High Rx demand ups pharmacy dept - Target: Special Report

DSN Retailing Today, April 7, 2003 by James Frederick

Currently, an even greater worry for Target may be its comparable-store performance. Intense competition in "non-discretionary" categories like pharmacy and food, combined with overall soft consumer demand, pushed comp-store sales down 1.4% below the year-earlier period in February. Target predicted comps could be off as much as 2% in March.

"The comp gap between Target discount stores and chief competitor Wal-Mart discount stores continues to widen, getting larger in each of 2002's four quarters, and reaching 4.4% in the fourth quarter, noted Dan Barry, retail analyst for Merrill Lynch.

Blair &Co. research analysts Mark Miller and Daniel Hofkin call the difficulty faced by Target in hotly contested categories like prescriptions and HBC "channel convergence," and say the increasing level of competition presents "long-term competitive challenges" for all mass retail channels, including both discount stores and supercenters.

"Within the $750 billion market for ... food, household products and health and beauty and prescription drugs, competition is primarily across mass retail channels ... as these channels converge," they note.

Thus, Target must also contend not just with WalMart for its pharmacy business, but also, of course, with national and local drug store chains and independents that offer something that's difficult for any mass merchandiser to emulate: in-and-out quick-shopping convenience. Miller and Hofkin note that "for drug stores ... convenience is a competitive advantage for pharmacy operations that contributes to higher per-store prescription volume, the key to profitability in the pharmacy business."

The result: Target has become a powerhouse national retailer of apparel, home furnishings, hardlines and other general merchandise. But in the massive market for groceries, consumables and pharmacy products sold in the U.S.--estimated at $750 billion by William Blair's research--the chain hasn't cracked the top 10. Archrival Wal-Mart, meanwhile, ranks No. 1 with roughly 10.5% of total sales.

Another key component in successful pharmacy marketing in the current era of a sustained shortage of pharmacists nationwide is the ability to attract and retain professionals. Not only do the steeply rising salaries of pharmacy staff make it tougher to eke our a profit in the prescription business, a recent survey of pharmacy schools by William Blair indicated that Walgreens, CVS and Wal-Mart, rather than Target, "are the most successful recruiters."

Despite the competition, however, Target's pharmacy sales should continue to increase--both in total dollars generated and as a percentage of overall sales. One big reason is simply the dynamism of the prescription drug market itself, which is still rising at roughly 12% a year despite slowing growth trends last year.

"If you examine pharmaceutical trends over the past decade, 2002's growth showed a return to more historic levels," said Paul Wilson, vp of IMS Statistical Services. "The slowdown in dollar growth last year was fueled primarily by the generic erosion of some blockbuster drugs losing patent protection, the fewest number of new molecular entities approved by the FDA since 1983 and rising patient co-payments. However, growth is still relatively strong due to continued favorable demographics and growing demand for a broad range of branded products."