Pharmacy is one silver lining of Target’s cloud

MINNEAPOLIS —The pharmacy at Target has emerged as an important asset to drive customer traffic and build loyalty at a time when the retailer’s sales and profits are the weakest in recent memory.

Although Target doesn’t disclose its pharmacy sales, occasionally the company offers nuggets of information that hint at the growth taking place within the business, and that was the case recently when top executives met with financial analysts.

“We are driving sales with Target Pharmacy through pharmacy rewards and our extended generic drug program with a 30-day supply for $4 and a 90-day supply for $10,” Target president and chief executive officer Gregg Steinhafel told analysts during a meeting in late October. “Last year, our pharmacy comp sales grew at seven times the company rate, and looking ahead, we foresee continued strong growth.”

The performance of Target’s pharmacy department has been one of the bright spots in an otherwise challenging year, as the nation’s second-largest discount retailer has seen same-store sales decline at an accelerating pace for the past five months.

It is understandable, then, that Target wants to increase its pharmacy business, and a key means for doing so is through converting more of its existing customers to pharmacy customers and persuading them to participate in the retailer’s pharmacy rewards program. Target Pharmacy Rewards is a program that provides participants with a 10 percent off certificate after they pay for 10 prescriptions with their Red Card credit or debit card.

“We bring guests into the store more often through the Pharmacy Reward program,” Steinhafel said. “Last year, we increased the number of enrollees by 70 percent, and pharmacy guests who enrolled in Pharmacy Rewards shopped Target an additional five times and spent an additional $90 million in the rest of the stores.”

This year, as marketing efforts for the program were increased, Target expected to increase enrollment by 50 percent, and transaction involving certificates were running 17 percent ahead of last year as of late October. So far, that success hasn’t been enough to offset weakness in other areas of the store, such as home and apparel, categories where consumers have cut back on discretionary purchases and hurt financial performance.

Retail sales at Target advanced 1.7 percent to $14.6 billion, but same-store sales declined 3.3 percent during the third quarter ended Nov. 1. On a positive note, operating profits for the retail division increased nearly 8 percent to $772 million.

To grow its pharmacy business, Target’s plans call for increasing the penetration rate of its rewards program; however, it is facing a major headwind as it restricts growth of credit operations. The company’s credit division has experienced increased delinquency and charge off rates, higher bad debt expenses and third-quarter operating profits that declined 83 percent to $35 million.