Will whole health fortify supermarket pharmacy?

Drug Store News, March 15, 1999 by Al Heller

They're coming to grips with their differences because the rewards can be significant. Chains typically experience 25 percent. to 30 percent gains in health and beauty care sales when anchoring the nonfoods sector with pharmacy. Since nonfoods contribute an average 10 percent of sales and 40 percent of profits at supermarkets, those gains mean a lot to operators who subsist on mere 1 percent to 2 percent net margins overall.

A pharmacy anchor brings great leverage to the selling floor, Pharmacists consult on OTCs, often coming out from behind the bench as at Publix in Florida; host a variety of health screenings year-round as at Bashas' Markets in Arizona; and draw incredible traffic, filling 400 scripts per day as at some Giant Foods in Maryland.

Simply, supermarkets are reaching a critical mass with nearly 8,000 pharmacies. And, what's propelling them up the productivity course is the rapid pace of industry consolidation. Just as mega-mergers dramatically changed the face of drug chains in the '90s and forced new disciplines, similar large-scale moves are occurring in the food channel that place pharmacy on the radar screen of upper management.

The joining of Kroger, Fred Meyer, Smith's and Smitty's gives that retail organization a base of more than 1,200 pharmacies, and leverages the opportunity to build the pharmacy discipline at the Ralphs division. Ahold has added Giant Food and Stop & Shop to its stable of supermarkets, enabling Ahold to export its pharmacy best practices to other operating divisions. Safeway has acquired Dominick's, a strong Midwestern regional operator. Perhaps Albertson's proposed acquisition of American Stores carries the greatest potential for shifting pharmacy market share in key operating markets, since "Albertson's can tap American's knowledge of nonfoods merchandising and pharmacy systems, and the free-standing Osco and Say-on stores give Albertson's strong presence in Chicago and Philadelphia," Debra Levin, food and drug retail analyst, Morgan Stanley Dean Witter, told Drug Store News recently.

Similar to the way Rite Aid struck a total supply pact with McKesson, and Kmart has done with Cardinal Health, supermarkets are looking to leverage their size in dealing with drug wholesalers. The prize is less inventory dollars tied up, faster turns, higher cash flow and a greater ability to be in stock on high-demand medicines. For example, both Winn-Dixie and Weis Markets use Bindley Western Drug Company as an exclusive supplier to their pharmacies.

In a different type of arrangement, Safeway/Vons is in its second year of a two-year pact with Bergen Brunswig. The wholesaler is charged with helping to execute patient-care programs in about 600 pharmacies.

"Supermarket pharmacy is definitely rising," added Eric Bosshard, drug store analyst at Midwest Research. "Ten years ago, some supermarkets had pharmacy. Today, it's a standard defensive move to offer one. They're not in love with the business, unlike one-hour photo, which they run as a profit center. Their pharmacy margin dollars will wind up being a lot lower than drug stores because they face similar costs, but usually don't have nearly the volume."