Breaking into the Pharmacy MarketBreaking into the Pharmacy Market
December 1, 1999
Breaking into the Pharmacy Market
by David Lakey, President, The Lake Group, Portland, Ore.
A crowbar is not required for this kind of breaking and entering. On the contrary, afocused marketing program and a ready wallet are the primary tools for supplementmarketers to build their business in the 20,000 plus major United States drug stores.
The market opportunity is huge. Nearly 1/4 of the $14 billion in nutritionalsupplements sold last year (or $3 billion) were in mass retail stores, primarily massdiscounters, drug chains and supermarkets featuring a pharmacy counter. But the complexionof these stores is changing dramatically.
Traditional chain and independent stand-alone drugstore pharmacy operators ruled thevitamin and OTC world as recently as three years ago and could boast 60 to 70 percent ofmainstream retail sales of vitamins. By late 1999, these traditional drug chains had only40 percent of all the vitamin sales compared to discounters and grocers, and their dollarsales were falling at 2 percent while the others were climbing 10 percent. Target,Wal-Mart, Safeway and other chains are aggressively adding prescription counters andexpanding OTC sections to capture these important sales. Meanwhile, struggling independentpharmacies continued to close or be acquired by the chains.
On-line drug and prescription sites mushroomed in the last year. Drugstore.com,Mothernature.com and vitamins.com are just a few of the sites joining in the e-commercehype. While important strategically, short term sales in this area have been minimal.
The top 11 "bricks and mortar" chains with pharmacy represent 25,000 storesand most of the action in both prescription and OTC category sales. The elite top fiveretailers include CVS, RiteAid, Walgreens, Eckerd and Wal-Mart, each with more than 2,500pharmacies. Although they have fewer stores among drug chains, Walgreens is the clearleader in sales per store.
While retailers have consolidated since 1995, the supplement product assortmentlandscape has become increasingly fragmented. A plethora of brands, price points and SKUscan be found on the store shelves. The largest mass retail brand is private label with a32-percent dollar share of category. Private label sales are expected to increasesignificantly as the few remaining chains emphasize the brand to achieve their aggressivecategory gross margin goals. The next largest national brands are Sundown, NatureMade andCentrum with dollar shares of 14 percent, 9 percent and 8 percent respectively.
Many crossover brands have cracked the pharmacy market in recent years, includingNatrol, Metagenics, Nature's Way and Tyler. It remains to be seen if the more esoteric andexpensive brands can survive in the self-service, high-promotion world of mass retail.
Drug stores have added products at a rapid clip. A typical Walgreens today may havemore than 100 linear feet of supplements, with an additional three to five display endcapsof promotional product, yielding more than 5,000 bottles of inventory in just one store.The company reports significant sales and share growth as a result of this strategy.RiteAid recently partnered with GNC (a company that also manufactures many of its ownproducts) to place the PharmAssure brand of private label supplements into RiteAid stores.It's not clear how well these relatively expensive formulas will play in Allentown, Pa. orAlbany, N.Y.
Only seven decision-makers dictate one's fate in nearly 19,000 stores. This is a muchhigher concentration of power than other supplement selling channels. Imagine competingwith more than 900 supplement companies that can call on these overworked buyers!
Lack of category traffic and oppressive entry costs are among the weak spots inpenetrating this channel. Inventory can back up rapidly here, often due to poorly plannedpromotions, which may pit competing formulas against one another at the same time. Weaksales forecasting systems between supplier and drugstore can also hamper results, withstock-outs on key items blunting incremental sales.
Stores are demanding ever higher up front payments to get on the shelf, and arede-listing products even more quickly if early sales don't make the required hurdle rate."With the huge demand for shelf space, drug chains are assuming none of the risk ofstocking new products," said Bob Rohl, an executive with Hynes Sales, a majornon-food broker in the Southeast.
