Walgreen Co. is pleased with the customer response to its 30 fresh food pilot stores and continues to mull plans to expand the concept to other locations, according to a retail analyst.

Walgreens, fresh food, food desert, fresh food pilot, Chicago, New York, Manhattan, Mark Miller, William Blair & Co., Jim Jensen, CCR, Customer-Centric Retailing, front end, Greg Wasson, shareholders meeting, same-store sales, Russell Redman

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Walgreens encouraged by response to 'fresh' pilots

January 13th, 2011

CHICAGO – Walgreen Co. is pleased with the customer response to its 30 fresh food pilot stores and continues to mull plans to expand the concept to other locations, according to a retail analyst.

The drug store chain is currently testing expanded grocery and perishables areas at 10 "food desert" stores in Chicago, which are in urban areas underserved by supermarkets, and an expanded fresh food selection at 20 urban and suburban stores in Chicago and New York City.

In a research note released Wednesday, Mark Miller of William Blair & Co. said he recently visited two of Walgreens' food desert stores in Chicago with key members of the fresh food initiative's team, including director of fresh and frozen foods Jim Jensen. Miller reported that Walgreens management describes the consumer reaction thus far to the overall "fresh" effort as positive.

"Management declined to discuss investment returns for the fresh initiative, given the short operating period for the 20 test stores. However, given the company's continued expansion of its food desert program in Chicago, and Jim Jensen's comment that management is 'planning on moving forward' with the fresh initiative, we perceive the financial returns for the square footage allotted to fresh/perishables are higher than what was displaced (the photo development desk) or whose footprint was reduced (greeting cards, beauty aids and other 'right-sized' departments)," Miller wrote in his report.

"Nevertheless, we expect Walgreens to take a measured approach toward this initiative, as additional refinements are likely to be made on a store-by-store and market-by-market basis," he added.

According to Miller, Walgreens last September began testing 20 fresh pilot stores in Chicago and Manhattan with an enlarged perishables offering of about 120 SKUs, including an array of healthy food choices for on-the-go customers such as prepackaged sandwiches, cut fruit and salads. "We understand these products are among the best-selling items so far in the pilot stores," he wrote.

Walgreens has declined to discuss a timetable or the size of a possible expansion of the "fresh" initiative because it still must work out the distribution scheme, among other financial considerations, according to Miller. "As the program expands to more stores over time, we believe Walgreens might consider investing in its own cold-chain distribution network," he said in his report.

The food desert store pilot got under way in the fall of 2009, when Walgreens remodeled two Chicago stores in lower-income neighborhoods with a dearth of grocery retailers. Miller said the initial SKU count of 600 fresh/perishable food items has since risen to about 750 items.

"The initial response from consumers at the food desert stores has been positive, according to management, with the strongest sales occurring for prepackaged produce and ambient-temperature bulk fruits and vegetables," Miller stated. "While the product assortment has been tailored toward the local community (e.g. 'value' products like $1.99 economy bags of cereal), shoppers can find premium perishable products as well, such as Haagen-Dazs ice cream and Lean Cuisine frozen dinners."

He noted that management has indicated that the food desert format could be expanded to at least 400 stores nationwide, or approximately 5% of Walgreens' store base.

At Walgreens' annual shareholders meeting on Wednesday, company executives cited the bulked-up fresh food selection as one part of its strategy to move forward with front-end opportunities, which also include a stepped-up private-label offering (including the DR Delish brand from Duane Reade in Walgreens stores) and piloting an upscale beauty department and shopper loyalty program.

The retailer reported at the meeting that its Customer-Centric Retailing (CCR) optimized store format — designed to make stores more productive and give customers the products they want and need most, along with an enhanced shopping experience — has been rolled out to 2,200-plus stores and is on track to be in about 5,500 stores by the end of this year.

"With more than 7,600 locations within three miles of 63% of all Americans, our drug stores are our center of gravity," Walgreens chief executive officer Greg Wasson said at the shareholders meeting. "Our strategy is to leverage the best store network in America, enhance the customer experience and achieve major cost reduction and productivity gain. Implementing those strategies is creating substantial growth opportunities for our company."

Walgreens' same-store sales increase in December could be a sign that its efforts in the front end are gaining traction.

The retailer said last week that overall comparable-store sales (excluding Duane Reade) in December rose 2.8%, fueled by a same-store gain in the front end of 3.6% — marking the highest increase in 14 months. In addition, customer traffic in comparable stores edged up 0.9% during the month, and basket size grew 2.7%.