Chains make holiday plans, but will they get their wish? - Cover Story - expecting holiday sales - Brief Article - Industry Overview - Statistical Data Included

As drug chain executives returned from the Labor Day weekend and began to frame their sales forecasts and promotional plans for the upcoming holiday selling season, they faced sharply conflicting economic reports.

In the first week of a new school year in many states there were several positive signals. U.S. auto sales rose 18 percent in August as consumers responded strongly to sales incentives. The Labor Department reported year-on-year average incomes up 1.9 percent after inflation. And the nation's unemployment rate dropped to 5.7 percent in August from 5.9 in July.

On the negative side, the Labor Department also said second-quarter productivity only rose 1.5 percent, compared with 8.6 percent in this year's first quarter and August back-to-school sales at mass merchandisers slumped badly, with Wal-Mart showing a small 3.8 percent gain in same-store sales and Target reporting a 0.1 percent decline. And a report on the retail industry from the financial ratings service Fitch Ratings, dated Aug. 30, said a meaningful recovery will not take place until 2003. Fitch cited "signs that consumers are becoming more cautious, with consumer confidence down to 93.5 in August from 106.3 in June, according to the Conference Board."

Frank Badillo, vice president and chief economist of the forecasting firm Retail Forward, said drug chain retailers still have reason for holiday optimism. He said baby boomer consumers have shown resilience in their buying confidence and conveniently located community stores have a chance to win purchases that are not currently going to shopping malls.

"In some aspects, the drug store business tends to be counter-cyclical," Badillo said. "Consumers are avoiding the big spending trips to the malls and supermarkets. You see it in the fall-off in spending at mall apparel stores. People have shifted to convenience stores. There is potential sales gain for the well-stocked community store."

Badillo predicted the pressure on price in the front end will not be as severe this holiday season with inventories down. He said holiday season sales growth was about 4.2 percent last year, which he attributed to a "bounce back from 9-11." The Retail Forward economist, however, sees slightly weaker growth this season to about 3.5 percent. He noted retailers will face more competition this season from catalog sales, which dried up last season as consumers backed off mail orders in the wake of the anthrax scares.

Holding the line on inventory

In this volatile early September atmosphere, drug chain executives focused on critical consumer attitudes in their own operating neighborhoods and remained cautiously optimistic. A stated strategy among several was for slightly, but not dramatically, tighter seasonal inventories and more aggressive advertising schedules, especially in the addition of store circular pages. Central to some plans is a need to communicate with customers earlier, as the traditional Thanksgiving start to the holiday shopping season is on Nov. 28, six days later than last year's Nov. 22 turkey day.

"We have been more conservative. We don't buy as deep for the holidays as we used to," said Gerald Heller, president and chief executive officer of Tulsa, Okla.-based May's Drug Stores. "We are buying tighter for a better sell-through and looking for quality selling, not quantity."

Heller said trim-a-tree merchandise is a major part of the Christmas selling season for May's, and the chain is looking for sales with new light sets and decorative lawn displays where "we have slipped into higher price points."

Circulars are May's biggest holiday advertising expenditure and, on weekends starting from early November, the chain will go up to 12 pages from its usual eight in several distributions. The seasonal increase in ad expenditure will be about 10 percent. Heller was encouraged by sales of some early season merchandise, including a $50 rocking horse that was selling quickly. But he was concerned about job losses to "well over 1,000" Oklahoma workers as a result of mergers at Phillips Petroleum and Conoco, the demise of Williams Communications in Tulsa and staff downsizing at local offices of WorldCom and TV Guide.

Mark Griffin, president and chief executive officer of Sioux Falls, S.D.-based Lewis Drug and chairman of the National Association of Chain Drug Stores, said he anticipates patriotic consumer sentiment and home enhancement will continue this season, as it did following the terrorist attacks.

"I think Santa's sleigh will have a red, white and blue flag on it," Griffin said. "The circumstances create an unusual forecast because people are still tender about 9-11 and the economy. Typically, people stay closer to home and nest. We look forward to a practical holiday season, and I think there is a conservative inventory philosophy out there now because of the uncertainty."

The NACDS chairman said he expects to see "buyers responding to promotions through a large part of the selling season. There will be more pages in circulars." Merchandise he expects to see moving includes small gifts, some fashion items, some soft goods, home decorative accessories and "a wider variety of front-end merchandise, period." Griffin said he sees economic conditions to be "uniformly soft" around the country this year, with little regional variation.

"The press was down on the economy last year. Hopefully they will be more supportive this year," Griffin added. "But I don't want to overdo the softness. I still expect an excellent season."

Concerns about employment

In the Pacific Northwest, drug chain executives are concerned about recent new rounds of layoffs as they prepare for the holiday season. John Crawford, vice president of operations at Hi-School Pharmacy in Vancouver, Wash., a suburb of Portland, Ore., said 15,000 jobs at Consolidated Freightways were eliminated when the transport company folded many operations in a Chapter 11 filing just before Labor Day.

The story is the same in Seattle for George Bartell, president and chief executive officer of the Bartell Drug Co. "Boeing has had a lot of layoffs, thanks to new aircraft orders being slower," he said. "Boeing affects everything up here because they buy components from so many smaller companies. A lot of high-tech players have gone broke."

Crawford and Bartell, however, are taking an opposite approach to stocking seasonal inventory.

