Ever Walgreens

As the stalwart drug chain goes upscale, retailers ponder where wellness and convenience collide.

By  Abbie Westra, Editor-in-Chief, Convenience Store Products

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When a customer enters the drug chain’s new flagship store at State and Randolph in downtown Chicago, the three sushi chefs make a clear, upscale statement. They man the forward end of what’s basically a gondola of freshness, with grab-and-go wraps, sandwiches, salads and, of course, sushi jamming the 30-foot, open-air display.

Along this varied and delectable centerpiece, grab-and-go options yield to a yogurt dispenser, then a bakery cabinet of bitesized chocolate cupcakes, each topped with a healthy dollop of cream. Finally, at the end of the gondola, four juice-bar employees make smoothies from fresh-cut pineapple and watermelon.

And that’s just the first pass. Then you see a barista making gourmet coffee, a fresh-flower island of white and lavender orchids, chilled and frozen take-home meals. And the entire back third of the main floor is wine: 700 options, complete with an island of high-end cheeses and deli meats, all under an artful display of bottles riding on two opposing conveyor belts.

Does this still feel like a drug store? 

Walgreens cut the ribbon on its flagship store two days before reporting its strongest increase in net income in a decade and largest growth in earnings per share in more than 15 years. After standing in the impressive flagship location, or sitting in on the shareholder meeting, the knee-jerk conclusion would be that Walgreens is white hot. But what if one were standing in any of its 7,699 less-elaborate stores? What would today’s verdict be? And what about three to five years from now, when its vision is fully realized?

Such impressions raise critical issues as the dominant player in the drug-store space repositions itself for the future. Its purchase in 2010 of Duane Reade, a ubiquitous New York metro drug chain, has provided Walgreens with the opportunity to test new visual and merchandising concepts and roll out what it calls “customer-centric retailing.”

But questions remain: Can it deliver consistently as it embraces more upscale offers, foodservice and convenience items? How pervasive will its transformation be? And what threat does it pose?

From a c-store perspective, here’s a rundown of Walgreens’ competitive strengths:

  • Convenient corners. Central to its current success was a realization that location was critical, and it cut some profitable sites in favor of higher-traffic corners.
  • Convenience philosophy. For several years, the word “convenient” has played into its mantra as a forward-thinking, prescription-drug retailer, and now the translation means everything from fresh foods to flowers to online ordering and pickup.
  • Pharmacy traffic. Despite recent disputes with a distribution partner that may put millions in prescription business at jeopardy, Walgreens has a lock on its core customers and intends to sell them more stuff in traditional c-store categories.
  • C-store goods. The overlap of key categories between the channels—including cigarettes and OTP, candy, snacks, single-serve beverages, grab-and-go foodservice, and beer and wine—suggest head-to-head matchups, with the question being: How competitive does Walgreens intend to be?

Many of the more formidable c-store operators keep the general category of drug stores, along with dollar stores and grocery, on their radar, but they are confident in their own business model.

“Everyone’s figuring out ways to add more and more to what they do,” says Mike Thornbrugh, spokesperson for Tulsa, Okla.-based QuikTrip Inc., widely recognized among the elite of c-store operators. “Are we cognizant of what they’re doing? Of course we are, but we’re not going to change just based upon [the competition]. We’ve got our long-term plan and will continue to execute it.”

Still, the majority of retailers polled recently see Walgreens in particular as a threat. (See results on p. 46.) And c-store researchers following the Deerfi eld, Ill.-based chain say its efforts with traditional convenience items are paying off. While c-store traffi c overall is down 1.4%, according to Port Washington, N.Y.-based The NPD Group, Walgreens traffic is up by that same percentage. NPD research also shows Walgreens holds an advantage, with consumers perceiving it has better prices and coupon programs.

“Walgreens is intentionally going [after] the convenience-shopping occasion,” says David Portalatin, executive director of industry analysis for The NPD Group. “Consumers are defi nitely seeing Walgreens as a convenience alternative. They’re being recognized for their efforts in those areas, merchandising for those categories and … using the same best practices as c-stores.”

Quick Tripping

Much of Walgreens’ current position can be attributed to recessionary-shopper habits, according to researchers. Quick trips, as categorized by SymphonyIRI Group, Chicago, gained share of CPG spending during the past three years at the expense of pantry stock-up missions. As club and mass merchandisers took a hit, the drug channel (and, to a lesser extent, dollar stores) stepped in and stole share.

Frequency within the drug channel overall accelerated sharply, increasing 6.7%, in the year ending June 2011, according to SymphonyIRI. Meanwhile, c-store frequency numbers dropped during that same time by 1.3%, also per SymphonyIRI, closely aligning with NPD’s fi ndings. And perhaps the most painful statistic: In the second-quarter 2011, Symphony- IRI found 13% of consumers said they are shopping more at drug stores due to their generally close-to-home locations in the face of higher gas prices. During that same period, the drug channel increased share of sales in seven of eight categories, including beverages and frozen and general food.

