MORE DRUG STORES GO AFTER CONVENIENCE FOOD SHOPPERS

Consumers appear to make little distinction between supermarkets and alternative formats -- a fact demonstrated during the first three weeks of the Southern California labor dispute, when Longs Drug Stores reported an upsurge in business that it attributed directly to consumers seeking shopping alternatives.The Walnut Creek, Calif.-based drug chain, which operates about a third of its 467 locations

Consumers appear to make little distinction between supermarkets and alternative formats -- a fact demonstrated during the first three weeks of the Southern California labor dispute, when Longs Drug Stores reported an upsurge in business that it attributed directly to consumers seeking shopping alternatives.

The Walnut Creek, Calif.-based drug chain, which operates about a third of its 467 locations in Southern California, said comparable-store sales in October "were favorably impacted by 250 to 300 basis points" -- and 80 to 100 basis points for the third quarter ended Oct. 30 -- as a result of consumers seeking alternatives during the supermarket strike-lockout that began Oct. 11.

"People will shop at various alternative venues quite readily because of the value trade-offs," Chuck Cerankosky, an analyst with McDonald Investments, Cleveland, told SN. "And while it's inherently inefficient to offer small quantities of food in a drug store-sized box, the costs are offset by having a non-union labor force, and that's the edge supercenters, clubs, dollar stores, limited-assortment stores and drug stores have in competing with supermarkets."

Steve Chick, an analyst with J.P. Morgan Chase & Co., New York, echoed those comments, noting that drug stores tend to be price-aggressive on food items to drive traffic, "and while they may be hurting supermarkets only a little bit, the pressure increases when you combine the impact of drug stores with the impact of dollar stores, clubs and supercenters."

West Coast drug store operators have historically carried a larger assortment of food products than most operators because their stores have tended to be larger, Jonathan Ziegler, principal, PUPS Investment Management, Santa Barbara, Calif., told SN. For example, food at Longs accounts for up to 20% of front-end sales, compared with 5% to 15% at most other chains.

However, since the mid-to-late 1990s, most drug store operators have moved aggressively into food distribution, led primarily by Walgreens, Deerfield, Ill., according to Lisa Cartwright, an analyst with Citicorp Smith Barney, New York.

Yet, it's unlikely drug stores will get much deeper into food, opined Cartwright. "If food sales at drug stores are averaging 10% of front-end sales nationally, then I don't think they will grow much beyond 15%," she said.

Cerankosky said he agreed that food in drug stores may be approaching a plateau. "However, although drug stores will never become a destination for food, they will be competitive alternatives for customers who are already there getting prescriptions filled and who decide to pick up a few grocery items," he said.

Although drug stores advertise food extensively in their ads, food is generally not a loss leader, Andrew Wolf, an analyst with BB&T Capital Markets, Richmond, Va., pointed out. "As drug stores have expanded their food assortments, they've moved away from a heavy reliance on loss leaders," he said. "Certainly, they've got ad specials to drive traffic, but basically they're getting premium prices on food because of the convenience they offer."

Food sales lost to drug stores are more an annoyance to supermarkets than a serious long-term threat, Cartwright noted, with drug stores posing a greater threat to convenience stores than to supermarkets. "People go to drug stores for fill-in shopping trips -- the kind they might otherwise use a convenience store for -- because of the ability to get in and out quickly," she explained. "But they're still going to the supermarket for perishables. Supermarkets seem to have a lock on perimeter sales."

For years, freestanding Osco drug stores in the Chicago area have been adding increased assortments of foods, including some perishables, Karen Ramos, director of public affairs for the Osco and Sav-on drug stores division of Boise, Idaho-based Albertsons, told SN. Since Albertsons acquired the drug chains in 1999, it has been using best practices from its supermarket operations to upgrade the food offerings at its drug stores in other parts of the country, culminating in the opening earlier this year of an Osco with a "food mart" in central Phoenix.

That store's selection includes a broader assortment of dairy, frozen and prepackaged deli items, along with salads, sandwiches and some bulk produce, Ramos said. "We typically carry oranges, apples, bananas -- foods people can eat on the go -- but we also have lettuce and other salad ingredients, plus potatoes and onions. It's not a very wide selection -- just a case of four to eight feet -- but it's a selection we found has been successful in urban areas where there are a lot of working people," Ramos said.

Walgreens Co., Deerfield, Ill., has also been testing produce at some stores, analysts told SN. "But I don't think they're going to roll that out because it's too hard to do," Cartwright said. "It may work at some college-town locations where students use the drug store as a food outlet, but fresh produce requires too much specialized knowledge of handling and presentation for a drug store to succeed with it."

Wolf said Walgreens opted to test produce as a way to use refrigerated cases that were no longer selling beer, a category the company dropped because the margins were too low, he said.

Drug stores are broadening their food offerings to utilize their positioning as a convenient location, Wolf said. "Once they decided to position themselves from the standpoint of convenience, they tried to figure out what people want as part of a convenient shopping trip, and they started with snack foods and grew from there," he pointed out.

According to Ramos, drug stores will continue to add food varieties if that's what customers demand.

"For today's consumer, stopping into a drug store for prescriptions and picking up some groceries is a convenience. But in the future, convenience may mean going to a full-service supermarket. So our goal at our drug stores is to serve the customers' convenience needs through what we offer."