For many drug store executives, the conventional wisdom is that their customers simply don’t buy value brands — such as Suave and VO5 shampoo, or Aim and Pepsodent toothpaste.

When looking closer at their stores’ offerings, the truth is that the executives’ beliefs are a self-fulfilling prophecy. Customers in these drug stores are less likely to buy value brands because few of those products are on the shelves.

Kurt Jetta, TABS Analytics

For drug stores, there is a significant benefit to offering value brands: They are highly productive, generating strong unit sales relative to their share of SKUs on shelf.

High unit productivity is the best measure of a brand’s consumer appeal, particularly when compared to high-end brands that turn slowly. Another benefit of high sales velocity is the opportunity for retailers to free up cash by turning inventory quicker, assuming comparable gross margins.

A common objection to value brands is that they harm private label sales. This is demonstrably false, as shopper card data shows more absolute cross-purchase activity between private label and larger brands, regardless of price point.

In a retail environment with more formats and outlet choices, drug store retailers can use value brands to increase buyer conversion and minimize losses to other channels — such as mass merchandisers or dollar stores.

Dollar stores are registering the largest competitive gains in the retail landscape despite all of the hype surrounding the Whole Foods/Amazon deal, the gains in e-commerce and the recent increases in Walmart share.

Dollar stores — such as Dollar General and Family Dollar — doubled their store count from 2005 and 2016, according to Nielsen data. These stores saw annual sales growth of 6.8% to $57.9 billion — more than double the 2.6% growth rate of retail overall — according to Euromonitor.

Our research at TABS Analytics points to the availability of value brands as a key driver in the shift to this channel.

The chart below shows that shoppers at dollar stores, Walmart and grocery stores (“traditional food”) are the ones most likely to “strongly agree” that value brands are a way to save money. Drug store buyers, though, also agreed with that statement at meaningful levels (about 25%).

Why you can’t afford not to offer value brands

Now let’s examine more closely the four reasons why retailers must seriously consider expanding the presence of value brand items.

• Value brands are highly productive — Many drug retailers believe they understand their customers, and say they are taking a “customer-centric” approach with their product offerings. However, carrying items that customers do not want or cannot afford — and that don’t move off the shelves — is not benefiting their customers at all.

We can use the examples of Suave and VO5 in hair care, or Aim and Pepsodent in toothpaste, to prove that drug store consumers demand value brands.

In the drug channel, these value brand shampoos have less than one-third of the share of shelf compared to food (3.9 versus 20.9). In both channels, however, the unit share of these brands (4.8 in drug and 20.9 in food) significantly outperforms their SKU share. In other words, the brands are popular with consumers in both outlets.

We can see a very strong dynamic for Aim and Pepsodent toothpaste. In both channels, their share of unit sales is more than twice their share of SKUs on the shelf.

It’s an easy formula: productivity = popularity. And to be consumer-centric, retailers should carry products that are popular with their customers.

• Value brands free up inventory — Because value brands are highly productive, they can free up scarce cash if retail margins are comparable to higher-priced products.

Source: TABS Analytics

Here’s one personal example in cosmetics from several years ago that can be seen in most other health and beauty care categories: I was asked to analyze the performance of a premium brand (average $12 retail) in a chain’s worst 20% of stores. I found that the entire brand of 1,800 SKUs only moved one unit for the entire brand in a year. At this rate we are talking centuries worth of inventory.

Think how much cash could have been freed up in those stores if the inventory was invested in value brand merchandise. We see the same thing in vitamins, hair care and oral care — hundreds of millions of dollars tied up in expensive premium inventory.

• Value brands aren’t a significant threat to private label sales — One of the biggest objections to value brands is that these products directly compete with retailers’ own private label offerings. However, TABS Analytics research shows that while a value brand consumer is slightly more predisposed to switch to private label than a higher-priced brand, there is a much higher level of switching in the absolute with the larger, higher-priced brands.

For example, in a TABS study of sun care products, buyers of value brands were about 20% more likely to buy private label than any other brand buyers. On the other hand, that value brand was 2% of the market, and larger brands were 30%. There was five times more absolute interaction between private label and those larger brands than there was with smaller, value brands with the 120 cross-purchase index.

• Value brands increase conversion and minimize loss to other channels — As shown in chart 1 above, dollar stores, grocery and Walmart outpace drug stores as the favorite outlets for shoppers to purchase personal care value brands. But the impact of value brands goes beyond just personal care, spanning into many other product categories.

Because incomes haven’t increased over the last five years, consumers in virtually every demographic are taking steps to save money, which include shopping at stores with everyday-low prices, buying in bulk, clipping coupons and shopping at stores that offer rewards. By offering a greater mix of value brands, drug stores can help increase conversion of value-conscious consumers and stem the losses to other channels, such as dollar and discount grocery stores, that offer value brands.

Time to make a strategic change?

As competition heats up, retailers cannot afford to go by beliefs or personal biases regarding what products to offer consumers. Executives need to look at market data to truly understand what it would take to make their core customer remain a loyal customer.

Many cash-strapped and value-conscious customers are looking to save money by purchasing lower-cost products, which is driving them to dollar stores and discount stores. Drug store retailers that offer value brands will be taking an important, strategic step toward growing their business with higher-velocity products. This in turn will help improve their bottom line by freeing up inventory.

Most importantly, offering value brands will enable drug stores to make good on their value proposition of being consumer-centric by giving consumers what they want: value.

Kurt Jetta is founder and chief executive officer of TABS Analytics. He can be contacted at [email protected].