Drug Chains Sharpen Post-Virus Differentiation Strategies

NEW YORK—  The chain drug store business has changed immeasurable over the past several years, even if you can’t tell that by driving by one of the innumerable stores that fall under its auspices, but the shift to a health care focus is a sector-wide initiative that is having an effect on housewares and even some home furnishings vendors.

An informal definition of drug chains, at least in their non-pharmacy function, has long characterized them as convenience stores for women. To some extent, that has held true, even if the emphasis shifted from everyday food, essentials and health and beauty care items. The shift initially was based, in large part, on expansion of the beauty business as drug chain retailers found that operation increasingly attractive.

However, the even larger change began more recently and has had two

components. The first was a deliberate shift from the traditional drug store role to one involving health care. A shift to mail order prescriptions helped power the move, but drug chains recognized that the consumer was in many ways underserved by the health care sector as constituted.

Pharmacists and newly conceived convenience clinics, drug chains reckoned, could help consumers with many health care needs that were otherwise problematic, as not everyone with an allergy problem wants to make a doctor’s appointment to discuss what will most likely be a non-prescription remedy or to conduct a simple child’s school physical. Given health care costs, as they fall on consumers without health insurance, and even those with insurance, lower-priced help might be appreciated, the drug chains determined.

The second component was mergers. Walgreens because an international company when it first partnered then merged with Boots, with its prominent representation in the United Kingdom and into Europe, and it got new expertise in beauty care, which its partner made a specialty; and pharmacy operations, which are more varied in their healthcare dimension on the other side of the North Atlantic.

In a more dramatic initiative, CVS acquired Aetna, both a healthcare and insurance company. United States Securities and Exchange Commission actions helped squelch a Rite Aid merger with Walgreens, which resulted in a sale of many Rite Aid pharmacies to Walgreens. However, with the remaining stores, Rite Aid pursued its own health-oriented repositioning, one that included a thoroughgoing store remodeling program.

One result of it all is somewhat greater differentiation between drug stores. Rite Aid particularly has developed a more polished presentation staying closer to the original convenience orientation than its rivals. CVS has gone deeper into health care-
oriented merchandise generally, while Walgreens has scaled back some
categories and expanded consumable food, wellness and OTC products. All three continue to emphasize beauty and seasonal products as well, with Walgreens remaining perhaps most conspicuously committed to calendar-sensitive goods.

The product mix and emphasis can vary with store size, which can vary tremendously from one market to another, and even within markets, but each of the three major pharmacy chains seems committed to greater differentiation one from another while retaining as least some commitment to the basic product segments traditionally carried in the front of store non-pharmacy business.

The changes that drug chains have made to position their operations as more important health care providers put them in good stead when the COVID-19 crisis hit. Just as critically, they were deemed essential business, with good reason, and allowed to stay open. Changes in how they served customers, through drive throughs and free delivery services, further enhanced their status, but they also remained places where people could pick up key non-medical essentials at a time when such products were getting scarce across the spectrum of still-operating retailers.

Walgreens first quarter performance, as the period ended February 29, wasn’t heavily affected by the COVID-19 outbreak in the U.S. Still, in an April 4 conference call James Kehoe, Walgreens CFO, stated, as transcribed by SeekingAlpha, “While we have not yet closed the books for March, we do have good visibility to our sales performance. In Walgreens, comp retail sales grew by around 14% in the month, led by 32% growth in health and wellness and 28% growth from our grocery category, partially offset by declines in discretionary categories such as beauty and seasonal. But there were two very distinct periods in March. We delivered comp sales growth of 26% in the first 21 days of the month. However, post-March 21st, the comp sales trends turned negative with the last week of the month running at a mid-teens rate of decline.”

Like other open retailers, the company saw comps slip as consumer movement and bricks-and-mortar retail occupancy restrictions kicked in. At the same time, e-commerce prescription sales kicked in.

In the conference call, Walgreens executives also mentioned a 50-store test of Kroger Express locations in positive terms. In a deal with the supermarket chain, and anoteable partnership post-Boots merger, Walgreens is trialing fresh produce and Kroger is testing Walgreens private label health and beauty products.

In a CVS conference call for the first quarter, in this case, ended March 31, Larry Merlo, the company’s CEO, said online activities including with the company’s convenience clinic operations, had taken off in the coronavirus crisis.

“We’ve achieved higher levels of engagement across our digital assets in Q1, a trend which began in January and accelerated with COVID-19,” Merlo said. “And let me provide you a few examples. Utilization of telemedicine for virtual visits through MinuteClinic is up about 600% compared to Q1 ‘19. Retail prescription home delivery is up more than 1,000%. Additionally, we saw a fourfold increase in the number of consumers adding front store items to their prescription deliveries; let’s call it the front store attachment rate.”

He added that front store sales had taken off as consumers confronted the coronavirus spread. Front store revenues increased 8.5% in the quarter building on the 2% gain that occurred before the COVID-19 related purchasing began. Front-end comps grew 8% in the period.

In the fourth quarter, ended February 29, Rite Aid saw front-end comps gain 1.5% and digital sales grow 28%, Matt Schroeder, the company’s CFO said in the related conference call. In contrast, March front end comps jumped 33%, with sales moderating in April.

As with some other retail channels, drug chains were able to re-engage with consumers during the COVID-19 outbreak including online, which is likely to be a first for many customers. As such, drug chains have been given an opportunity to become higher profile community institutions and may even have been able to make a stronger case for themselves as prescription providers given that supermarkets and supercenters that fill scripts were heavily used and could be difficult to access in the coronavirus crisis.

Drug chains continue to reconfigure their front end, non-prescription sales, which sometimes seems to be an endless process, but the larger health-related initiatives they are pursuing are likely to favor those housewares and related home products that can position themselves in the wellness vein, as candles and aromatherapy electrics have managed along with products ranging from fitness monitors to massage products have done.

However, keep in mind that the definition of wellness is expanding to include the mind, so products such as beauty tools that have given up space in some cases may see a rebound, and cleaning products, so deliberately sought in the coronavirus crisis, may become more important as well.