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[25 comments]

Dollar Stores Move In on Drugstore's Territory

April 17, 2012

It's nothing new. One retail channel sees an opportunity and moves into it. Drugstores have become more like convenience stores. Mass merchants and club stores have focused on key categories to grab customers from supermarkets. In recent years, dollar store chains have added groceries and growth across the U.S. has been nothing short of phenomenal.

Now, according to a Sun Sentinel report, dollar store chains are also moving into the pharmacy business. Deals, part of Dollar Tree, opened a store that included a pharmacy operated by PharmaGo, an independent operator.

"It's a win-win on both sides of the equation," Bradley Schnur, chief operating officer of PharmaGo, told the Sun Sentinel. "It's convenient for the customer to shop while they wait to fill prescriptions."

FINANCIALS:     [NASDAQ:DLTR]

Discussion Questions:

Discussion Questions: Will pharmacies become commonplace in dollar stores? How do you expect drugstores to react to this potential competitive threat?

While we value unfettered opinion, we urge you to show respect and courtesy for people or companies about whom you comment. Keep in mind that this is a public, professional business discussion. RetailWire reserves the right to edit or refuse the publication of remarks that we deem unsuitable. We may also correct for unintended spelling and grammatical errors.

Instant Poll:

How big an opportunity do pharmacies represent for dollar stores?

Comments:

Boy, talk about channel blurring! There's a small company named CVS that started out as a glorified dollar store (Consumer Value Stores) and then discovered putting a pharmacy into the back would significantly drive traffic and profits. So are dollar stores and chain drug stores converging?

I tend to think the pharma ship has sailed, but then I didn't think adding food into dollar stores would have the impact it has had. So, I would guess they've got a better than even chance of succeeding.

I just wonder what will happen when there's a Family Dollar and CVS located next to each other in a strip center (as they are right near my house). I cannot believe Walgreens and CVS don't have some kind of restrictions built into their leases.

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Paula Rosenblum, Managing Partner, RSR Research

Dollar stores, like a fast-moving river, will fill all available territories. Thus pharmacies will likely become commonplace in many dollar stores.

Drugstores will react and move further into groceries and into "dollar-deal" merchandise. Stability and retailing are opposites.

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Gene Hoffman, President/CEO, Corporate Strategies International

Dollar stores may be hamstrung by space and expense limitations preventing them from putting full-blown pharmacies into many of their stores. More importantly, there may be an image problem associated with dollar stores -- the "lowest common denominator" brand position may be out of sync with customer expectations. (Target, Walmart and Costco don't have the same problem.) Maybe Dollar Tree can make this work in its "Deals" format, but I'm a skeptic.

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Dick Seesel, Principal, Retailing In Focus LLC

I doubt pharmacies will become "commonplace" in dollar stores, but that's not to say they might not become more common in certain locations.

That said, if I were a chain drugstore operator, I'd monitor the growth of the hybrid formats but not lose too much sleep over it quite yet.

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Ryan Mathews, Founder, ceo, Black Monk Consulting

Prescription and OTC drugs is big business and as such will find its way into any retail distribution channel where it can reach its consumer. This will certainly become more commonplace. Walgreens already has the feel of a small footprint Walmart. Lowe's and Home Depot have started selling bandages and joint support products. Brick n' Mortar retail is searching for anything that its shoppers will buy once they walk across that threshold. The irony is the link to the increase in robbery and theft associated with pharmaceutical products as noted in your other discussion question.

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Adrian Weidmann, Principal, StoreStream Metrics, LLC

Yes. Where there are people, there will be retail opportunities, and the dollar stores have many customers who have pharmacy needs. Placing an independent pharmacy in any of the major chains will not only benefit their customers who are already at the dollar stores, but will serve as another reason for the customer to come to the dollar stores to shop. This is a win for everyone!

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Kai Clarke, President, Kowa Optimed, Inc.

It's all a blur. Menards sells perishables and household cleaning products, toiletries and grocery shelf staples. For convenience a dollar store shopper would most certainly have no hesitation to transfer their scripts from Walgreens, Rite Aid and CVS to their Family Dollar or Dollar General store. Why not make room in the back of the store for a very strong traffic draw. The doors are open and you are paying rent, why not maximize your productivity.

It's about convenience and what the store brand stands for isn't as key/essential as it once was -- this is all out of necessity to source new revenue, not maintaining brand identity.

