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.
A Corner on Corners
As Davis of Stinker Stores says, Walgreens had a revelation during its evolution.
High-traffic, convenient corners would be an integral part of its new formula, so much so that the chain was willing to shutter profitable stores in favor of opening a new site at a nearby location with better traffic.
The overall effect, in some instances, was competitive bidding for prime real estate—not just from Walgreens but also the likes of CVS, major dollar-store chains and other retail formats.
Oddly enough, Thornbrugh of Quik- Trip says the recession actually slowed the bidding activity from cross-channel competitors. “We’ve had a similar philosophy that if a location is making money but not reaching our threshold, we cut our losses and move to a better spot,” he says. “But economic woes have slowed [our competitors’] aggressive approach and given us the opportunity to be aggressive.”
What’s also a factor is reinvestment in current stores, says Steve Montgomery, president of b2b Solutions, Lake Forest, Ill. “When you look at Walgreens’ network, you see a lot of new or nearly new stores,” he says. “Even when I’ve gone into an older location, it’s been redone, re-laid out or brought up to the extent that the physical size will allow the same things as in new stores.”
Can’t Touch This
Despite the financial might that a company such as Walgreens can put into its convenience efforts, c-stores still have an edge, according to Jim Fisher, president of IMST, a consultancy based in Houston.
Taking fuel out of the discussion to better compare, he says drug stores lack the convenience mindset needed to outpace c-stores. In addition to having inand- out parking, another benefit is that c-store employees prioritize a fast checkout. “[At drug stores] at certain times of the day, you won’t see any [employees],” he says. “They’re stocking, in the photo lab, cleaning or doing facings, but not behind the counter. When they see someone, then they position themselves.”
The pared-down number of SKUs at c-stores also makes the shopping experience quicker.
Fisher makes a huge point by asking, “And when was the last time you went to the restroom in a Walgreens?”
In newer ones, maybe you have, Fisher concedes.
But Walgreens certainly fails to “promote restrooms, and if they do exist, they’re not accessible.”
But don’t think Walgreens is blind to its weaknesses on the store floor. Part of its strategy for transformation is an “outstanding— even memorable—shopping experience.” In its 2011 annual report, the chain touts an initiative in “setting new standards, providing training and developing leadership skills” to strengthen employee “engagement” with customers. What people consider Walgreens a destination for “is totally different than a c-store,” Fisher says. “That being said, an older-generation c-store, one that does not reflect industry standards or has not stayed current or doesn’t have the most provocative product-and-service mix within the store, then yes, it’s [vulnerable]. But that’s self-created, not created by Walgreens.”
Pharm Life
Despite competitive overlaps, Walgreens is still a pharmacy, and Neil Stern, senior partner in retail consultancy McMillan- Doolittle LLP, Chicago, advises competitors to see the forest for the trees.
“As much as we want to focus on the boxes and what they do in the front, they still are very driven by the pharmacy business. … The heart of Walgreens is and will continue to be a focus on the pharmacy business and health and wellness,” he says.
(Happening at the same time as the company’s recent enhancements is its battle with prescriptions manager Express Scripts. Walgreens announced last year it would end its contract with the company after the two were unable to reconcile a pricing dispute. The result could mean Walgreens may have to turn away billions of dollars in sales.) Where the pharmacy side hits c-stores is as a traffic builder. “The easiest way to build sales is sell more to the customers you already have,” Stern says. “If people go for prescriptions, the likelihood of them to buy something else [increases].”
As it rolls through 2012, Walgreens is seeking to transform the pharmacy from a simple transaction to an experience, what it calls the “Well Experience.”
On display at the Chicago flagship are some of the elements of the Well Experience, including greater access to pharmacists by bringing them out from behind the counter; the Take Care Clinic, for health-care services such as vaccinations, physicals and treatments for minor injuries and common illnesses; and greater integration between the pharmacies, clinic and retail categories to create a “community health corner” in stores.
On the retail end, the Well Experience also includes a miniature spa for getting a quick manicure, as well as more upscale beauty products and lifestyle brands.
The pilot program for Walgreens’ Well Experience included more than 20 locations in the Chicago area. In mid-January, the format was expanding to Indianapolis.
