Rite Aid and Walgreens Need to be Careful as They Add Fresh Food
Across the country from each other, two major drugstore chains have both hit upon fresh food as their next hot merchandise category. Their locations and reasons for adding produce are different, but both Rite Aid (RAD) and Walgreens (WAG) have the same goal: To bring shoppers back more often. Both also face challenges in executing fresh food in a way that doesn't damage profit margins or confuse customers.
In Walgreens' case, the addition of fresh food comes clothed in do-gooderism. The chain is adding produce in urban Chicago drugstores where there are no nearby full-line groceries.
Walgreens' attempt to eradicate "food deserts" and bring healthier food to inner-city residents is earning it some positive press. No doubt carless residents in these neighborhoods are thrilled to be able to get a bag of salad or some fresh melons instead of just Hostess cupcakes.
But if Walgreens expands this program, it could run into trouble. For customers with ready grocery access, the question will just be: What does Walgreens know about produce? The answer is nothing. While they might buy the occasional gallon of milk or grab an apple at the drugstore, at some point more sophisticated customers will still want to buy their food from a store where there's a produce manager on deck to answer questions.
As drugstores reduce their health and beauty items to make room for avocados, customers may wonder what exactly the drugstore is becoming. After all, we go to the drugstore for the much broader variety of health and beauty items they usually carry. As they scale that back for food, some customers are bound to be disappointed as their favorite makeup is dropped and their drugstore starts to look a lot like...well, big national grocery chains. Only smaller. At which point, shoppers might as well just head to Safeway (SWY) for both their grocery and beauty needs.
Rite Aid has the better approach, adding produce through a partnership with supermarket giant Supervalu (SVU). In 10 Greenville, SC, where Rite Aid says its traditional health-and-beauty merchandise hasn't sold as well, it's partnering with Supervalu's Sav-A-Lot chain to create cobranded Rite Aid Pharmacy/Sav-A-Lot stores. Though it's a licensing deal and Rite Aid will still be operating the stores, remodeling stores to add a grocery name to the presentation has the advantage of communicating to customers that somebody who knows fresh food is on board.
Both chains face a common problem in adding grocery: merchandise management. These chains aren't used to handling goods that spoil. At first, there'll probably be a lot of waste and discarded, rotted fruit before they figure out what shoppers will buy fresh from a drugstore. It'll be wise to focus the fresh-food assortment, both to avoid waste and to keep customers from getting confused or disappointed about where the drugstores are going with their merchandise mix.
Photo via Flickr user The Consumerist
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