Mass merchant pharmacies remain solid competition for drug stores

Mass merchant pharmacies remain solid competition for drug stores – 2003 Annual Report

Mike Troy

The mass merchant retail channel remains a significant competitor to conventional chain drug stores, though no more so than in the prior year. Individual operators such as Wal-Mart and Target made significant advances last year, but the large reduction in pharmacies operated by Kmart kept the collective group of mass merchant pharmacies on roughly equal footing with their drug chain counterparts.

The dramatic retrenchment of Kmart’s pharmacy operation was clearly the most significant mass merchant development of the past year. As a result two waves of store closings, of which some units are still in the process of being shuttered, Kmart shrunk its pre-bankruptcy store base of 2,114 units by a total of 600 stores. Of those 600 stores, 458 contained pharmacies. When the dust from the store closings settles in the coming months, Kmart will be left with approximately 1,500 stores, 1,100 of which will contain a pharmacy.

While that is still a sizeable number of pharmacies, it is about one-third the number Wal-Mart operates. The dominant mass merchant pharmacy operator widened the gap between it and other mass merchants last year and continues to put itself on more equal footing with leading chain drug store operators–both in terms of the number of units operated and the services offered. Wal-Mart operates pharmacies in four different retail formats in the United States, including supercenters, discount stores, Neighborhood Markets and Sam’s Clubs. And unlike chain drug competitors, Wal-Mart operates pharmacies internationally at a variety of formats in Mexico and in ASDA supermarkets and supercenters in the United Kingdom.

Wal-Mart’s pharmacy count increased by 213 units last year, thanks to an aggressive store expansion program that is expected to remain focused on supercenters for the next several years. More rapid growth in the number of pharmacies Wal-Mart operates is expected once the retailer decides to ramp up growth of the Neighborhood Market concept. There were just 49 Neighborhood Market pharmacies in operation at year’s end, even though the concept is nearly four years old. Only 20 to 25 additional units are planned for this year. However, one telling note that more aggressive expansion is in the offing is the fact that the first Neighborhood Markets were opened in new states, such as Florida, Utah and Alabama, in addition to states such as Arkansas, Texas and Oklahoma where the majority of Neighborhood Markets are located.

Beyond simple expansion, Wal-Mart also made a significant move to improve pharmacy services. Earlier this year, Wal-Mart announced an exclusive 10-year agreement to use Priority Healthcare as its provider of specialty pharmacy services. The deal is intended to help Wal-Mart capitalize on projections of increased usage of biotech drugs.

Beyond Wal-Mart, the most significant growth in pharmacy operations took place at Target Stores. The nation’s second-largest discount retailer added 100 pharmacies last year and continues to emphasize the pharmacy department in the layout of its stores. This is especially true in the case of Super-Target stores, where the pharmacy is positioned as a free-standing department in a high-profile location on the food side of the store near the entrance. Target’s pharmacy count will increase further this year as the chain’s store count increases by approximately 80 units.

Other mass merchant pharmacy operators experienced more limited growth than Wal-Mart and Target. For example, Fred’s increased its pharmacy count by 15 units last year. The Memphis, Tenn.-based discount retailer with a health and beauty care emphasis opened 61 new stores, but only 15 included pharmacies. It plans to follow a similar path this year with 70 stores scheduled to open, 30 of which will contain pharmacies.

Warehouse clubs operators, such as Costco and Sam’s Club, continued to increase the number of pharmacies they operate, while BJ’s Wholesale Club, the distant third player in the warehouse club segment of retailing, entered the pharmacy arena for the first time last year. BJ’s opened its first pharmacies last summer when it entered the Atlanta market with three clubs that included pharmacies. Later in the year, several existing clubs were remodeled to include pharmacies, and with the addition of several other new clubs, BJ’s ended the year with nine pharmacies.

Selective mass merchants made pharmacy inroads last year, but conventional drug store operators have less to fear from this class of trade than they do from their chain drug counterparts.

Top mass merchants in pharmacy sales

Pharmacy sales

% of sales # of stores

Retailer 2002 2001 from pharmacy with pharmacy

Wal-Mart (1) $9,000 $7,700 5.7% 3,190

Kmart (2) 2,200 2,880 7.0 1,100

Target 1,080 600 3.0 700

ShopKo 648 640 20.0 227

Costco 838 750 3.0 291

Marc’s 378 364 28.0 48

Meijer 365 350 3.0 156

Fred’s 365 309 33.2 217

Bi-Mart 155 147 25.0 60

BJ’s (3) N/A N/A N/A 9

% of stores ’02 openings

Retailer with pharmacy or closings

Wal-Mart (1) 93.8% 213

Kmart (2) 73.3 -458

Target 61.1 100

ShopKo 62.3 10

Costco 98.6 26

Marc’s 88.0 1

Meijer 100.0 4

Fred’s 47.5 15

Bi-Mart 98.0 0

BJ’s (3) 6.4 9

(1)Wal-Mart figures are for domestic stores only, including

supercenters, discount stores, Neighborhood Markets and Sam’s Clubs.

(2)Kmart figures reflect the closing of 600 stores, which included 458

pharmacies.

(3)BJ’s first pharmacies opened June 2002, and projected sales represent

less than 1 percent of company totals.

COPYRIGHT 2003 Reproduced with permission of the copyright holder. Further reproduction or distribution is prohibited without permission.

COPYRIGHT 2003 Gale Group