As if the obvious needed to be stated, the period of slow, evolutionary change in the retailing environment for drug, food and convenience items is long over. The arrival of pure-play e-commerce companies to food, drug and beauty retailing marked the end of evolutionary and the beginning of truly explosive revolutionary change.


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Inside This Issue - Opinion

Chain drug stores can flourish in omnichannel world

January 6th, 2014

As if the obvious needed to be stated, the period of slow, evolutionary change in the retailing environment for drug, food and convenience items is long over. The arrival of pure-play e-commerce companies to food, drug and beauty retailing marked the end of evolutionary and the beginning of truly explosive revolutionary change.

The battlefield is now been defined by the term “omnichannel” — and rightly so from the perspective of the customer. We believe rising customer expectations and cut-throat competition are increasingly requiring all retailers to “up the game” — calling for innovation and out-of-the-box thinking, approaches and capabilities.

While different players bring particular sets of strengths and weaknesses, we believe chain drug stores can not only survive but thrive — if they leverage their unique strengths. In this article we’ll discuss how chain drug stores can excel versus the Internet pure plays. In the second of this two-part series we will talk about the more significant threat facing grocery/combo ­retailers.

Pure e-commerce players have gained market share on account of two distinct factors, competitive pricing and deep analytical capabilities that have enabled them to build an extensive knowledge base of their increasingly loyal customers. With Amazon leading the way, these companies, with their lower cost structure and lower price point, are able to slice away from brick-and-mortar stores an increasing portion of the consumer’s basket.

In exchange for best price, e-commerce players require customers to accept “latency,” shorthand for the “willingness of the customer to order and wait for the product to arrive.” This drawback is precisely the point being addressed by same-day shipping and the now-famous “drone delivery” model for 30-minute fulfillment. For example, in categories such as beauty and vitamins, chain drug stores have felt the sting from e-tailers because an educated online consumer has started to slice away purchases that can tolerate latency from impulse or convenience spending and place those dollars with different partners, at least for the time being.

While the e-tailers feverishly build fulfillment centers and high-tech last-mile delivery models, one of the main challenges for the Amazon-like online pure plays is that not all purchases can tolerate latency. The weakness in the e-commerce model today is that not all purchases — in particular the traditional purchases made in the neighborhood retail pharmacy — can be made in the spirit of stocking up or a planned purchase.

Nor can online shopping offer the live experience of shopping in a store, with both its visual cues and personal interactions to guide the customer’s choices. Impulse buys, first-time buys and pure convenience trips, run against the spirit of the e-commerce model.

E-commerce players are aware of these disadvantages, and they are working vigorously to minimize the trade-offs. Subscriptions for automatic replenishment and de-risking returns are examples of these efforts. But obviously their main focus needs to be on accelerating the shipping process, and working at achieving the holy grail of a financially viable same-day delivery.

While unmanned e-tail drones can draw away a significant portion of public attention, not to mention generate timely buzz, a more concrete and tangible step toward achieving this ultimate logistical goal is to build a network of distribution centers located within urban areas, near the customers. But when we look at it this way, the apparently “asset light” model does need tangible and not-so-light distribution centers. Regardless of how fanciful the transportation method is, proximity to consumption is and will continue to be a key to gaining in the omnichannel battlefield.

So it should come as no surprise that a main advantage drug stores have in the digital era is their most traditional physical asset: the stores. Having a vast network of stores has been the cornerstone of the drug chain’s convenience proposition — locations that are close to home, extended hours of operation, and the ability for customers to quickly duck in and out of the store. This can be the key differentiator in an omnichannel battlefield when it is paired with a superior online customer experience.

And so the main challenge for drug stores is to evolve the convenience proposition to match evolving customer expectations. What does this mean? For a start, drug stores need to strengthen their e-commerce and analytical insight capabilities in order to deliver a seamless omnichannel experience centered on the distinctive competitive advantage inherent in their physical stores.

Several chain drug stores have made great headway in the online customer experience. They have aggressively aligned their assortment to their online presence, advanced mobile applications linking store with e-commerce offerings, expanded online presence and the green shoots of home delivery from the store. They are taking advantage of their convenience, ubiquity and, of course, patient traffic — a customer base with instant needs if ever there was one.

All are investing in reconfiguring the store to increase convenience, relevance and shoppability, and expanding and tailoring the assortment. These new product assortments are being paired with customized offers — CVS has been the most vocal in this ­dimension.

However, there’s yet more that chain drug stores need to be doing to combat the Amazons. E-tailers have been doing a great job of capturing insights from data, customizing communications and offering truly relevant deals to their customers. Taking a cue from this, Walgreens and Duane Reade with the recent Balance Rewards card and CVS with its longer-running Extra Care card are gathering data on consumer spend and preferences.

That said, many drug chains have yet to fully embrace the idea of enhanced data analytics, much less the value of integrating analytics into decision making to gain practical, in-the-field results to better market to each customer. There’s plenty more distance they can go in this ­direction.

Drug stores are also moving aggressively toward providing their own Internet offerings that fully link the convenience of brick and mortar with the digital benefits — in essence, beating the e-tailers at their own game by providing fulfillment from centralized fulfillment centers when latency can be tolerated and integrated into the store network when it cannot.

For instance, if services like ‘order online, pick up in-store’ are in place, drug stores can offset their concerns about the e-tailers’ same-day delivery threat. Or take it up a notch and offer “order online, deliver to your home” executed from retail. Let the customer control the transaction to manage the time uncertainty of home delivery. Providing convenience in both directions will help cement customer banner loyalty and satisfaction.

By extending the power of analytical insights to include the pharmacy delivering targeted information not only about medical conditions but also about relevant products and promotions, relationships with customers stand to become stronger, and the overall shopping experience can be elevated.

When customers visit a store, envision the pharmacist, tech or cashier, by tapping on a screen, making recommendations, or reminding them of their previous purchases or expected needs before the payment is made. Or suppose that the drug store sends customers a refill reminder to their mobile phone when they enter the store — or any other “reminder” for that matter. With service additions like these in place, the value pure-play e-tailers get from customized offers can be offset and a seamless omnichannel experience becomes reality. Indeed, today, companies such as Nomi and Square are concrete examples of how this seamless connection between the digital knowledge and in-store experience could start to materialize.

As health care services and prescription fulfillment continue to penetrate local communities through convenient retail pharmacy locations, drug stores are positioned as the destination for a range of products and services. If they play their cards right, chain drug stores can become the convenient destination of choice — in both the digital and physical universes — and positively thrive in the omnichannel era.

ANDRES MENDOZA PENA (Andres.MendozaPena@atkearney.com) is a principal in the strategy, marketing and sales practice of A.T. Kearney, a global management consulting firm.

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