Wellness Overlap
The Well Experience is aptly named. It promises something consumers increasingly expect: an experience.
And it’s only natural for Walgreens to build its experience around health and wellness. It starts from what customers identify with and expands it to the “pursuit of a higher quality of life, as well as spiritual and emotional wellness,” according to the company.
For c-stores, where the rubber meets the road is how the Well Experience will affect competitive categories, namely foodservice.
“There is likely significant opportunity for Walgreens to exploit the intersection between the health-and-wellness side of the drug store retailing (prescription drugs, OTCs) and foods and beverages,” says David Wright, senior associate at research consultancy The Hartman Group, Bellevue, Wash.
Will drug stores become a “third place” akin to Starbucks? While The Hartman Group has found that from the consumer perspective, drug stores have indeed evolved into something more than a source for medicine, “most drug stores are not exactly ‘fun’ places to hang out in,” Wright concedes.
In the end it comes down to occasion, and Stern of McMillanDoolittle believes the drug channel might be the wrong tree to bark up. “Based on what I think of the occasions c-stores have, I might be more worried about Starbucks, McDonald’s and Dunkin’ Donuts than I would be worried about Walgreens,” he says.
In assessing what drug stores such as Walgreens offer over c-stores, Fisher of IMST advises retailers to stay upbeat. “There’s never a shortage of doomsayers— everyone wants to go out and find what might be a problem rather than what is a problem,” he says.
“Ninety-eight percent of all competition is self-created. If all retailer facilities were doing everything correctly—staying current, positive and having the ultimate customer experience—would we be saying, ‘Are drug stores moving in?’ Absolutely not.”
What Women Want
In the battle for market share, drug chains have one forte: attracting the female shopper. Females are increasingly what Susan Morris calls “chief purchasing officers.” They make up 51% of the population and 50% of the workforce, and they are the main purchasing decision maker in a household that’s increasingly made up of three generations.
“I don’t think any of us have woken up to just how powerful women are for pretty much every product out there,” says Morris, owner of retail consultancy New Height Group, West Boothbay Harbor, Maine.
Appealing to the female shopper, says Morris, means being intuitive, speedy, authentic and trustworthy. “There is no downside in an organization focusing on females. If you focus on doing it right for the female consumer, the guys will be happy,” Morris says. Nonetheless, Morris doesn’t see Walgreens as a particularly innovative company. She looks more to brands such as Dunkin’ Donuts, Starbucks and Caribou Coffee as competition—and aspiration. “No c-store has become the Caribou coffee of the industry, of the local, third place. … The good/ bad news is, no one has gotten it right,” she says.
Tackling Foodservice Distribution
Channel blurring is probably most apparent further up the supply chain, with manufacturers and distributors having clients in multiple segments. Dan Elrod, vice president of sales for mass markets for McLane, Temple, Texas, says the company currently meets the convenience-related needs of retailers in the mass, drug, club and supermarket channels.
What’s at stake is its share in the growing demand for convenience items, especially foodservice. To meet future demand, McLane had to make a sizable commitment in equipment and technology.
“For the past 15-20 years, [c-store] retailers knew they needed an effective foodservice strategy. But few were willing to make it happen” often because margin pressures and spoilage rates are a difficult balance, he says. “Market leaders in many channels have taken the plunge and are ‘all in’ with fresh food. ... The consumer demand for food choices and the subsequent store traffic it drives means the commitment level is high. They’re making it work.” The larger trend is one of accessibility, Elrod says. Whether from a downtown office worker who can now go downstairs for a sandwich or someone in a rural town who no longer has to drive 2 miles for one, cross-channel competitors are discovering what for them is new demand. For food-drug-mass retailers, that successful formula may differ drastically from c-stores. “For some retailers, if they can grow store traffic and break even on food, they’re way ahead,” Elrod says.
By the Numbers
75% Percentage of U.S. consumers who live within 5 miles of a Walgreens store
1.4% Percentage drug store traffic is up—and c-store traffic is down
6.7% Increase in frequency within the drug channel in the year ending June 2011, compared to a 1.3% decrease for c-stores
79% Percentage of households that shop drug stores
35% Percentage of households that shop convenience stores
Sources: SymphonyIRI Group, The NPD Group
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