“Honey, I'll stop at Walgreens on the way home and pick up dinner.”
That might not be a commonly heard statement today, but it could become more prevalent than traditional supermarkets would like in the coming years.
Deerfield, Ill.-based Walgreen Co. has long incorporated grocery offerings into its product mix, but the company is now thought to be taking it to another level, with an expanded effort in fresh and prepared foods that seeks to make the store a more frequent destination for consumers seeking meal solutions.
“I think they are headed in the direction of offering more prepared foods,” said Andrew Wolf, a Richmond, Va.-based analyst with BB&T Capital Markets. “They have hired up for it, they have tested it, and I assume they have done a lot of research.”
Although the company has been secretive about any efforts to expand its prepared-food offerings, reports have indicated that expanded tests of chilled foods may be rolled out to up to 50 stores in its home Chicago market this fall. It has also rolled out beer and wine to 2,500 stores so far and plans to double that penetration, another indication that it may be seeking to capture more frequent visits from buyers of consumables.
“Prepared food — what's for dinner tonight — is a pretty tricky category,” said Wolf. “But they want to get to the point where people think of them as a place to get that center of the plate entree, or maybe the whole plate, and all the things that go along with it — soda, ice cream, chips. I think they have some pretty ambitious designs.”
Meanwhile, CVS/Caremark, the No. 2 drug store chain in the country, also is expanding its food offerings, although perhaps not as ambitiously as Walgreen Co.
In recent conference calls with analysts, CVS said it is expanding the amount of grocery offerings in about half its stores.
Both CVS and Walgreens have picked up some grocery expertise through acquisitions — CVS through its purchase of Longs Drugs, the California-based chain that had been known for its perishables offerings, and Walgreen through its purchase this year of Duane Reade, the New York City-based chain that has been expanding its food offerings dramatically in the past two years under the direction of John Lederer, the former chief executive officer at Toronto-based Loblaw Cos.
The expanded food efforts at Duane Reade include a new private-label line, DR Delish, which was rolled out last year and has since been expanded, and a grab-and-go chilled island in some stores offering prepared salads, sandwiches, yogurt, sliced fruit and beverages. Many of the prepared foods are supplied by local gourmet shops.
Walgreen said it hopes to adopt some of the grocery know-how from Duane Reade into its network of other stores around the country.
Speaking with analysts in June, Gregory Wasson, president and CEO of Walgreen, said the chain is picking up food expertise from its Duane Reade acquisition.
“We're really encouraged and excited with their private brand and the expertise and what they've done with [it] in that market, so I think there's a huge opportunity there,” he said. “We're also excited about their fresh food and urban retailing, so the more we've gotten into it, the more excited we are and the more we think we can pull a lot of their expertise back through the chain.”
Asked about rolling out Duane Reade's private label to Walgreen, Wasson replied, “Where we under-penetrate and have over the years is in consumables, and that's where they over-excel with their Delish snacks, cookies — their food and consumable items. But we think they can really help us in the consumables space.”
Both CVS and Walgreen recently detailed to Chicago-area newspapers their plans to expand their food offerings in that city's so-called “food deserts,” where access to healthy foods is limited.
According to a report in the Chicago Sun-Times, CVS will double the amount of shelf-stable food in 11 Chicago stores to include convenience items like Hamburger Helper and Old El Paso dinner kits, as well as condiments and “other items targeting busy people who want to grab dinner ingredients on the way home.”
Walgreen, meanwhile, said it was adding fresh fruits and vegetables and other “meal ingredients” to 10 of its stores in Chicago's food deserts. In two Chicago locations, Walgreens has added 150 square feet for its food offering, which includes frozen meats, pasta, rice, eggs, cheese, milk, bread and produce, including onions, potatoes and peppers, the Sun-Times reported.
Currently, food makes up a tiny fraction of sales at Walgreen, where 75% of the company's $63.3 billion in sales last year came from prescription and over-the-counter drugs. The company did not break out what portion of the remaining 25% of its sales came from grocery products.
Brendan Langan, director of retail insights for Kantar Retail, Cambridge, Mass., said drug stores, particularly Walgreen, may grow as a competitive threat as they add more perishables, though the immediate threat is modest.
“Drug stores are not a significant competitive threat to supermarkets today,” he told SN. “However, they have the potential to be if they do food in a way that fits their footprint and their customer base.
“What we're seeing in drug stores, primarily at Walgreen, is an influx of talent with a strong food background who know how the model works and who are working to present food and consumables in more meaningful ways.”
According to Langan, Walgreen has a legacy in foodservice — it used to run restaurants — “and it probably should have had the fill-in food market cornered 10 years ago” but opted to focus instead on pharmacy, health and wellness, photo, general merchandise and seasonal goods to boost its consumer base.
