STEALING THUNDER

To capture greater health and beauty care sales, supermarkets are going directly after drug stores in their merchandising strategies, pharmacy upgrades and aggressive pricing tactics.The numbers indicate supermarkets have picked an appropriate target. For the 52 weeks ending April 17, total HBC sales for supermarkets were down 2%, while drug stores showed a 3% gain, according to Information Resources

To capture greater health and beauty care sales, supermarkets are going directly after drug stores in their merchandising strategies, pharmacy upgrades and aggressive pricing tactics.

The numbers indicate supermarkets have picked an appropriate target. For the 52 weeks ending April 17, total HBC sales for supermarkets were down 2%, while drug stores showed a 3% gain, according to Information Resources Inc., Chicago.

Drug stores still have the competitive advantage partly because they have recognized the power of "locational" convenience, said Neil Stern, partner, McMillan/Doolittle, Chicago.

"Drug chains have stores on nearly every corner with manageable footprints that are easy to get into and out of quickly, and they're combating the 'pharmacy-in-the-back' syndrome with drive-throughs," Stern said.

Drug stores also have established themselves as pharmacy experts, with more than 60% of sales associated with prescription purchases, he added.

"We pride ourselves on being very convenient and having people that are extremely knowledgeable so they can give suggestions to customers on which products are best for their specific ailments," said Tiffani Bruce, spokeswoman for Walgreen Co., Deerfield, Ill.

Because supermarkets don't have the smaller, more maneuverable footprints common to most drug stores, many chains, like Kroger and H.E. Butt Grocery, are adding drive-throughs to their pharmacies to create convenience, Stern said.

"Some rearranging definitely needs to be done in stores," agreed Meredith Adler, analyst for Lehman Bros., New York.

Most HBC items are impulse purchases with high price points making the high margins well worth the extra effort required to make the HBC department more appealing, Adler said.

A handful of supermarket chains recently gave their HBC departments face-lifts.

"A new Kroger store in Cincinnati has an absolutely beautiful health and beauty section that looked like the latest prototype, with gondolas or shelves that were very low, making the department very spacious," Adler said.

Several design guidelines for creating a distinct drug department include using elegant or unusual gondolas, different floor treatments from the rest of the store and custom signing that is distinct from other sections, Stern said.

"In creating a separate zoned environment, we believe Stop & Shop has done this extremely well and Safeway is pushing this in their Lifestyle remodels, too," he said.

Stop & Shop HBC departments are dotted with "Relax. Renew. Revive." signs in overhead banners on promotional endcaps to highlight some upscale products and to provide buying information.

Wild Oats Markets, Boulder, Colo., also has established a stand-alone HBC category that draws in consumers and keeps them browsing for long periods of time, according to Sonja Tuitele, spokeswoman.

"We've created a store-within-a-store Holistic Health Center that allows for more privacy, more attention and is a relaxing environment where consumers can shop for all-natural HBC," she said.

The chain's Holistic Health Centers feature electronic kiosks shoppers can use to research products, as well as music and video stations. To reach shoppers who don't have time to browse the HBC department, Wild Oats also merchandises related HBC items at the checkout at appropriate times of the year, such as allergy or cold and flu seasons.

While many of the larger chains are capable of designing entire departments that rival drug store layouts, smaller chains typically have only a small section of an aisle dedicated to HBC. Consequently, getting the right product mix at the right time is vital.

"We have very tiny stores, and the biggest thing we can do is keep the mix moving, making sure we have the new products people are looking for," said a spokeswoman for Highland Park Markets, Glastonbury, Conn. "Everything we have comes from our supplier, so we have to make sure we choose a supplier that is well informed on the latest products and trends so we know they'll have the products that are most in demand."

Toby Nelson, director of nonfoods for Dahl's Food Markets, Des Moines, Iowa, added that keeping up with the allowances that come through distributors is an effective way for many supermarket chains to compete with drug stores.

"We also do some cross merchandising of summer items in HBC with grocery to keep things interesting," he said.

With food and HBC under the same roof, supermarkets should follow Dahl's lead, capitalizing on the opportunity to cross merchandise and cross promote whenever possible, said Jim Wisner, president of Wisner Marketing Group, Libertyville, Ill.

