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Charting a path with private-label

Drug store retailers willing to invest in a private-brand campaign that will attract new customers have a lot to consider. Their strategy must include everything from what a drug store really is to whether there is more room for innovation in the core health and beauty part of their business, or in food and beverage at the front of the store.

Let’s face it this is an omnichannel retail world, where drug stores and supermarkets look very much alike. Shoppers can buy refrigerated foods at the drug store, and they can fill their prescriptions at the supermarket. However, the private-brand strategies for both are not interchangeable.

“Food retailing and drug store retailing are two entirely different channels, and it is hard to imagine what a high-end drug store would offer that a low-end drug store would not,” Private Label Manufacturers Association president Brian Sharoff said. “There are categories that might allow for high-end, low-end differentiation, such as cosmetics, but for most of the health-and-wellness categories, the assortment would not change.”

And therein lies one of the fundamental differences between the supermarket landscape in the United States and the drug store scenario. There are dozens of supermarket chains, and most are regional. There are three major drug store chains — CVS, Walgreens and Rite Aid — and their reach is national.

One way supermarket chains use private-label products is to help establish identities to separate themselves from similar stores. Wegmans and Trader Joe’s, for example, are considered to be more high-end or upscale, while Aldi and Lidl are ultra discounters and Whole Foods Market takes its identity in a different direction by calling itself “America’s healthiest grocery store.”

The drug store chains don’t need to worry about that kind of differentiation because there are so few of them. Through consolidation, the major players eliminated the little guys years ago.

“Once you get to that kind of industry concentration, it’s not about differentiation, it’s about pricing power,” said Hart E. Posen, an associate professor of management at the University of Wisconsin-Madison’s School of Business. “With two or three big competitors dominating the industry, it’s not about rivalry because one firm knows that if they lower prices, the other firm will have to lower prices. If one firm invests in substantial differentiation, then the other firm will — and no one will necessarily be better off.”

Posen, an expert in corporate strategy, innovation and entrepreneurship, who earned his doctorate at the University of Pennsylvania’s Wharton School, said he sees parallels in the consolidations the drug store and airline industries have gone through. He pointed out that all the things the drug store industry has done to eliminate smaller drug store rivals has been undone by the emergence of new players in the pharmacy arena — big-box stores like Walmart, big grocery stores like Kroger, pharmacy benefit managers like Express Scripts and online shopping behemoth Amazon.

“That is why creating a sort of distinctiveness in their offerings is important,” Posen said of the drug store chains. “Why should I go into the Walgreens, which is two blocks from my house, rather than the Target store three blocks from my house? Creating that distinctiveness is important, but less so because of CVS versus Walgreens, and more so because of CVS and Walgreens versus the Walmarts and others.”

Through that lens, CVS Pharmacy, Walgreens and Rite Aid share the goal of enticing shoppers to come to their stores instead of taking their business to a nearby big-box or big grocery store, or buying pharmaceuticals online. The right private-label strategy must take into account all of a drug store’s competitors, not just the rival drug store around the corner, and it must yield a high-quality product that is both unique and of great value to the consumer.

Traditionally, private-label products are less expensive than their brand-name counterparts, and they provide a greater profit margin to the retailer. Sharoff said that the drug chains have been very aggressive in creating and marketing their own over-the-counter products, from cough-cold medications and dental floss to antacids — all with compare-and-save strategies that challenge the national brands at the shelf.

The question, though, is this: Are those private-label products enough to bring customers into the drug store?

Bill Bishop, chief architect and co-founder of Brick Meets Click, a retail advisory website, pointed out that private label has evolved into two types — traditional and new generation.

He defined traditional as “a label that obviously carries the retailer’s name, which purports to be as good as the brand, but really is never quite as good — but it’s close. I think the drug store business is still very much in the traditional private-label area,” he said.

Bishop sees new generation private label as an innovation — something new that resonates with the public. As an example, he pointed to how the Aldi supermarket chain brought foods with “clean labels” — products that contained nothing artificial — to the market.

“No one else in the private-label areas had clean labels, so here they are bringing products that are different and on trend,” Bishop said. “You want to be different by being more on trend with what people are looking for. What are the broader things people are looking for? Some people are looking for clean labels. Some people are looking for regular convenience. Some people are looking for better portion control. You’ve got to kind of discern what the trend is. New things that are on trend is the definition of innovation.”

Innovation is only one aspect of new generation private label. Bishop said the second aspect is unquestioned, consistent quality — no variance allowed. The third aspect is that the product must provide the consumer with great value — a combination of high quality and attractive price.

Bishop said the final aspect of new generation private label deals with the retailer: There must be an investment in the product, which not only includes the money needed for conceptualization and development, but also the willingness to take a risk and do the necessary marketing.

Sharoff said that PLMA’s annual trade show, which has been around for more than 30 years, can help retailers interested in innovation and development. They can inspect the latest products, meet the most experienced suppliers and come away with cutting-edge ideas.

What kind of cutting-edge idea should the drug retailer turn into a new and unique product? Perhaps an innovation in cosmetics would resonate with the public enough to warrant the expense and risk of product development. Of course, today’s drug stores carry food and beverages, too. Maybe there would be room for innovation there, even though it isn’t the store’s core component.

“That’s really the key question in this whole thing, right?” said John Stanton, a professor of food marketing at Saint Joseph’s University in Philadelphia. “It has to do with how developed the pharmacy is in terms of their pharmaceutical products and makeup. Have they gone about as far as they can in terms of making these departments as effective as possible?”

To illustrate his point, Stanton gave the example of a pharmacy that carried five different brands of aspirin. Should it add a private-label sixth brand — giving it virtually every aspirin on the market? Or should the retailer use its space in a different way, perhaps on a new food product. Whic
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