Discount retailers vie for share of expanding pharmacy market – 2002 Annual Report – discount store industry, in-store pharmacies; Wal-Mart

Discount retailers vie for share of expanding pharmacy market – 2002 Annual Report – discount store industry, in-store pharmacies; Wal-Mart – Statistical Data Included

Mike Troy

Mass merchants and warehouse club operators continued their vigorous pursuit of the pharmacy business last year, adding new pharmacies at a steady pace and experimenting with drive-through windows and a new store designs.

In a year full of interesting developments, it was not surprising to see Wal-Mart, the largest mass merchant pharmacy operator, at the center of several of them. From a competitive standpoint, the most significant development was the company’s acceleration of an ongoing store conversion program that involves relocating or expanding its discount stores to supercenters. Even though pharmacies are present in many of the discount stores that are converted to supercenters, the full assortment of groceries and perishables provided by a supercenter is a powerful traffic generator that increases pharmacy volume along with health and beauty care sales. Wal-Mart ended last year with 1,066 supercenters and plans to add another 180 to 185 this year as part of an expansion program that grows more massive every year. Within five years, it is expected that Wal-Mart will operate in excess of 2,000 supercenters.

In addition, Wal-Mart is devoting more resources to its Sam’s Club division where pharmacies have been added at a rapid pace in recent years and now are a component of the prototypical club. In the three years since Sam’s began installing pharmacies in existing clubs and designing new clubs to include pharmacies, the number of Sam’s pharmacies in operation has increased to 243. That number should surpass 300 this year as older clubs are remodeled to include pharmacies and one-half of the 50 new clubs being opened are relocations of older clubs that don’t have pharmacies. Wal-Mart ended last year with 500 Sam’s Clubs in the United States.

Perhaps the most significant development relating to art’s pharmacy business was the retailer’s decision to temporarily exercise restraint in expanding its Neighborhood Market food-and-drug combination store format. It was big news when the first of these 40,000-square-foot stores with their drive-through pharmacy windows opened more than three years ago. And since then, the format has undergone considerable testing with each new store that’s opened, sporting changes to merchandising, fixturing, the usage of construction materials, service department offerings, product mix and overall appearance.

The Neighborhood Market format came full circle this past January when a prototype incorporating features tested in dozens of other stores were rolled into a store in Rogers, Ark.; just a few miles from the site of the first Neighborhood Market in Bentonville, Ark. Although Wal-Mart asserts that the format is meeting profitability goals, the company this year plans to add only 15 to 20 new units to the base of 31 units in operation in Arkansas, Texas and Oklahoma at the end of the most recent fiscal year. Within a few years though, analysts are convinced Wal-Mart will be adding hundreds of Neighborhood Markets annually with expansion radiating out from Arkansas in the same fashion as supercenter expansion took place.

Other major retailers expanding their pharmacy businesses last year included target and Costco. While both still are relatively bit players on a national scale, they are among the nation’s hottest retailers and their pharmacies are capable of impacting the business of nearby chain drug stores. Target added approximately 100 pharmacies last year to a base of 507 and is expected to add roughly that many again this year as its growth plan calls for about 65 discount stores and 35 SuperTarget stores.

Costco, which isn’t building new stores or adding pharmacies as rapidly as Target, nevertheless added 32 of its high-volume warehouse clubs last year and plans another 32 this year. Costco’s current prototype, like Sam’s Club, includes a pharmacy in the design. A third warehouse club operator just entering the pharmacy business is BJ’s Wholesale Club. This company has demonstrated an ability to compete with its larger rivals and is schedule d to debut its first pharmacies when it enters the Atlanta market this year.

The most innovative approach to pharmacy last year belonged to Meijer. The company elevated its presentation of pharmacy, HBC and related categories in a new store design that debuted in August along Chicago s western suburbs. The stores feature a radically redesigned space at the front of the store dedicated to pharmacy, HBC, cosmetics and stationery. The new store design also includes Meijer’s first drive-through pharmacies. The pharmacy and related departments have been relocated to the food side of the store, as is the case with SuperTarget stores–but not Wal-Mart supercenters–to expose more of the store’s traffic to those departments which previously had been scattered throughout the store.

As new players enter the pharmacy business and existing operators expand and imp rove their operations, Kmart’s pharmacy business is shrinking and could shrink further in coming years. The retailer’s January bankruptcy filing and subsequent announcement to close 284 of its 2,114 stores will reduce the number of pharmacies Kmart operates by 208 units since not all of the stores being closed contain pharmacies. However, there is real possibility that I(mart’s pharmacy count could decline further as the retailer’s initial store closing announcement was well short of the 500 units most financial analysts believed the company would need to shutter if it is to emerge from bankruptcy.

Last year also was a period of modest retrenchment at ShopKo as the company began 2001 by closing 23 stores and ended the year with a total of 366 stores comprised of 141 ShopKo stores and another 225 units operating under the Pamida banner.

Memphis-based Fred’s, a retailer whose pharmacy operations tend to be overlooked, expanded pharmacy operations modestly last year. The company increased its store count by 32 units to 385 total stores, but only 10 of those stores contained pharmacies. This year the company plans to open 60 units and of the 12 units that have opened so far only two contain pharmacies.

