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CVS gains in general merchandise, as drug chains advance in recession

As drug chains reposition and promote to win market share in the recession, Easter put a hop into retail at CVS during the second quarter, with comparable store sales for general merchandise up three percent.

Even taking out extraordinary factors, including the holiday and a raise in cigarette prices ahead of the Federal tax increase, general merchandise comps would have gained one percent, not bad in the current cruddy economy.

Pharmacy comps did gain at a better clip, up 7.5 percent, but improved retail sales demonstrate that consumers continue to see drug chains as a convenient yet cost effective shopping destination in the recession, one that they may consider more frequently in the recovery and beyond.

In assessing growth in general merchandise, referred to as front store or front end sales by drug chains, Thomas Ryan, chairman and CEO said, as transcribed by SeekingAlpha:

In our core CVS stores, we continued to gain share in front store categories that account for 90 percent of our business. Customers are very sensitive and aware of promotional opportunities so while we are not promoting more, customers are in fact selecting products on promotion to a greater degree than in the past.
On a comp store basis, in fact, our front store traffic was slightly down but our average ticket was up. Private label sales were 15.4 percent in the first quarter -- 15.4 percent of front end sales -- about 40 basis points higher than last year. We expect to add over 900 items for the full year, so the combination of adding additional items plus the consumer psyche around the economy and trying new private label products is continuing to drive our private label business, which is obviously a higher gross margin for the company.
We are seeing continued growth in sales and transactions using ExtraCare loyalty card. In the second quarter, 63 percent of front end transactions and 70 percent of sales were using the ExtraCare card.
While still pursuing additional pharmacy and other health care business, drug chains recognize that they need to boost their sales of soft drinks, school supplies and other front end general merchandise to maximize the financial efficiency of the many, many stores they operate. In fact, after its recent acquisition of Longs, CVS now runs 7,000.

The competitive factor enters in as well. Given the expansion of pharmacy operations by supermarket, discount store/supercenter and warehouse club chains, drug operators want to compete effectively in those product lines where they can offer a particularly strong proposition, which is one reason why they have put so much effort into the back to school season. When it comes to notebooks, pens and other school supplies, drug chains are a local, focused and -- as they have been promoting to convince consumers -- competitively priced alternative to packing the kids up for a ride to, say, a discount store. A recent survey suggests that drug chains are, indeed, gaining greater favor as a back to school destination.

Yet, it's more than just seasonal. In fact, Walgreens Rewiring for Growth strategy is one that focuses on general merchandise as critical to making the chain's store base more productive. In contrast to CVS, however, Walgreens is paring down the number of general merchandise products it offers to focus on the most popular items and reduce what it regards as clutter in the aisles.

Drug chains are becoming increasingly creative in finding ways to make themselves more attractive to customers both in stores and online. Rite Aid has announced a new online program dubbed Video Values that provides customers with coupons they can print after watching short informational videos on select products.

Developed by AdPerk, a video marketing firm, the presentations are available for viewing by brand, product category or manufacturer on Rite Aid's website and currently generate coupons worth $130. Customers participating in the program also get a $5 Rite Aid Bonus Coupon when they earn 20 video credits, which come one or more per viewing. Videos and coupons available will swap out regularly. Program participants include Procter & Gamble, Kimberley-Clark, L'Oreal, Johnson and Johnson, with major brands covered including Huggies, Aveeno and Alavert.