With shoppers keeping a tight rein on their spending, category managers are being compelled to change the way they operate, drug retailers said at a Chain Drug Review roundtable in New York.

The ability to measure the performance of products and a particular category's impact on the overall business has never been more crucial, especially with consumer confidence at or near an all-time low, according to panelists, who included executives from Walgreens, Duane Reade, Kerr Drug and drugstore.com.

NEW YORK — With consumers keeping a tight rein on their spending dollars, category managers are being compelled to change the way they operate, drug retail executives said in a recent Chain Drug Review roundtable in New York City.

A standard part of nearly every retailer’s operation for close to 25 years, category management has become an essential tool for merchants and manufacturers to remain competitive. The ability to measure the performance of products as well as gauge the impact that a category has on a particular chain’s business has never been more crucial.

Combine that with consumer confidence levels at or near an all-time low and shoppers’ caution with regard to their discretionary income, and the perfect storm that was once on the horizon has now arrived.

“Consumers have lots of options, and that puts pressure on the front end of the drug store today. There’s pressure on the back end as well, but the requirements of the front end of the store are perhaps even greater today than they have been in the past,” noted Tim Toohey, managing partner at Market Performance Group (MPG), who moderated the roundtable along with fellow MPG managing partner Marc Greenberger and Jeffrey Woldt, vice president and editorial director at Racher Press Inc., the publisher of Chain Drug Review.

The discussion, held last month at Manhattan’s Carlton Hotel, included retailers Kelli King, category manager for cosmetics and beauty care at Kerr Drug; David Stephan, director of merchandising for beauty and wellness at drugstore.com; Duane Reade head of category management Paul Tiberio; and Walgreen Co. vice president of purchasing and new business development Dave Van Howe.

Also participating were executives from Bausch & Lomb, Wm. Wrigley Jr. Co., Pfizer Inc., Stiefel (a GlaxoSmithKline company), Kiss Products Inc. and Abbott Diabetes Care.

Since 2005, Toohey said, there has been nearly a 40% increase in the number of coupons used at retail, and most consumers have become extremely value-conscious, with many looking to supercenters as an option for lower-price groceries and to dollar stores as a way to save on commodities. Still, he stressed, drug stores are holding their ground as consumers consider them priority shopping venues.

“It’s no secret that the consumer is incredibly value-driven right now, and in a drug store it’s incredibly challenging,” Walgreens’ Van Howe said. “Our pricing philosophy is everyday fair prices with weekly specials that drive customer traffic. We’re up against the supercenters, which are focused on everyday low prices and where on any given week customers have many choices of where to spend their dollars.

“We traditionally masked our pricing structure with lots of layering of programs and coupons, rebates and those types of things, and quite honestly, consumers reacted to that by saying, ‘Boy, I just want the lowest price today.’ And that’s putting a pressure on our front-end margins.”

In addition, he said, the size of consumers’ average market basket is shrinking during the sagging economy, and retailers are struggling for ways to bring that basket back to the level it was at a few years ago.

Roundtable participants noted that one of the primary strategies retailers are using as they try to get shoppers to buy more is SKU optimization.

“Less is actually more,” Van Howe said about Walgreens’ ability to reduce the number of SKUs carried in its stores from 22,000 to about 18,000. “[Our shoppers] don’t recognize that we’ve really taken about 15% of our SKUs down, and we are probably going to go a little bit further. It will be very, very focused. Certain categories will grow; certain categories will compress.”

Along with retailers across the entire spectrum of the mass market, Duane Reade is benefiting from a proliferation of private label products across a growing variety of categories. And like Walgreens and many of the other retailers at the roundtable, Duane Reade has selectively scaled back its assortment.

Tiberio noted that despite the rollback in the number of SKUs in Duane Reade’s stores — mostly in the units the chain has been remodeling — shoppers have been expressing their pleasure with the breadth of the mix.

“We’re actually getting accolades that we have more variety,” he said. “Duane Reade had some cluttered stores in the past as we tried to take advantage of our high rent costs, multiple floors and smaller boxes. Cleaning them up, taking some of the product off the floor and giving the customer a better shopping experience have certainly helped us.”

One big problem for drug chains — getting the prescription customer to shop the front of the store — continues to plague retailers, those on the panel said. And so far, there are no sure-fire solutions.

“The days of driving folks in through a circular program don’t exist anymore,” said Kerr’s King. “There are so many different other vehicles out there that tie in and bring those consumers in. The hardest part is tying it all together.”

Like other retailers, Kerr has used a variety of methods — end-caps, shelf extenders and a massive amount of cross merchandising, to name a few — to drive market basket size, she explained.

“I can’t tell you how many times we sit around and try to figure out what else we can get customers to pick up at the shelf if they’re coming in to pick up a prescription,” King remarked. “How can we get them to the shelf? How can we get them to go by the shelf first before they go to the pharmacy and pick up that script?”

Walgreens’ Van Howe noted that one barrier to getting the pharmacy patient into the front end of the store has been the guidelines of the Health Insurance Portability and Accountability Act (HIPAA). The limitations that the law puts on in-store marketing efforts are particularly noticeable now because of the influx of drug store customers getting flu shots.

“There is not a lot of activity that we can specifically do and stay within HIPAA guidelines today,” Van Howe said. “We have all of these patients coming into the store to get their flu shots. How can we talk to them? How can we provide a service? How can we sell them something on the front end? We have to be very, very careful.”

To overcome that, retailers are putting more emphasis on promoting front-end products adjacent to their pharmacies, he said. “We’re talking about customer solution sets here,” Van Howe added.

Manufacturers and retailers continue to do extensive research into consumer behavior to get a better read on how people shop and what motivates their purchasing decisions. Yet some on the panel suggested that the responsibility for putting those findings into practice and communicating the suppliers’ message usually falls primarily on the retailer.

For its part, drugstore.com closely tracks customer behavior, according to Stephan. The company has a unique perspective, he said, because it sells mass beauty products on drugstore.com and prestige beauty on Beauty.com, which lets it see how customers trade up or down amid changes in the economy.

“Customers are absolutely much more value-conscious than they have been in the past,” he said, citing data culled from a recent survey on the shopping habits of drugstore.com customers. “Customers tell us they are shopping online more frequently and doing more price comparisons before buying a product.”

Stephan also pointed out that drugstore.com has seen a dramatic rise in the use of instant “click and save” manufacturer coupons on its site.

He noted that unlike many brick-and-mortar retailers, which are reducing the number of SKUs, drugstore.com is actually expanding its O-T-C assortment — a strategy that has helped create a point of difference for the online company by allowing it to offer products that customers want to buy but have been disappearing from store shelves.

For the full article on the Category Management Roundtable, see the November 23, 2009, print issue of Chain Drug Review.