Top mass merchants in pharmacy sales

Rank Company Pharmacy sales 2001 % sales

2001 2000 from pharmacy

1 Wal-Mart Stores $7,700B $7,100 3.5%

2 Kmart 2,880 2,700 8.0

3 ShopKo Stores 640 665 19.3

4 Target Stores 600 450 1.5

5 Costco Wholesale 500 440 2.0

6 Marc’s 364 332 28

7 Meijer 350 308 3.0

8 Fred’s 309 256 34.4

9 Bi-Mart Corp. 147 114 24.0

Rank Company No. of stores % of stores 2001 openings

with pharmacy with pharmacy or closings

1 Wal-Mart Stores 2,977 (1) 91.0% 150

2 Kmart 1,616 (2) 76.0 37

3 ShopKo Stores 213 (3) 58.0 -23

4 Target Stores 600 55.0 93

5 Costco Wholesale 265 80.0 25

6 Marc’s 47 89 NA

7 Meijer 152 100.0 9

8 Fred’s 202 53.0 5

9 Bi-Mart Corp. 60 97.0 5

Source: Drug Store News research and company reports.

(*)Dollar sales in millions

(1)Includes 2,700 Wal-Mart pharmacies, 243 Sam’s Club pharmacies, 31

Neighborhood Market stores and three clinical pharmacies.

(2)Kmart has announced plans to close 208 of its pharmacies this spring,

and was down to 1,432 pharmacies as of April 4, 2002.

(3)Includes 140 ShopKo and 73 Pamida pharmacies.

Channel breakdown

Store Traditional Independent Supermarket

characteristic chain drug store drug store with pharmacy

Selling space in square

square feet 8,804 3,726 30,388

No. of employees per

store 26.8 8.4 107.1

Total sales $101.3B $33.1B $142.9B

Total pharmacy sales $59.7B $30.5B $16.9B

Average annual sales

per store $5.0M $1.6M $17.3M

Average annual pharmacy

sales per store $3.0M $1.5M $2.0M

Percent pharmacy sales 59.0% 92.0% 12.0%

No. of stores 20,298 20,896 8,268

Store Mass merchant

characteristic with pharmacy

Selling space in square

square feet 78,387

No. of employees per

store 211

Total sales $210.4B

Total pharmacy sales $13.1B

Average annual sales

per store $2.4M

Average annual pharmacy

sales per store $2.4M

Percent pharmacy sales 6.0%

No. of stores 5,549

Source: National Association of chain Drug stores the calendar year 2000

Comparable-store sales by drug chain

Front end

Company Jan. Feb. Mar. Apr. May June July Aug.

CVS 1.0% 2.0% 1.0% 0.0% 1.0% 0.0% 0.0% 0.8%

DuaneReade (*) — — 4.0 — — 3.0 — —

Eckerd 1.6 1.2 -0.9 -0.4 1.0 -0.3 4.7 2.3

Longs — 0.3 1.7 -1.7 1.7 0.6 -1.4 -1.4

Rite Aid 11.7 7.7 7.4 5.3 5.2 4.0 5.6 5.2

Walgreens 4.3 4.4 4.1 1.0 1.1 1.0 2.7 4.4

Average 4.7 3.1 2.9 0.8 2.0 1.4 2.3 2.3

Company Sept. Oct. Nov. Dec.

CVS 0.2% 1.4% 2.8% 4.2%

DuaneReade (*) 3.0 — — -2.6

Eckerd 3.3 3.3 0.6 -1.7

Longs -2.3 -1.8 -2.5 -1.3

Rite Aid 0.4 2.1 1.2 2.6

Walgreens 2.5 3.0 1.6 1.3

Average 1.2 1.6 0.7 0.4

Source: Bear Steams 2001 resuls (*)Duane Reade percentage reflects

quarterly results.

Pharmacy

Company Jan. Feb. Mar. Apr. May June July Aug.

CVS 18.9% 20.1% 14.6% 13.9% 14.0% 12.1% 13.0% 12.3%

Duane Reade (*) — — 16.9 — — 19.1 — —

Eckerd 16.2 18.0 13.4 12.5 12.4 11.0 12.7 11.0

Longs — 9.4 14.1 14.3 13.4 10.9 11.7 10.8

Rite Aid 12.7 15.0 11.9 12.6 13.2 10.6 13.2 11.6

Walgreens 25.0 21.0 17.5 20.0 18.0 15.8 21.0 17.5

Average 18.2 16.7 14.7 14.7 14.2 13.3 14.3 12.6

Company Sept. Oct. Nov. Dec.

CVS 10.5% 11.7% 10.2% 9.0%

Duane Reade (*) 17.5 — — 17.3

Eckerd 10.5 12.4 10.6 7.8

Longs 10.3 13.4 9.7 4.3

Rite Aid 9.8 11.7 10.4 10.5

Walgreens 14.8 20.3 16.6 15.8

Average 12.2 13.9 11.5 10.8

Source: Bear Steams 2001 results (*)Duane Reade percentage reflects

quarterly results.

COPYRIGHT 2002 Reproduced with permission of the copyright holder. Further reproduction or distribution is prohibited without permission.

COPYRIGHT 2002 Gale Group