Fast-growing pharmacy catches industry eye

Drug Store News,  August 18, 2003  by Jim Frederick

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For Target Stores, the pharmacy department always has been secondary to the chain's primary mission as an upscale discount mass merchant nimbly staking out the market niche between Wal-Mart and department stores. But company brass are quick to point out that the prescription centers--now found in roughly 700 of Target's 1,167 discount stores and Super-Centers--have been a bright financial spot in a difficult economy.

Both Target and investment analysts who follow the chain cite the chain's pharmacy departments as among the fastest-growing areas of the store. Target doesn't provide sales breakouts, but its pharmacy sales last year are believed to have exceeded $1.1 billion to $1.2 billion, or roughly 3 percent of total sales.

Given the recession-resistant nature of the category, the continuing boom in prescription demand and the steady rise in drug, prices, that ratio is likely to increase as the nation's population ages and drug utilization explodes. Add in sales of other drug store categories, such as over-the-counter medicines, vitamins, cosmetics, first aid products and other HBAs, and the total contribution to Target's revenues probably exceeds 6 percent or 7 percent.

Deborah Weinswig, a retail analyst for Salomon Smith Barney, noted that despite the relatively strong snowing for its pharmacies in recent quarters, "Target is 'stuck in the middle' between Kohl's and WalMart." And that undefined middle zone, she indicated, extends to HBAs, where Target has a tough time matching Wal-Mart's "everyday low prices on basics."

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 SuperCenters--the chain's reach as a prescription retailer is likely to grow to roughly 800 pharmacies.

Those new prescription centers are likely to be more appealing than those that haven't been renovated. The chain's newest pharmacy design is a vast improvement over older models, with semi-private 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 HBA department fronting the pharmacy has also been spruced up, with modern graphics and signage on shelf risers to point out special 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.

Target's pharmacies are generally not nearly as high-volume as those of drug store competitors like Walgreens and CVS. The lower workloads preclude the need in many locations for robotic or high-speed dispensing technology or other automation; Target pharmacies are generally low-tech.

Despite the inviting surroundings, there are worrisome developments for Target in basic departments like pharmacy and HBA. For one thing, 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 to those of Wal-Mart, with generally fresher fixtures, a more open and inviting counter area and more accessible pharmacists and technicians, it's clear that Wal-Mart is still winning the larger war for prescription customers.

For Wal-Mart, the reasons boil down to lower prices, far more pharmacy outlets and the sheer number of customers streaming past its pharmacies every day. One study by William Blair & Co. found that Target's prices for grocery items, for instance, were 13 percent 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 and Eckerd Corp. and 260 for Walgreens.

Nevertheless, Blair's analysts predicted that Target, along with Wal-Mart, would gain market share in prescription sales over the next five to 10 years at the expense of supermarket chains and weaker mass merchants with pharmacies. But those gains, they added, would come "primarily through new-unit expansion."

14. TARGET AT A GLANCE

2002 *      2001 *     2002 % of    No. of stores **     % of stores
Rx sales   Rx sales   total sales   with pharmacies    with pharmacies

$1,080       $600        3.0%             773                67%

Source: Chain Store Guide/Drug Store News * Sales in millions
** As of April 2003

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