“But food and beverages have always been more a part of Walgreen's DNA than that of CVS, and what we're seeing now is that Walgreen is staffing up with more senior-level talent from the retail food business to put together consumables programs for urban stores and stores in food deserts.”
Recent hires include Bryan Pugh, who helped Tesco  develop the Fresh & Easy Neighborhood Market format, as vice president, merchandising, and Jim Jensen, who worked for Fresh & Easy and 7-Eleven  as divisional merchandise manager for fresh foods.
“Walgreen is doing what it's always done — getting the distribution and supply chain issues settled first before rolling out a program aggressively,” Langan noted.
“So far, we've seen just the tip of the iceberg at Walgreen,” Langan said, with a test of Café W at some stores — a stand-alone fixture of 20 feet located on an endcap that offers “essentially what 7-Eleven offers — coffee, slushy drinks and cold beverages.”
Walgreen tested that concept but pulled back as it decided to focus on resetting the entire store, Langan said, as part of its “Customer Centric Retailing” initiative.
“Rather than just looking at a single footprint — a 14,800-square-foot box at the corner of Main and Main — Walgreen is studying different types of formats,” Langan said. “For example, you're starting to see the beginnings of more of a push into fresh as Walgreen works on getting the distribution model right. Plus, it's getting into more SKUs of grab-and-go items, based on expertise it picked up when it acquired Duane Reade.”
Though Walgreen might not be interested in emulating the Duane Reade model — which relies on heavy foot traffic — in suburban locations, “it is trying to parallel what Duane Reade does at some of its own urban stores, and the Duane Reade acquisition is accelerating that effort,” Langan explained.
Among other things, Walgreen is also installing some of Duane Reade's DR Delish line of snacks, cookies, coffee and other dry groceries into its stores, Langan said.
As part of a Fourth of July program, Walgreen merchandised a limited offering of fresh consumables, including small watermelons and fresh apple pies, “but expansion of that kind of merchandise will be limited in favor of the traditional shelf-stable products that require little handling,” Langan said.
“But it's looking to expand its offerings as a neighborhood convenience destination for fill-in shopping in its small-box and urban locations, and we expect to see that effort grow over the next 12 to 18 months. Cracking the urban market with a combination of health and wellness and food is something Walgreen is shooting for as it reinvests in its store base and tries new formats.”
Wolf of BB&T said Walgreen's biggest challenge in ramping up its prepared-food offering is “creating demand” among consumers.
“Fresh is very hard to do, but if you do it right, it is a potentially big sales driver,” he said. “The biggest challenge is to create demand. It's a challenge of getting the consumer to think of the store differently.”
He cited the offering of fresh foods at Longs Drugs in California as an example of how drug stores can execute such categories.
“It's not easy, but it can be done,” he said, noting the importance of controlling shrink.
“Overall, it's an incremental process, and one that needs to be tested out very precisely. Even if the rollout is in waves, you don't want to screw up any of the waves, because the shrink can be really high.”
CVS RAMPS UP GROCERY
CVS has been trying to capture a larger share-of-market with large-scale acquisitions, including Eckerd in Texas and Florida, Osco and Sav-on in the Midwest and West, and Longs in the West.
“CVS is focusing on share-of-wallet and on its core customer, the pharmacy shopper, with a strong emphasis on health and beauty and an effort to tailor store offerings to specific neighborhoods,” Langan explained.
One way CVS is doing that, he said, is by expanding consumables at half of its 7,000 U.S. stores — adding hundreds of SKUs of dry groceries, including more cereal, coffee, baked goods and snacks — mostly center-aisle products, and many of them under its own Gold Emblem brand, Langan said.
He pointed out that CVS is also focusing on store clusters, including urban clusters that will feature more coolers with more doors for grab-and-go merchandise, including limited selections — approximately 75 SKUs — of prepared salads and cut fruits, along with altered layouts and self-checkouts.
Longs has been selling produce for years, including bagged and bulk tomatoes, onions and some ethnic offerings, “and CVS may look into expanding that kind of merchandise to other stores on a very selective basis. But it won't adopt it across the chain. CVS is more focused on selling health and beauty than on selling food items,” Langan said.
With most drug stores measuring only 10,000 to 15,000 square feet with 15 or 20 employees, “unless they gain sufficient traffic to justify additional staffing, it would be difficult to accommodate the shrink and turnover of too broad a selection of fresh products,” he noted.
In a Kantar Retail report, the firm said CVS plans to use food more than in the past as a customer draw.