A trained and trusted pharmacist--combined with a corporate commitment to merchandisingvitamins--is the greatest strength of this channel. Supplement marketers need to researchevery aspect of the product so that it passes the inspection of board-certifiedpharmacists. The more a product can show scientific studies, high manufacturing standardsand credible benefit claims, the more likely a chain will stock the item. "Up-frontmoney alone will not guarantee placement. Marketing programs and clinical trial supportare increasingly needed for new item approval," said Rohl. Manufacturers also need toorchestrate positive consumer press about their product to generate demand.
Drug chains are working harder than ever to marry the health care provider role of thepharmacist with the expanding OTC and health product offering in the larger store."Whole Health" is the latest initiative in supermarket chains, which are in aclass by themselves in the broadest offering of food, produce and drug related items.Willard Bishop Consulting and various trade associations pioneered this concept andquantified its results.
TOP 10 CONSIDERATIONS FOR SUPPLEMENT COMPANIES ENTERING THE DRUG CHANNEL
Make sure top management is committed to servicing channel demands.Sophisticated retailers consume great quantities of product and data, then return toextract significant pricing concessions from suppliers. Is the management team prepared tofund the inventory and participate on the customer's terms? Do product development andpurchasing departments ensure they consistently meet the highest quality standards?
Know your consumer. Be prepared to describe who purchases your product, how itis used and the lifestyle considerations of the product. Savvy retailers have clearlyidentified their target consumer, even on a regional basis. Be able to match your targetto their target.
Adjust the product and service offering where needed. Promotions are critical tomoving product. Detailed syndicated data is available to analyze sales results. Is thesales department prepared to discuss promotion lift, base sales, share of requirements andother key concepts with the retailer?
Thoroughly plan a new product launch. Drug chains can no longer help suppliers"work out the bugs" in a new product introduction. Every implementation stepneeds to be properly planned and well communicated throughout the organization. Make surethe web is a key part of any list of marketing tactics.
Develop a "pull-through" strategy to generate consumer awareness andtrial. Trade promotion alone is not enough to reach the required critical mass of sales toensure sustainability in a drug chain. Reach out to the supplement consumer and explainthe benefits.
Create ways to leverage the drugstore's unique pharmacy positioning. Forexample, Leiner Health Products, the largest drugstore private-label manufacturer, fundedpharmacist continuing education for a major chain to help them explain supplement benefitsto consumers. Develop promotions with other OTC products, regional health care providers,wellness testing (such as the program launched recently by Oxis Health Products) and otheropportunities.
Help the drugstore customer make it easier for the consumer to shop the section.HealthNotes, a Portland, Ore.-based provider of high-tech nutrition information kiosks, isone example of a method to easily provide information to the consumer. Supplement productselection is intimidating for occasional users. Retailers need manufacturer expertise todevelop the easiest-to-shop sections.
Allocate development funds to clinical trials to support product claims.According to one source, drug chains feel they are providing an "impliedendorsement" of supplements, particularly when dispensing prescriptions that may haveharmful interactions with natural products. Third party firms have developed inexpensiveways to secure product performance data using valid research resources.
Ignore retail implementation at your peril. When will schematics and pricing bedistributed to stores on the new product(s)? Who will set the stores? Was productavailable in all stores during the launch promotion? Often promotional vehicles such asfloorstands can force this initial distribution.
Segment the customer. Significant sales and important differentiation can befound among regional chains, ad groups, wholesalers, web-only and specialty drugoperators. Depending on your product, a strong match may be made between you and a lesscompetitive and less exposed distribution channel. The drugstore channel can yieldtremendous long-term sales to those that thoroughly plan and execute with care.
David Lakey is President of The Lake Group, a marketing and management consulting firm.Lakey is also a marketing instructor at Portland State University. He can be reached at11501 SW Pacific Highway #1008, Portland, OR 97223. Phone (503) 244-6315, Fax(503).244-6796 Email www.lake-group.com.
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