"Drug stores don't have an endless ability to leverage food along with OTC products under the same roof," he said. "It's as simple as placing a grocery endcap in the HBC area near the pharmacy or dispersing kiosks with HBC items throughout the store."

Supermarkets could also offer more HBC items for people on maintenance regimens like daily aspirin, glucosamine for arthritis, or products in the antacid category for those with reflux disease, Wisner said.

"Supermarkets could compete directly with drug stores by offering bulk packs of these necessity items that are purchased regularly by consumers," he said.

Offering private-label HBC items is another effective tactic. Shoppers not only save money when buying store brands, but supermarkets experience consumer loyalty when their own brands are routinely selected over national brands that can be found at numerous retail outlets.

In Wild Oats stores, HBC makes up about 19% of total store sales, including sales of the chain's private-label vitamins, minerals and supplements and some private-label body care products.

"We have unique product lines, such as our Food Origins line of vitamins, that are under the Wild Oats label," Tuitele said.

ACNielsen, Schaumburg, Ill., has the numbers to back the importance of private label in HBC. An ACNielsen annual report on total sales in the United States for the 52 weeks ending Dec. 25, 2004, showed that private-label medication/remedies sales equaled $1.9 billion and private-label vitamins raked in $1.5 billion.

During the same period, a 5% decline in the grooming products category, personal soap/bath category and hair care category was met with a 26% increase in private-label grooming products, 14% growth in private-label personal soap/bath items and a 12% increase in private-label hair care.

Albertsons, Boise, Idaho, and Ahold USA, Braintree, Mass., are pushing private label in HBC. Both chains are currently revamping their own brands to be more competitive, particularly in OTC, Stern said.

Food Lion, Salisbury, N.C., has several locations with HBC near in-store pharmacies. The chain heavily promotes its private-label HBC items and manages its pharmacy and HBC as one department.

"We offer both national-branded products and Food Lion-brand HBC products, which offer our brand's quality at a lower price," said Jeff Lowrance, spokesman. "In stores with pharmacies, we tie HBC in with the pharmacy since it's such a logical and natural connection."

Too many chains miss the opportunity to relate HBC to pharmacy as complementary departments, Adler said.

"Some chains see pharmacy as just another department, like bakery or deli," she said. "The mind-set of the consumer, however, is that drug stores are where they get prescriptions filled and, while waiting, they pick up a few HBC items. More supermarkets should approach pharmacy and HBC as a single health care or health and wellness department."

Though supermarkets are concentrating on battling drug chains, mass retailers and club stores are also overhauling their HBC departments and pharmacies to better compete with other channels, including supermarkets.

Wal-Mart Stores recently opened a new prototype store in Greenville, Mich., with layout that is 'female-friendly,' according to media reports. Located in the same town where Meijer, now based in Grand Rapids, Mich., opened its first supermarket, the new Wal-Mart is open 24 hours, and has a drive-through pharmacy and a medical supplies center.

HBC Price Pressure

Mass merchants are setting the pace in HBC pricing.

"HBC items in supermarkets are usually more expensive than in mass outlets but less expensive than in drug stores," said Jim Wisner, president of Wisner Marketing Group, Libertyville, Ill. "Pricing pressure is coming from mass [outlets] and forcing supermarkets to be more price-competitive. Of course, this is a trend throughout the store, not just HBC."

Other retail outlets also pose a threat, making it even more crucial for supermarkets to establish effective game plans for their HBC and pharmacy departments.

The recent merger of Sears and Kmart will result in 25 new stores under the Sears Essentials banner, each containing a pharmacy. Even alternative outlets like Big Lots! add to the competitive environment, with an abundance of low-priced HBC items.

Wisner expects the HBC category to increase nearly 15% in the next decade due to the large portion of the population that will be 50 years old or older. These maturing consumers will likely purchase more health and wellness items as they get older, he said.

HBC product mix also will change in the coming years, and Neil Stern, partner, McMillan/Doolittle, Chicago, predicted that the upscaling of beauty and personal care is going to be the new trend.

"The categories are evolving from commodities like toothpaste to fashion items like tooth whiteners," he said. "There are big opportunities here for supermarkets to better compete, and they should take advantage of these opportunities wherever they can."