David Slavick, Director, Loyalty & Retention, FTD.com

It obviously is happening. Will it become widespread and common in all dollar store locations? That will depend upon the success of the trials. One difference is that consumers depend upon pharmacies to have certain items and dollar stores often change this product assortment. How the two kinds of inventories get balanced and how well consumers come to depend upon the pharmacy section will be related to the amount of expansion.

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Camille P. Schuster, Ph.D., President, Global Collaborations, Inc.

Channel blurring at its finest. Dollar stores, pharmacies, convenience stores all are working to appeal to the same customer base. As dollar stores expand into pharmacies, beer and tobacco, pharmacies are getting back into alcoholic beverages and reemphasizing tobacco products, and food. C-stores still have the edge with foodservice and fuel, but it is not unlikely that dollar stores and pharmacies will look at those categories as well.

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Steve Montgomery, President, b2b Solutions, LLC

Success will only come if the traffic will allow for a profit to the independent pharmacist. I find it very difficult for this to happen, as profits from pharmacies are driven by the extra stuff they sell as well. It's no wonder why the Dollar stores won't do this themselves, as the cost for a pharmacist would eat up their entire bottom line. This will be a hit and miss deal at best.

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Tony Orlando, Owner, Tony O's Supermarket & Catering

I agree with some of the comments and thoughts regarding the challenges dollar stores will face with trust and quality perception. There may be some demographic targets who will actually gravitate toward dollar stores offering pharmacy services. However, there will also be further challenges with regulatory scrutiny regarding controlled substances and abuses.

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Matt Schmitt, President, Chief Strategy & Innovation Officer, Reflect

There will be some success, but I think more failure. Dollar Stores are built on being cheap. It is going to be difficult to offer cheap in this space.

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Mel Kleiman, President, Humetrics

There is opportunity here. There is a distance to cover for it to be commonplace.

Based on the BIGinsight Monthly Consumer Survey, the Consumer who is shopping Dollar Stores calls out similar areas of importance as those who shop a Walgreens or CVS as to where and why they seek their prescription drugs. Top items are: Location (70%), Price (50%), Prescription Phone in availability (33%), Insurance covers Prescription at store (33%), Trustworthy Retailer (25%), and Pharmacist provides valuable information (20%).

The opportunity lies in the fact that only about 1 out of 3 Dollar Store shoppers are making use of Drug Stores at this point in time. Grocery Stores, Discount Stores, and various other locations make up the balance. With lower Household Incomes of $27,000 to $35,000 (Dollar General, Dollar Tree, and Family Dollar), a predominantly Female shopper (70%), and substantially lower education levels than those of Drug Store shoppers, this is not likely the sweet spot for more expensive pharmacological needs.

While Dollar Stores have growing traffic, they will have to invest time, personnel, and floor space. Will they be able to get scaleable revenue from pharmacy? This seems like a site-by-site decision. That makes it difficult to "go all in." Wouldn't bet heavily on this one as an out-of-the-park winner.

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Roger Saunders, Managing Director, Prosper Business Development

I don't think of this as "channel blurring" but as sharper focus on the customer. As I've often said, retailers should define themselves by the needs and wants of their customers, not the suite of merchandise that they may have historically offered. Although there is nothing wrong with that existing suite serving as a proper springboard into the future, it ought not to be an anchor.

With the aging of the population, pharmacy is a GROWTH business, and will be for at least a few decades. Take the leap now, or plan for how you can shrink your business profitably, leaving something worth selling at some point. ;-)

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Herb Sorensen, Ph.D., Scientific Advisor TNS Global Retail & Shopper, Adjunct Senior Fellow, Ehrenberg-Bass Institute

Price isn't an issue when it comes to prescription drugs. For the consumer, it is largely a matter of their plan. They will have the same benefits at the dollar store as the chain drug?

What it will come down to is convenience, trustworthiness and competence. With that in mind, the dollar stores don't have a chance.

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Gene Detroyer, Professor, Independent

I think about my doubts when dollar stores went in the food business. Look how that has turned out for them. Now pharmacies? No doubt they will make an impact; but I still hold some doubt about how successful they will be.

I agree with Paula's comments about the lease issue when there is a dollar store and pharmacy in the same center, as there are in many locations. We have another winner for the legal profession's bank account.

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Ed Rosenbaum, CEO, The Customer Service Rainmaker, Rainmaker Solutions

Lot's of great comments already today on this topic, but I have to call out Paula Rosenblum for recalling the CVS story. Great stuff, Paula!