Battleground: C-Store

Indeed, it’s inside the store where those interviewed for this article see the battleground. How well Walgreens executes on each will determine its competitive position. “I used to discount them like everybody else, years and years ago,” says Shawn Davis.

“I used to laugh: ‘Those are the guys that sell discounted beer and chia pets.’ ”

Davis, co-owner and COO of Stinker Stores, has changed his tune. He’s been watching all drug chains grow as a threat over the past decade. In his market— around the 65-store chain’s headquarters of Boise, Idaho—Walgreens has won.

“They’re open many times 24 hours on the best corners, and they are an absolute huge competitor of our channel of trade, especially in our market,” he says.

Vulnerability lies in several categories:

  • Cigarettes. A few retailers, including Davis, point to Walgreens’ aggressive cigarette pricing and increased selection of OTP as a competitive threat.
  • Dispensed beverages. More stores are being outfitted with dispensed beverages, coffee drinks and frozen beverages. The effect of such additions is yet to be seen.
  • Grocery and fresh produce. Last summer Walgreens pledged to help eliminate food deserts (rural and urban areas that lack easy access to fresh, wholesome foods) by opening or converting at least 1,000 “food oasis” stores over the next five years. These stores received a 60% increase in food selections, including fresh produce, whole grains and lean proteins.

In August it unveiled the Nice! privatelabel brand. Current store brands will be phased out and the Nice! Brand will take over shelves with soups, sauces, bakery items, macaroni and cheese, and other dry goods. Items in the line are priced as much as 30% below national brands, according to the company.

Snacks. Mirroring its strategy in the grocery category, Walgreens rolled out a private-label line of premium snacks and candies under the Good & Delish brand. First introduced in Duane Reade stores, the line includes snacks that are trans-fatfree, gluten-free, reduced-calorie or made with natural ingredients, differentiating the line from other private-label brands.

  • Alcohol. After a 15-year hiatus, Walgreens last year again began selling alcohol, with an emphasis again on private label. In January 2011 it rolled out a privatelabel beer called Big Flats 1901, initially available in about 4,600 stores for a suggested retail price of $2.99 for six cans. Its proprietary Cherrywood Cellars wines are provided by E&J Gallo Winery.Walgreens and Australian winemaker Daryl Groom have launched Colby Red, a new table wine produced in partnership with Treasury Wine Estates. The Chicago flagship store clearly makes a statement in this category.
  • Electric-car charging. Perhaps more a feather in its cap than a competitive threat at this point, Walgreens is nonetheless in the car “fueling” business, and it is working toward a goal of offering electric-vehicle charging stations at approximately 800 locations before this summer—making it the retailer with the largest number of charging stations nationwide.
  • Foodservice. Foodservice may be one of the most vulnerable categories for c-store retailers, who are certainly in the foodservice game but have yet to gain solid traction in the competitive marketplace. The entrance of Walgreens into grab-andgo may tip the scales just as consumers are starting to take note of c-stores’ efforts.

Foodservice Distribution

The pivotal component of Walgreens’ foodservice success may be distribution. One wholesaler, who spoke on condition of anonymity, says science is allowing for prepackaged sandwiches to stay fresh longer, but “upscale” elements such as lettuce and tomato are still problematic. “Lettuce and tomato reduces shelf life to four days, max,” the distributor says. “Now you’re looking at multiple or daily deliveries.”

In high-traffic locations such as downtown Chicago or Manhattan, volumes may make the economics work, but outside of that zone or in rural America, it may not add up. “You look at others trying to do it and they’re working hard to get more items on the truck,” he says. “Why are they doing that? They’re trying to figure out how to make the truck pay.”

“It’s a huge undertaking,” says Dan Elrod, vice president of sales for mass markets for Temple, Texas-based McLane, which over the past several years has taken on the distribution of a number of convenience categories for several leading retailers in the mass-drug-supermarket club class of trade. (See sidebar, p. 51.)

Working through the needed processes and capabilities for McLane didn’t happened overnight. Continuous investment in temperature-controlled distribution and transportation, and building a fleet of “three-temperature” trailers, for instance, were important internal moves. “We have invested through the past number of years to position ourselves for this growing demand,” Elrod says, “not only in buildings and fleet, but as important, the technology to support an evolving customer base.” In addition to Walgreens, McLane in varying degrees supplies goods to drug chain CVS; grocery chains such as Safeway and Albertson’s; and big boxes including Target, Kmart, Walmart and Sam’s Club. Elrod says demand for more advanced foodservice distribution is great across all channels.

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