What do those economists know? For two-and-a-half years after the Great Recession was declared officially over in June of 2009, dark clouds continued to cast a long shadow over consumer spending behavior. But just in the past month, real retail sales as reported by the Federal Reserve have finally recovered to prerecession levels.


consumer spending, retail sales, Judy Chang Cody, Market Performance Group, Great Recession, drug channel, consumer shopping behavior, retail channels, drug retailers, pharmacies, front end, health and wellness, retail marketplace




































































































































































































































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Inside This Issue - Opinion

Post-recession, drug stores have golden opportunity

April 23rd, 2012
by Judy Chang Cody

What do those economists know? For two-and-a-half years after the Great Recession was declared officially over in June of 2009, dark clouds continued to cast a long shadow over consumer spending behavior. But just in the past month, real retail sales as reported by the Federal Reserve have finally recovered to prerecession levels.

Given this long-awaited milestone, it may be an opportune time to play “Monday morning quarterback” and take a critical look backward to find the relevant lessons for the drug channel as it seeks to move forward in this new post-recession era.

For the drug channel, the look back over the past four years is not nearly as bleak as consumer sentiment would have predicted. Indeed, strong performance across numerous measures — sales growth, share, trips, basket size — would suggest that drug was well positioned to find numerous silver linings within the recessionary storm clouds.

While fundamental shifts in consumer shopping and spending behavior were consistently detrimental to retail sales in general, for drug these trends seemed to create a new shopping environment that instead favored the channel.

Consumer shopping behavior had already been shifting at the start of the decade, with average trips per month declining from 14.5 in 2001 to 13.6 in 2006. Escalating gas prices and recessionary worries further exacerbated the trend in recent years, driving consumers to reduce trips even further. As consumers shopped less and shopped closer to home, they started to make more quick trips, something that greatly favored the conveniently located, ubiquitous drug retailer.

Similarly, as consumers cut back on entertainment and eating out to the detriment of the economy overall, retail channels such as drug benefited, especially as they increased their food and beverage offerings and provided “small indulgences” at home, including the recently trendy and blazing-hot salon nails category.

Another recessionary trend that favored drug was the sharp rise in price consciousness and deal-seeking behavior. As consumers became more proactive in searching out bargains, the well-understood, high-low strategy common to drug and the readily available supply of coupons via circulars and in-store machines provided ample opportunities for the promotionally sensitive, trip-consolidating shopper.

In the aftermath of the recessionary trough, the drug channel has emerged with a greater channel share (up 7% while grocery is down 14%), a larger market basket (up 14% in dollars in just the past year), and more shoppers visiting weekly (55% in 2011, compared with 46% the year before). The unique confluence of events that has strengthened the channel’s relative position now provides a golden opportunity for drug retailers. In the new post-recession era they are well poised to build from these recent gains in order to firmly establish themselves as the new outlet of choice for consumers.

Perhaps the most compelling, post-recessionary impact overall for the drug channel is the new energy and success within the front end of the store. Recognized yet unrealized as a critical, strategic opportunity and imperative for drug, the front end had always held the promise of revenue growth, margin enhancement and retail differentiation. Yet throughout most of the past decade the general trend had been toward greater, not reduced, reliance on pharmacy sales. It wasn’t until the most recent years that the trend appears to have shifted in favor of the front end.

Indeed, it seemed that the challenge of the recession may have served to heighten the sense of urgency for drug to reinvent the front end. Scaled-back consumer spending across the board, even in prescription spending, meant that the battle for share of trips and wallet would intensify. Exacerbating the share battle was the continued blurring of channel lines, with competition adding pharmacies and expanding health and wellness assortments.

For the drug channel, the time was nigh for a new approach to the front end. Retailers had to reinvent themselves to break out of the competitive clutter and to provide true relevancy to consumers. The risk of not doing anything became greater than the risk of trying.

Under this intensified competitive pressure drug retailers implemented a wide variety of strategies from new formats (such as small box and wellness) to new product assortments (such as the emphasis on consumables, including beer, wine and liquor) to truly localized assortments (such as sushi on Wall Street and Garrett popcorn at State & Randolph) to sharpened pricing strategies that better compete with mass market and dollar retailers. The good news was that the recession appeared to accelerate and amplify consumers’ response as they increasingly turned to drug for their scaled-down, quick-trip shopping needs. This meant that feedback cycles were shortened and retailers were able to quickly discern success from failure.

While not every new front end strategy introduced in recent years has ultimately proved successful, it will be critical to closely examine each for the key lessons learned: What worked and what didn’t and why? Which were the innovations that worked conceptually but failed in reality? Which reinventions added true consumer relevancy and which ones just added more cost? Once these insights have been identified, they then must be translated and scaled into the ongoing strategies that continue to inspire the shopper long after the recession is over.

The forward-thinking retailer is already formulating next-step strategies to solidify its recent performance into a new baseline, establishing a stronger foundation from which to drive greater growth. For the opportunistic retailer, a larger channel share means new and more frequent shoppers who are forming new behaviors. Reinforcing those behaviors through targeted messages and incentives will be critical to help ingrain those patterns into habits.

Similarly, increases in average market basket mean greater cross-purchasing and impulse buying. Continuing to motivate those behaviors —whether through solutions selling, carefully designed in-store marketing or other innovative merchandising strategies — will be critical to maintaining and accelerating the momentum started over the past several years.

Beyond these basics, the successful retailer is further asking: What else can I do to become even more relevant to my shopper? What will grow trips and baskets as consumers continue to evolve? How can we truly integrate the front and back ends to achieve significant competitive advantage? This then is the golden opportunity for the post-recessionary drug store: to transform recent gains into a catalyst for even greater growth and, in doing so, finally turn the promise of the front end into a reality.

The rearview mirror assessment of the Great Recession finds the drug channel in a somewhat enviable position. Not only were there numerous “silver linings” in the economic storm clouds that seemed to favor the channel, but at the same time the turmoil in the retail marketplace appeared to provide a much needed catalyst to help drive the reinvention of the front end.

Now the golden opportunity is what lies ahead: to capture the lessons learned from the recent past in order to accelerate the transformation of the front end as the differentiator that builds traffic and sustains loyalty over time. By doing so, there’s little doubt that drug retailers — and the vendors who partner with them — will be able to blow past the recessionary clouds to find the proverbial pot of gold at the end of the post-storm rainbow.

Judy Chang Cody is senior vice president at Market Performance Group.

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