“CVS has committed … to focus[ing] on capturing both share-of-lifetime value and driving trips,” the report said. “This will entail sustained focus on creating a unique point of difference in health and beauty, balanced with a renewed focus on enhancing local relevance in higher frequency consumables categories to gain a greater share of trips and relevance with today's shopper.”
After a series of tests that yielded strong improvements in sales, margin and traffic, the report said, CVS began adding hundreds of new national and Gold Emblem private-brand food items in more than 3,000 stores, with plans to double the space dedicated to consumables in approximately half its store base.
“Since February, CVS has been aggressively resetting categories [and] introducing hundreds of new [food] items to its shelves and coolers,” the report said, which are “creating a variety of on-shelf solutions for different day parts: breakfast, a quick lunch, dinner tonight and even baking needs.
“These additions have been supported by a comprehensive outreach effort to convey to time-starved shoppers ways to ‘save a trip, money and time with our newly expanded food selection.’
“The blend of marketing and merchandising has served to both raise awareness of new products and position CVS as a resource.”
CVS plans to remodel 20% of its store base this year, or approximately 1,400 stores, which will include revamped layouts with a clear focus on consumables and convenience in the front of the store; expanded coolers; new department signage and decor packages; and a new grab-and-go cooler featuring ready-made and easy meals.
According to the report, using food to drive visits “is a revolutionary shift for CVS,” which had concentrated on growing market share before the drug store industry became so consolidated.
“While food will take on a level of significance within the box, it will not displace CVS' core focus on health and beauty. Consumables will serve as a conduit to health and beauty, fueling the necessary trips and creating opportunities for CVS to do what it does best: driving conversion and margin expansion.
“However, a focused and appropriate use of food to enhance relevance and drive trips signals a fundamental acknowledgment of the changing landscape and evolving growth paradigm that has come to characterize CVS over the past decade.”
David Bishop, managing partner at Balvor LLC, Barrington, Ill., said drug stores do a good job aligning themselves with quick fill-in trips for groceries. “Like convenience stores, drug stores predominantly serve a percentage of those quick-trip customers who typically buy five items and are willing to purchase something else as long as they're in the store,” he explained.
Among the top-selling grocery items in drug stores are gallons of milk, Bishop noted, “so the drug chains stay very competitively priced on milk. As channel trips slow, food is a natural extension to drive trip frequency and transaction size — for example, items like milk, frozen entrees or ready-made meals are a good fit.”
On a long-term basis, Bishop said drug stores are likely to add additional food-related items, “but they must develop the ability to figure out whether they want to attract new customers or — the more realistic choice — just go after a larger share-of-wallet from their existing customers.
“Groceries at the drug store have greater value to the stores' existing customer base and widens that base as it builds value.”
In the next three to five years, drug stores are likely to focus mainly on perishables and how to deal with shrink, Bishop said. “They're likely to start with more packaged perishables and to build on frozen foods, and as they enjoy more success, they'll become more knowledgeable and they'll also acclimate customers to that kind of offering.
“It will be an evolving process as consumers respond to that offering in terms of how they shop the stores. What will be interesting to watch is how drug stores price food items vs. the value they offer. Most consumers who buy groceries in drug stores are motivated more by convenience than price — they're already in the store making other purchases, and that aligns well with the quick-trip mission.”
Jim Hertel, managing partner at Willard Bishop, Barrington, Ill., said he does not see drug stores becoming any more of a competitive threat in the next few years than they are today.
“Right now I would classify drug stores that offer edibles as a very small threat — way down the list from supercenters or price formats. That could change, but I don't think it will.
“Chain drug merchants have thought about edibles in a less-than-cohesive way. They see edibles primarily as a way to build the store out to a higher margin, but historically, the assortment has been more like that of a convenience store than any real threat to a grocery store, with just a couple of one item and a couple of another, including salty snacks, some frozens, milk and eggs — primarily items someone could pick up on their way home.
“It's not a cohesive strategy. The question is, is that likely to change?
“That depends on whether drug stores think of themselves as a food cluster or as a convenience category. I have not seen any widespread change away from packaged goods toward perishables — just 16 feet to 24 feet of shelving and some salty snacks on an endcap, even though drug stores stand for health and wellness and all the things with which perishables are in alignment.
“The challenge with perishables is, you've got to have a strategy to deal with shrink, and drug stores don't know who should be responsible for turning produce as it goes bad or who should be responsible for temperature control or logistics or procurement or store-level operations.
“That will require someone with a strategic vision and commitment, and I don't see anyone willing to do that — and I don't see anything changing over the next three to five years because I don't feel there's a level of thought by drug stores to get to that kind of commitment.”