Food, Glorious Food: Walgreens Sees Appetizing Potential in Duane Reade

CVS (CVS) and RiteAid (RAD) shouldn't be the only retailers in New York to worry about Walgreens' purchase of Duane Reade (DRD). Sandwich shop Pret a Manger should be nervous, too.

Duane Reade holds a particular place in New York life, as BNET's Ian Ritter pointed out last week. Duane Reade is important for three reasons. First, there's drugs, both pharmacy and over-the-counter. Then there are beauty needs, such as cosmetics, hosiery and incidentals. And finally, there is food.
New York has supermarkets, of course. Nevertheless, the pricier real estate zones in and around Manhattan â€" extending to Brooklyn, Queens and easy-access parts of New Jersey â€" are among the more underserved in the country in regard to supermarkets. In that case, having a Duane Reade on the corner can be a boon when the cupboard is bare and a Cup O' Noodles will tide a Gothamite over until the next delivery from FreshDirect.

But Duane Reade's food selection always has been limited and uninspiring. Walgreens, on the other hand, has been into food for a long time. It even has produced its own private-label ice cream and other edibles. Recently, it has been expanding beer and wine operations. In a discussion on that topic, an executive from Walgreens let it be known that the company planned to expand an operation it had been quietly developing in Chicago and some other urban locations that offered salads and sandwiches.

The opportunity is delicious. Walgreens will have more than 250 Duane Reade locations where it can add elements of its food program as it incorporates the best of Duane Reade's edibles effort. In a form filed with the U.S. Securities and Exchange Commission, Walgreens identified a new food and beverage brand DR Delish, that Duane Reade has launched as among a group of recent initiatives from which it would benefit in the acquisition.

Consider, too, that many Duane Reade stores are on the ground floors of office buildings and apartment complexes full of folks who want a cheap, convenient meal to munch at their desk or in front of American Idol. Better food bring them into the stores more often.

Walgreens isn't moving into New York to sell ham-and-cheese sandwiches. About 70 percent of a chain drug store's revenue comes from prescriptions. But Walgreens does get about a third of its revenues from "front-end sales," which means basically everything that's not prescriptions. Comparable store sales in that part of the business gained almost three percent in the last reported quarter. By providing other conveniences New Yorkers need, Walgreens can drive more revenue through locations that won't be cheap to operate.

After all, ice cream is just the kind of dinner that can complement American Idol.