Crawford said Hi-School, faced with new competition from Wal-Mart and Target, each of whom opened their second Vancouver-area stores this year, has tightened seasonal inventory. With front-end sales down about 2.5 percent at Hi-School for the year to date, "I've had buyers cut back on what we were doing," said Crawford. "Most people were caught with carryover at Halloween and Christmas last year, so we've cut back." Hi-School, however, is aggressively promoting with seven coupon book distributions and a bigger, 32-page gift guide that will be a newspaper insert designed in the production format of a television guide.

By contrast, Bartell said, "We are not more cautious on inventory. Our approach has been fairly aggressive. We don't hold back because we like to be in stock." The Bartell president said his team will send out some promotional supplies to stores earlier in November this year, "but not too early." Bartell Drug is looking for single-digit sales increases during the holiday period, mindful that the depressed post-9-11 market last fall "should help comparable same-store sales for a while this year."

Daniel Butler, vice president of retail operations at the National Retail Federation, recommended that retailers work closely with newspapers that need their business.

"The newspaper industry wants to work with retailers this year. They are looking for an ongoing relationship," he said. "They will be flexible, offering rights to shift ads and add or subtract a day from a promotion. Retailers will be demanding more measurable from their media buys."

William Baxley, senior vice president at Durham-based Kerr Drug, said he is hopeful "the worst is over in North Carolina," where the apparel, textile, furniture and tobacco industries have all taken job loss hits. Kerr, said Baxley, is using "the full depth of our technology to evaluate successes and track purchases." The chain is guardedly optimistic that same-store purchases will be strong this year compared to the weak performance of last when holiday season sales were flat.

Nearby on the mid-Atlantic coast, Happy Harry's s president and chief executive officer Alan Levin said he sees a resilient customer who would like to activate purchasing plans being continually sidetracked by downbeat reports in the media. "The media plays a big role in all of this," Levin said. "Every time the consumer is ready to move up they read or hear about the market dropping or threats of war or another terrorist attack . Sometimes it becomes a self-fulfilling prophecy."

Levin said he sees a cautious customer going "back to basics" this holiday season with small gifts and items for the home. Happy Harry's opened five new stores this year, has three more openings before year's end and 15 slotted for 2003, but Levin said new store sales predictably lag behind existing locations. Holiday season sales were flat in 2001, but the Happy Harry's resident is looking for 6 percent or better growth this fourth quarter compared with last. It will be a late run, though, especially on gift items. "We'll get a little spurt at Thanksgiving, but we won't see our real action until the 18th or 19th of December," Levin predicted.

Snyder's hits the airwaves

Gordon Barker, the president of Snyder's Drug in Minnetonka, Minn., said his company has moved to a radio campaign this year to establish brand recognition of its Drug Emporium stores purchased last year. "As we get deeper into the fall, we will go more toward price and item advertising from the institutional messages," Barker said.

Snyder's, said Barker, put together its seasonal circular plans four months ago and is adding more pages. While holiday lights are big seasonal sellers at Snyder s, the larger lawn displays popular elsewhere are not big items in the com an 's Snow Belt markets. Currently doing business in nine states, Snyder's is seeing" tougher selling markets in upstate New York and in the greater Detroit area, with stronger results in greater Philadelphia, Columbus, Ohio, and its Minnesota base, according to Barker.

"We've expanded our gift lines with some things we brought from overseas," the Snyder's president said. "We think it will build, and we'll see some improvement for a good season compared to last. But we would still not expect to see big increases."

There is even stronger optimism from other chains on both coasts. According to Mark Martinchek, director of retail marketing at Kinney Drugs, which serves upstate New York and Vermont, the expectation is for holiday seasonal sales growth "in excess of 10 percent" compared with last year. "Corporately we are bullish on the fourth quarter," Martinchek said. "When economic indicators are down our regional economy remains stable in a service-oriented, blue-collar market."

Martinchek said Kinney is following "an aggressive, chainwide growth plan in the front end," and expects toys for Christmas to be an especially strong category. Kinney customers have responded well to ads on radio and television, where the chain has increased its presence as its front-end sales have risen this year. The company is maintaining the same number of circular pages as last year, but gets an early kickoff to each holiday season by promoting an anniversary sale that launches late October at Halloween time. "We've had a strong year with the exception of Au gust, which softened a little," said the retail director. "But we thrive on the customer with the $20 bill in hand who is looking for something nice to buy."

Going against the strategy of other retailers, Big A Drug Stores chief executive officer Edward Dallal said he is increasing inventory and reducing advertising. He remains bullish on holiday sales.

Based on 31 years in this industry, I know that you really can't anticipate. Every time you expect a bad year, you have a good year," he said.

Dallal said his buyers have increased seasonal inventory by more than 10 percent because Big A ran out of decorations and lights last year. Big A will be "more conservative" with ad spending, and focus on circulars, a coupon book and some Pennysaver advertising. "Our holiday circulars will go out the first week of November, and we expect customers will begin buying the Tuesday before Thanksgiving," Dallal said

While Big A had a "big finish" in last year's season, business ended up one or two points lower than 2000, according to Dallal, but he expects the same finish to produce 3 percent to 5 percent sales growth this season.

Consumer confidence slips

100 = 1985 confidence level

2001

M     115.5
J     118.9
J     116.3
A     114.3
S      97
O      85.5
N      84.9
D      94.6

2002

J      97.8
F      95
M     110.2
A     108.8
M     110.3
J     106.3
J      97.4
A      93.5

Source: NFO WorldGroup

Note: Table made from line graph

Retail sales in the November-December 2001 period rose an estimated 5 percent to 6 percent. Do you think sales this holiday season will be better, worse or about the same as last year? Cast your vote at www.drugstorenews.com under the industry poll icon.

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