Bright future for pharmacy, health-related products

Discount Store News, August 4, 1997

Consumer interest in healthy living is proving that there is long life in health-related categories. Started several years ago with an explosive interest in health foods, particularly in the no-fat and low-fat variety, retailers are now concentrating more effort on real health-oriented products such as pharmaceuticals, nutraceuticals, over-the-counter drugs and related items to meet the needs of its aging, yet vital, clientele.

Pharmacy, a category that is not offered by all discount store retailers, showed the most growth in 1996 over 1995, charting a 31.27% sales gain, to $6.97 billion, or 4.3% of total industry sales. It is a category that Wal-Mart, Kmart and ShopKo have staked for future growth.

In fact, Wal-Mart has targeted the entire health category, specifically nutritional supplements, as a growth vehicle. It will install prototype departments called One Source--named after its own nutritional supplement product of the same name--in some of its stores starting this year.

ShopKo, whose background--and that of its chairman Dale Kramer--is steeped in the pharmacy industry, is working diligently to intensify its activity in health-related products and services. The retailer offers customers access to its ProVantage Health Services segment, which includes retail pharmacy and optical operations and its ProVantage Pharmacy Benefit Management program. The business grew to $465 million in fiscal '96. ShopKo's interest in medical-related products and services also extends to its ProVantage Vision Benefit Management Service, its health services division. Optical at ShopKo, started in 1978, has grown by $20.4 million in the last five years.

All three chains have gotten aggressive in their advertising to attract new customers to their doors with tried-and-true approaches in the discount store tradition, such as the compare-and-save ad and dollars or percentages off first or transferred prescriptions. Just how big pharmacy can become in this retailing sector is unknown as so few chains, albeit large ones, participate. Other factors include the competitive forces outside the market, specifically the drugstore chains, as well as the vicissitudes of the entire drug/medical services industry, which is feeling the pinch from insurance companies through managed care plans and other regulatory forces. Even still, there appears to be a lot of growth left in the market.

Also growing significantly is domestics, which is at the center of the total home focus being embraced by most discount store retailers. Outside of pharmacy, domestics (a core category carried by every discount store chain in the mass market) was the fastest-growing category within the store. More importantly, retailers have trained their energy on further growing the business, the most visible example being Kmart's Martha Stewart Living program now available in all Kmart stores. The full force of the program, with the upcoming catalog and special-order kiosks yet to arrive, will only expand the reach of the carefully planned program. At this point, no other discounter is working on a domestics program of such magnitude. Not all retailers need to do so. Target's program, for example, is well focused and coordinated in both style and color across several merchandise categories, which has long permitted the chain to present a total home program. Target also invests heavily in consumer advertising to emphasize its fashion-forward prowess in this arena.

There is a lot of room for productivity improvement in domestics, as evidenced by the performance averages returned in the annual survey. Still, the current retro trend in fashion apparel is expanding the reach of domestics and related home categories by drawing them together. Consumers seem to like the lemon yellows and bright oranges in their bathrooms and kitchens, since these hues warm up the home environment.

Remaining hot in retailers' stores and apparently consumers' stomachs is the increasing size and scope of food departments. Currently, Kmart is charging ahead most forcibly with its Pantry rollout-450 stores per year for three years and a total investment of $750 million. While Kmart's investment is by far the largest, most retailers are at least examining how deeply involved they want to become in a low-margin category, higher traffic opportunities or not. On the whole, food sales advanced 10.61% last year, primarily fed by increasing assortments of cookies, crackers, soda, juice and packaged foods. With Kmart's Pantry layout, refrigerated and freezer cases hold chilled beverages as well as bologna, cheese and other products normally found in grocery or convenience stores. But Kmart isn't the only chain offering refrigerated goods. Most chains offer refrigerated cases for soda, teas and juices. Wal-Mart, too, offers customers milk and sometimes even other dairy products. The nation's largest retailer has long offered route bakery and bread service in its stores, as do such retailers as Kmart and Caldor.

Other categories to record big gains in 1996 were jewelry & watches, health & beauty care and lawn & garden, which grew by 15.80%, 15.13% and 15.12%, respectively. Each one holds additional of sales potential for discounters because they are core departments.