperson Jennifer Mooney could not share specific numbers as to PFresh’s effect on store sales but did say the company is “very pleased with the results.” Stores with the PFresh program have experienced traffic and sales increases of approximately 6%, with some stores seeing increases of 10%, according to Mooney.
“We’re seeing the biggest sales lift in food items, as well as notable sales increases in categories such as health and beauty, household chemicals and paper products,” she says. “Our SuperTarget stores are already a destination for our guests looking for high-quality, fresh and great-tasting prepared food items at an incredible value.”
A Threat to C-Stores?
A company with the resources and reach of CVS or Walgreens could be “an enormous threat” to convenience stores’ food sales, according to Neil Stern of McMillanDoolittle LLC. He points to Walgreens’ previous foodservice attempts, such as expanded grocery offerings and its experiment with dispensed beverages under the Café W banner, which only served to whet its appetite for consumers’ food dollars.
“You look at Walgreens, which has 7,000 locations, and it’s relatively easy for people to park,” he says. “To the degree that they can capture more of that business, it’s certainly something to be worried about. … Anyone new getting in and taking away from what’s there is an issue anytime the overall pie isn’t growing much.
“That said,” he continues, “they’ve got some real barriers to overcome. They’re known by consumers as a pharmacy provider, and that doesn’t necessarily translate into someplace I want to buy my sandwich.”
Drug stores could effectively carve out a niche in select markets—so-called “food deserts,” or urban centers abandoned by supermarket retailers, for example—especially as consumers try to conserve dollars and rein in their weekly shopping trips. In these areas, drug stores’ prime corners and diverse product mix have them well positioned to compete.
“Urban areas with less options—that’s going to make the most sense,” says Jennifer Halterman, senior consultant with Kantar Retail. “I think it’s going to be a threat for more urban convenience-store locations, where maybe there isn’t as much activity happening. But it’s also an opportunity for convenience stores to improve their game.”
Drug stores have largely ceded the tobacco business to c-stores, but other threats remain. Walgreens, for example, is moving aggressively into another c-store cornerstone category: beer and wine. The company expects to reintroduce alcohol beverages into as many as 5,000 of its stores by year’s end, Deutsche Bank Securities analyst Bill Dreher wrote in a June 2010 research note.