Navigation

Kroger Pharmacy

Kroger, a longtime operator of food-and-drug combination stores, wants to further improve its competitive position this year by pricing more aggressively and wringing out excess costs.

On the pricing side, Kroger expects to invest approximately $500 million in promotional activities designed to build and protect its market share. In addition, the 2,400-store chain has begun taking steps toward centralizing procurement, which Kroger said will "better align it with vendors that are set up to serve one primary contact point at large retailers."

As Kroger strives to become more competitive with other large retailers, it also wants to enhance and expand such high-margin categories as health and beauty. The chain wants to capture a larger share of key growth departments, including pharmacy, nutrition and natural foods.

As of Feb. 2, the chain's fiscal year end, Kroger operated pharmacies in 1,702 of its 2,418 stores, or 70 percent of its store base, compared with 65 percent in the year-ago period. Kroger filled more than 105 million prescriptions in 2001, an increase of 5 percent. Pharmacy sales, after soaring 22 percent in 2000, rose 15 percent in fiscal 2001 to $4.5 billion. Kroger's total sales last year increased 2 percent to $51 billion.

"Kroger is opening pharmacies in just about every new and remodeled store," said Jack Murphy, a securities analyst at Credit Suisse/First Boston. "Pharmacy is important in two ways. It helps [Kroger] provide another service to customers, and it helps generate more sales of higher-margin health and beauty aid items."

"Kroger, like many food and mass market retailers, sees the pharmacy business as a way to drive sales," added Todd Hale, senior vice president of consumer analytics for ACNielsen. "They're also responding to the trend of an aging population and trying to cater to the needs of that market."

Kroger chairman and chief executive officer Joe Pichler has noted that pharmacy, along with Nature's Market, the chain's in-store natural food department, and its in-store nutrition centers, have become "very strong components of our business" and are among the chain's fastest-growing categories. "People are really into health and the effect of food on their health," he said. "It's more than a passing fad."

Kroger ended 2001 with 649 nutrition centers, up 11 percent versus the prior year. Last year, Kroger also more than doubled the number of Nature's Markets, ending the year with 336 Nature's Markets, compared with 139 at year-end 2000.

Kroger is using its strength as a leading food retailer to establish itself in profitable, value-added categories that feed off this high customer traffic. In markets where it has a major presence, Kroger has one of retail's highest household penetration rates, according to ACNielsen's Homescan consumer panel. For example, in Columbus, Kroger has a 93 percent household penetration rate. Walgreens in its hometown Chicago market and CVS in Boston come close to that level, with 83 percent penetration rates. But drug chains typically have much lower penetration rates.

Being as shoppers visit food stores "five times more frequently than they visit drug stores, there are tremendous selling opportunities for the food chains that expand their product mix and the services they offer," said ACNielsen's Hale. "That's another incentive to add or expand pharmacies."

Meredith Adler, a securities analyst at Lehman Brothers, noted that Kroger has "always done a good job with the drug store side of its business." Indeed, in the 1980s, Kroger owned the Hook/SupeRx chain. Adler noted that by once managing a drug chain, Kroger acquired the expertise needed to become a more effective food/drug combination store operation. "Kroger has a really decent market share position in pharmacy in most markets," she said, noting that the chain puts a lot of focus on pharmacy. "Kroger saw that the biggest problem that the traditional drug stores have is no traffic, so it decided to combine the traffic that the supermarket stores generate with all the categories that drug store's carry," she added. "It has worked very well."

Kroger already has begun to surround pharmacy with other wellness departments, such as nutrition and natural foods, that will not only help offset any slacking in pharmacy sales, but also will help to make pharmacy more of a destination shop. With the information systems that Kroger has now, Pichler told Wall Street analysts last month that the chain should be able to go beyond running various departmental businesses as "separate streams" and begin integrating them with combinations that can work synergistically. One example is tying in natural foods with the organic fruits and vegetables in Kroger's produce aisles.

Kroger, Adler noted, also is making its pharmacy business successful by making all the right basic moves.

"They're promoting the department aggressively, signing it aggressively and supporting it with the labor dollars and technology necessary to maintain high service levels," she said.

COPYRIGHT 2002 Reproduced with permission of the copyright holder. Further reproduction or distribution is prohibited without permission.
COPYRIGHT 2002 Gale Group