Pharmacies in dollar stores will work, for one very simple and fundamental reason that is akin to what Herb Sorensen has been saying for some time now. For the vast majority of shopping trips -- the number one driver is "convenience."

For the vast majority of consumers -- convenience is defined as "proximity". For many consumers -- particularly in rural communities and urban retail deserts -- the most proximate retail outlet is the dollar store.

The only thing that can screw this up is the labor cost model or regulatory intervention of some kind.

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Ben Ball, Senior Vice President, Dechert-Hampe

The door is open here for dollar stores to leverage the value and convenience they offer shoppers. There is likely a profitable niche to be developed here, likely limited and smaller scale -- it will be interesting to follow. I expect drug chains will work harder to promote strengths of their comprehensive services, full time access to pharmacists, trust and reliability.

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Anne Bieler, Sr. Associate, Packaging and Technology Integrated Solutions

Pharmacies can certainly fit in almost any kind of retail store, and dollar stores are growing and growing quickly. There's no reason they shouldn't enter the pharmacy area, there is nothing unprofessional in the photo of the PharmaGo unit in the Deals outlet. Pharmacy is big business. In 2010 (latest data available), 3.7 billion prescriptions were filled by retail pharmacies; that's equal to 12 per person in the U.S. The average price of a prescription can be estimated at around $75, which makes this about a $280 billion market. So there is good cause to enter this market.

But there is competition -- tough competition that's dedicated and well resourced -- from the drug chains, as well as others, importantly such as Walmart and Target. Many leading supermarkets have prescription service. A large drug store chain may average 250-300 scripts per day per store overall (established plus newly opened stores), but their fully developed stores do much, much more. In addition, pharmacy is a high ring, high cost (pharmacists need six years to get their PharmDs and they command $70,000 - $100,000 right out of school) business. dollar stores are not, and even though this is a leased operation, it is still within the dollar store environment. I would guess that successful dollar store pharmacies will be those in high traffic locations (drop off in morning, pick up a night), not the dollar stores in any strip mall.

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Roy White, Editor-at-large, RetailWire

I would imagine that Walmart is quaking in their boots a little over this test. Not so sure these guys can pull off this coup though, given the relationship Big Pharma has with not only WM, but Walgreens, CVS, Target, etc. Good strategy on their part, in any case.

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Lee Peterson, EVP Creative Services, WD Partners

I always chuckle when I see or hear terms like PharmaGo's, "It's a win-win on both sides of the equation." "Win-win" already implies both sides. "Win-win for both sides" is a meaningless redundancy that means both sides win twice -- which would be great if it were possible. Just sayin'.

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M. Jericho Banks PhD, President, CEO, Forensic Marketing LLC

When Walmart announced the Walmart Express format launch, I saw pharmacy and site-to-store as its major points of differentiation against dollar stores. I guess we can cross one of those off of the list. Given dollar stores' massive scale, drug stores have plenty to be worried about, but they are getting hit on all sides. One reason why drug stores are doing their own version of "the blur" by expanding further into food, prestige beauty, etc. Until others' small formats start spreading, dollar stores will grab pharmacy market. Scale plus convenience equals a powerful advantage.

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Carol Spieckerman, President, newmarketbuilders

As this article states, retailers of all product categories have been blurring the lines for decades. Soon, everyone will be selling everything. Won't that just be super?!

Bottom line, capture the share of market that you can in every product category. Just ensure that the movement of the category justifies the floor space.

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Ralph Jacobson, Global Consumer Products Industry Marketing Executive, IBM

Yes, I believe dollar stores will continue to add not only pharmacies, but other services. Why not a minute clinic or wine shop next? I spent over an hour in the new Walgreens in downtown Chicago last week. Needless to say, the store carries far more than your standard pharmacy from 5 years ago. Yes, they still have get well soon cards and of course they fill prescriptions, but the assortment has now grown into fine wines, a smoothie and sushi bar, fresh fruit and produce and RTE meals.

The blending of retail verticals will continue. My only concern is consumers losing retail options in the future. Will we only need a Walgreens or dollar store to handle all our needs or will there still be room for the local liquor and Hallmark store?

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John Boccuzzi, Jr., Managing Partner, Boccuzzi, LLC

... not to mention the current CEO of Dollar General was the old CEO of Longs and previously a Safeway executive.

It starts to become more and more clear....

'storewanderer'

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