Mass channel takes on drug store categories, pharmacy - Brief Article

The rat race never ends in the mass merchandise industry. One year, retailers are scrambling to appeal to consumers with supercenters offering everything from apples to sprinklers. The next year, building supercenters takes a backseat to the next hot retailing trend: adding pharmacies and installing drug store departments. That's what mass retailers focused on in 1999, perhaps as they realized HBC and OTC margins far exceed margins realized from consumables, and as they also sought to keep pace with demographics that continue to skew older.

Wal-Mart, for example, continued its rollout of a new format that focuses heavily on the drug store business with bold signage, drive-through pharmacy access and ample OTC and HBC selling space. Kmart closed out 1999 with an unprecedented $1.1 billion store conversion process that updated 1,860 stores to the Big Kmart prototype--one that offers an easy-to-shop drug store atmosphere. Kmart even rolled out its first drive-through. Target led the pharmacy add-on craze with 82 new pharmacies, while Shop-Ko revealed that its new stores bring together the pharmacy and optical department under the banner "The Drugstore at ShopKo."

As for this year, the drug store trend looks like it may stay at the forefront of mass retailers' goal lists.

The year 1999 was another extra-ordinary one for the world's largest retailer, Wal-Mart. A new format combining a discount store merchandise mix with a drug store department was rolled out, called Neighborhood Markets. In these 40,000-square-foot stores, the drug store experience is addressed on all levels. Traditional drug store departments, like HBC and OTC, occupy about one-fourth of the store's total selling space. Drive-throughs are incorporated for added consumer convenience. Merchandising clearly separates the drug store section from the food section with HBC products on short gondolas running perpendicular to grocery aisles.

The format, first tested in late 1998, appears to be working. According to the company, Wal-Mart plans to add five to 10 Neighborhood Market units in the next fiscal year. Wal-Mart will also continue its aggressive expansion rate with 40 new discount stores, most with pharmacies. Its recently redesigned Web site, walmart.com, is also expected to enter the pharmacy arena with online pharmacy services slated for 2000, according to a spokesperson.

While Wal-Mart is building more drug stores, Kmart's drug store division, led by Ronald Chomiuk, has its eye on grabbing additional market share. To achieve this, the drug store group plans to utilize less investment resources and increase turns in 2000.

"We will take category management one step further to assure that the right SKUs are stocked to drive top line sales," Chomiuk said. The new drug store focus stems from the smaller-than-average profit margins on grocery items. To compensate, increased turns of profitable categories are an initiative for 2000.

Toward that end was the nationwide rollout of Kmart's Nutrition Wells, a department that features a larger array of vitamins, herbs, nutritionals and diet products. Replacing the vitamins and herbs pulled off the pharmacy wall for the "wells" are products in the smoking cessation, family planning and diabetic categories, since they require more hands-on care from the pharmacist.

In cosmetics, Chomiuk's group is looking at improving product flow so that the lead time from the warehouse to the shelf is shortened. "Through the help of receipt-type initiatives with top vendors, by slotting top-moving items in [distribution centers] and by working on logistics flow from both a new items standpoint and an old items standpoint, the hold-up in cosmetics" will be alleviated, Chomiuk said. The fragrance category has also been reexamined. It is an area that Kmart plans to focus on more heavily in 2000, as well as bath. Teens and moms with young kids will continue to be Kmart's target shoppers.

Then there's Target, a company that drums up Shakespeare's famous query "What's in a name?" Ask that of Gregg Steinhafel, Target's president, and his answer may be "75 percent of Dayton Hudson's revenues and pretax profit." That's the amount Target contributes to the overall company each year, and that's what led the company to change its name from Dayton Hudson to Target Corp. on Jan. 13. Target's 2000 plans include adding 80 stores to its base of more than 1,200, including the addition of 15 SuperTargets, a supermarket-discount hybrid.

But what's sure to attract notice among drug chains is the addition of 100 pharmacy and optical departments to existing stores throughout the year. That will bring the discount chain's total number of pharmacies to more than 500. New stores will also receive 1999 initiatives that focused on the teen consumer, like a more comprehensive cosmetics department with Sonia Kasjuk's new line of private label cosmetics.

Rank Company                      1999 pharmacy     1998 pharmacy
                                sales in millions sales in millions
 1   Wal-Mart Stores                 $6,230            $5,500
 2   Kmart Corp.                      1,800             1,700
 3   ShopKo Stores [1]                  519               348
 4   Costco Wholesale Group [*]         365               275
 5   Target [2]                         338               270
 6   Meijer                             280               276
 7   Fred's                             180               160
 8   Bi-Mart Corp. [*]                   96                94
 9   bigg's Hyper Shoppes                16                16
Rank 1999 % sales  No. of stores with No. of pharmacies % of stores with
     from pharmacy      pharmacy        added in 1999      pharmacies
 1        4%             2,510               73               84%
 2        5              1,597               27               74
 3       17                219               74               69
 4        1                217               19               72
 5        1                408               82               44
 6        3                127               10              100
 7       27                190               11               65
 8       19                 52                1              100
 9        2                  9                0              100
(1.)ShopKo acquired 159-store Pamida chain in 1999. Sales include acquisition.
(2.)Target acquired 10-store Fedco chain in 1999.
(*.)1998 prescription sales revised
Source: Drug Store News and Chain Store Guides

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