High Rx demand ups pharmacy dept - Target: Special Report

DSN Retailing Today, April 7, 2003 by James Frederick

No one would call Target's pharmacy department the tail wagging the corporate dog. The dog is still in charge, and pharmacy remains secondary to the chain's primary mission as an upscale discount niche player between Wal-Mart and department stores. But the tail is wagging harder now, and the dog has noticed.

Roughly 700 of Target's 1,145 discount stores and super-centers contain pharmacies, which anchor large-scale selections of cough-cold medicines, analgesics, diet aids, family planning products, vitamins and supplements, and other health and beauty aids. Recently, those pharmacies and drug store departments have been cited both by Target and by analysts who follow the chain as among the fastest-growing areas of the store.

Prescription sales account for an estimated 2.7% to 3.3% of Target's total sales, and that ratio is likely to increase as the nation's population ages and drug utilization explodes. Add in sales of other drug store categories like over-the-counter medicines, vitamins, cosmetics, first aid products and other HBC, and the total contribution to Target's revenues probably exceeds 6% to 7%.

The rise in pharmacy sales stems from the recession-resistant nature of the category, as well as from the continuing boom in prescription demand and the steady rise in drug prices. Those factors are lifting all boats on the pharmacy waterfront.

"Discount retailers appear to be less susceptible than other retailers to unfavorable shifts in consumer spending," observed Asma Usmani, a retail analyst for Edward Jones & Co. "This is because discount retailers mainly sell non-discretionary items."

Deborah Weinswig, a retail analyst for Salomon Smith Barney, noted that "some of the better-performing categories [in the fourth quarter ended Jan. 31, 2003] at the core Target division were pharmacy, entertainment, toys, and consumables, while apparel and sporting goods were relatively weak." Despite the relatively strong showing for the pharmacy, Weinswig maintains that "Target is stuck in the middle between Kohl's and Wal-Mart" And that undefined middle zone, she indicated, extends to HBC, where Target has a tough time matching Wal-Mart's "everyday low prices on basics."

Target doesn't provide sales breakouts, but its pharmacy sales last year are believed to exceed $1.2 billion. That compares with roughly $9 billion or Wal-Mart's more than 3,000 pharmacies, and $17 billion in prescription sales for Walgreen Co., the leading drug store operator with more than 4,000 units.

Virtually all new Target stores will include pharmacies, one executive confided. With plans afoot to increase Target s store count by a net 100 or more new stores in 2003--including relocations and the net addition of roughly 23 more super-centers--the chain's reach as a prescription retailer is likely to grow to roughly 800 pharmacies.

It's worth noting that the chain's newest pharmacy design is a vast improvement over older models, with semiprivate areas for counseling and an open, airy pharmacy counter that has been widened for greater contact between patients and pharmacists, and segmented into separate areas for prescription drop-off, pickup and consultation. The floor and counter have been lowered to give pharmacists eye-level contact with their patients. The lower workloads preclude the need in many locations for high-speed dispensing technology; Tar get pharmacies are generally low-tech.

The HBC department fronting the pharmacy has also been spruced up, with modern graphics and signage to point out in-line health and wellness departments like "Women's Health," herbal remedies, vitamins and supplements. Fast-turning categories like analgesics and cough-cold are kept fully faced on shelves with the aid of spring-loaded slotting trays that push product forward as it's removed.

Despite the inviting surroundings, Target does little to promote its pharmacies beyond featuring a handful of health and wellness products in its weekly circulars. In many ways, the departments are still more of a customer convenience and a nod to one-stop shopping--a perimeter department designed to siphon off customer traffic and dollars--than they are a true destination center. And while its pharmacies are superior in design, it's cleat that Wal-Mart is still winning the war for prescription customers.

For Wal-Mart, the reasons boil down to lower prices, more pharmacy outlets and higher customer traffic. One study by William Blair & Co. found that Target's prices for grocery items, for instance, were 13% higher on average than those of Wal-Mart overall. The firm also estimated that Target's pharmacies generate an average of just 130 prescriptions per store per day--compared with 180 for Wal-Mart, 200 for CVS/Pharmacy and Eckerd Corp., and 260 for Walgreens.

Nevertheless, Blair's analysts predicted that Target would continue to gain pharmacy market share at the expense of supermarket chains and weaker mass merchants. But those gains, they added, would come primarily through new-unit expansion."