When, a number of years ago, the head of a leading drug chain was asked about the challenge that Walmart posed for other community pharmacy operators, he said that his company and, by implication, the rest of the industry could do just fine by living off the crumbs left over by the world’s largest retailer. Time proved him right, with many pharmacies, most notably Walgreens and CVS Caremark, flourishing even as Walmart’s annual sales rose to eclipse the $470 billion mark.


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Analysis: Drug chains' convenience edge is eroding

April 7th, 2014

When, a number of years ago, the head of a leading drug chain was asked about the challenge that Walmart posed for other community pharmacy operators, he said that his company and, by implication, the rest of the industry could do just fine by living off the crumbs left over by the world’s largest retailer. Time proved him right, with many pharmacies, most notably Walgreens and CVS Caremark, flourishing even as Walmart’s annual sales rose to eclipse the $470 billion mark.

Now the equilibrium that has allowed those parties to coexist and prosper is threatened, with Walmart’s management apparently deciding that the company, which in recent years has found meaningful same-store sales gains hard to come by, is leaving too much on the table.

Just weeks after Doug McMillon succeeded Mike Duke as president and chief executive officer, the company in February announced that it is accelerating the rollout of small-format stores, a development with potentially serious implications for retailers that have benefited from Walmart’s intense focus on Supercenters.

The discounter now plans to open between 270 and 300 small-scale stores, double the projection made last October. The addition of more Neighborhood Markets and Walmart Express outlets — which include pharmacy, health and beauty aids, and other core drug store categories in their merchandise mix — will give the company entree into communities previously off limits to it because of real estate restrictions. The retailer, too, is piloting a convenience store concept, called Walmart to Go, in its hometown of Bentonville, Ark.

In the process, Walmart will quicken the erosion of one of the pillars of chain drug retailing — convenience. That phenomenon, which has been under way for years, is fueled by such factors as the proliferation of dollar stores, other big-box retailers testing the waters with smaller outlets, and the rise and expansion of Amazon and other Web-based merchants.

The understanding that supporting the well-being of customers is their primary purpose is what distinguishes drug stores from other retailers.

The objective of all those retailers, including the major drug chains, was recently summed up by Bill Simon, president and CEO of Walmart’s U.S. operations, who said that with his company’s combination of large- and small-format stores and e-commerce capabilities “we provide our customers with anytime, anywhere access to our brand.”

Those developments complicate life for drug chains, one of whose selling points has long been the ease of the shopping experience at their stores — the argument being that for someone who needs to pick up a loaf of bread, a quart of milk or an H&BA on the way home from work, it is more efficient to do so at a 10,000-square-foot drug store than a 180,000-square-foot Supercenter.

As that competitive advantage diminishes relative to other mass market retailers, drug chains will have to find new means to set themselves apart. The best way forward is to leverage their heritage as health care providers, emphasizing the personalized professional care that consumers have learned to expect from their pharmacists.

Together with the continued expansion of such services as immunizations for influenza and other conditions, diagnostic testing, and health counseling, that should solidify the chain drug store’s standing as the retail destination for health care.

The understanding that supporting the well-being of customers is their primary purpose is what distinguishes members of the trade class from other retailers. It gave rise to the drug store business and continues to be the greatest strategic asset of drug chains as they wrestle with new dynamics in the retail ­marketplace.

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