Convenience stores across the country are facing burgeoning competition on beer and wine sales from drug store giant Walgreens, which is branching back into the adult beverages category.
Walgreens is adding beer sales due to “a direct response to consumer demand,” said Robert Elfinger, spokesperson for the Deerfield, Ill. drug store chain. It plans to provide a modest selection tailored to its existing customer base and is methodically applying for liquor licenses on a city-by-city basis in the market it operates in. Still, the new strategy has c-store operators watching the chain’s moves carefully.
“It’s a pretty significant threat,” said Tim Cote, vice president of marketing for Plaid Pantries Inc. in Beaverton, Ore., which operates 100 stores in Oregon and Washington. “You can get in and out of a Walgreens store almost as fast as you can get in and out of a typical convenience store.”
While Walgreens’ leap back into alcohol isn’t likely to uproot the industry’s customer base, females, as well as older customers who frequent a drug store’s pharmacy, could be most at risk for being pulled away.
“With certain demographics of our customers, especially female and older customers, Walgreens is a more inviting environment than a lot of c-stores,” Cote said. He added Walgreens resembles a Kmart or Wal-Mart, and appears brighter and secure to some patrons.
“There are a lot of people who are turned off by going to the traditional liquor merchants,” Elfinger concurred. “We think we will offer a very convenient, safe and tranquil place to purchase beer and wine.”
Back To Beer Basics
Walgreens is no stranger to alcohol. The company offered a robust adult beverages section in many of its stores from after after Prohibition lifted until the early 1990s, when the company opted out of the category in most states.
“It was profitable when we decided to stop, but many of our managers found the category cumbersome and too time consuming to maintain, and it took a lot of man power that we thought could be better directed in more productive ways,” Elfinger said. A few hundred Walgreens stores still carry large alcohol sections, especially in the Southwest where the demand has remained high.
But as Walgreens reintegrates beer and wine sales nationwide, it is not looking to recreate the past. Instead of a large alcohol area, the chain will be offering a scaled down selection. The new offering will consist of a 4-foot wide beer cooler and a wine aisle less than 12-feet long. The beer selection will feature six-packs, 12-packs and cases, but no spirits, no malt liquor and no single serve offerings.
Walgreens does not have a goal or percentage for how many stores will be converted. “We’re going market by market and applying for licenses, and we’re going to see where we’re at the end of the process,” Elfinger said. “We realize some liquor licenses will be unobtainable for various reasons, such as zoning reasons.”
Because of the lengthy process of going through the various legal channels, the chain does not have a deadline for when the task must be completed.
“I think it’s really a financial move,” said Nick Lake, vice president and group client director for beverage and alcohol for The Nielsen Co., of Walgreens re-entry into the category.
Walgreens net earnings decreased 8.8% in the third quarter, and numbers released by the company in July showed comparable store sales were up 2%, but front end sales were down 1.3%.
With half the U.S. population drinking beer, and Walgreens base female consumer especially SKUing toward wine, alcohol becomes another item it can sell consumers to drive sales, Lake noted.
What’s more, adding the category will likely increase foot traffic in its stores, and those same consumers will make additional purchases. “Walgreens doesn’t use beer as a profit center. It uses use it more as a volume center to pull people into the store,” Cote said. “Although c-stores use beer to drive traffic, it’s also a significant profit generator for us. This is probably going to cause us to lose some margin in the category.”
Still, drug store alcohol sales are holding their own. Nielsen data shows that for the 52 weeks ended July 25, the drug channel is up almost 9% in dollars for beer. While that’s a small percentage of beer sales—roughly 2-3% of all beer sales go through the drug channel—it shows beer sales are growing in the channel.
Protecting Market Share
Despite the new competition, John Tomlinson, assistant vice president of purchasing and merchandising for Englefield Oil Co., the Ohio-based operator of 131 c-stores in Ohio and West Virginia, isn’t worried. He remembers when CVS began selling beer and wine and his company didn’t feel much heat from the drug store’s alcohol business.
“Here in Ohio, there are two different customer segments that we are seeing. People come to us to get gas and then they come into the convenience store and end up buying beer. Walgreens draws people going to the pharmacy.”
Meanwhile, Cote compared the Walgreens plight to when Rite Aid began selling beer and wine in his market. While he didn’t notice a huge downsize when the drug store entered the category, Rite Aid’s ad pricing on beer was aggressive. “To stay competitive we had to bring margins down a little bit,” Cote said.
What does concern Cote is that Walgreens does a good job of designing its stores to appeal to the female demographic. “That customer may not be our primary beer consumer, but we do sell beer and wine to females, and this is probably going to cause us to lose some of those customers,” Cote said.
Cote urged other c-store operators not to be married to existing margins, and not to sacrifice customers for the sake of holding onto a theoretical margin percent that may not be available anymore.
Do Beer Better
As competition for suds sales increases, c-stores still hold many advantages. Not only does the c-store channel cater to the core beer drinking demographic, it offers more than 100,000 beer selling locations compared to Walgreens 6,804 U.S. stores, giving the c-store industry an instant benefit in terms of reach.
In addition, a Nielsen Homescan survey conducted last March polled customers about the c-store categories that were most important to them. About 80% said gasoline was most important, followed by 57% who named hot and cold beverages.
“Because of the number of outlets selling gas, the c-store channel has the built in advantage that people are coming to buy gas and, next to gas, the channel is known for cold beverages, so there is an opportunity to leverage the trips people are making for gasoline and turn them into beverage trips by focusing on the fundamentals of merchandizing,” Lake said.
To capitalize on this advantage, operators should ensure their alcohol assortment is in-stock and properly targeted to the neighborhood they’re selling in. Keeping brands price competitive and using local marketing and signage to inform customers about their products are all tactics Lake recommended.
Cote agreed that c-stores can do better than Walgreens—and all drug store chains for that matter—with their assortment on a local level. “Market specific merchandizing is very important,” he said. “Walgreens is going to manage this category on a regional basis most likely. C-stores should be managing this category on a neighborhood basis. If we have a better assortment than Walgreens that is more reflective of the market, we should get the customers in our store.”
Foodservice also presents a unique advantage to c-stores because it is yet another offering that drives consumers to make planned trips to the store. “As chains tweak their prepared food assortment, an opportunity exists to get customers to come back into the store to buy beer,” Lake said.
Another way c-stores are poised to compete with Walgreens is by offering a colder product. “I think with c-stores having beer caves and more cooler doors that contain cold, cold beer helps us,” Tomlinson said. “If Walgreens doesn’t put any beer into beer caves or beer coolers it will be tough because when you put beer—or soda and bottled water—into walk-ins, it’s not that cold, and people want cold.” CSD
Driving Demand for Beer
According to Nielsen data for c-store beer sales, June dollar volume is up about 2% and case volume is down 1.3% through the end of June. There has been tremendous growth in the high end of the beer category, especially in the craft beer segment.
“The super premium segment continues to grow in the convenience channel, and one of the things you see in the drug channel is a lot of consumers are older, particularly because of the prescription market, and older consumers tend to buy more of the low premium brands,” said Nick Lake, vice president and group client director for beverage and alcohol for The Nielsen Co.
Tim Cote, vice president of marketing for Plaid Pantries Inc. in Beaverton, Ore., is noticing a high demand for craft beer, which is rising in popularity. In addition, customers are opting for lower priced wines that sell for about $3 to $4 a bottle, whereas they were buying $6 and $7 wines last year. Customers also are choosing below premium beer products.
Cote predicted Walgreens will focus on Bud, Miller, Coors and some lower premium beers as it uses the category as a traffic generator, keeping the selection to the top 10 or 11 most popular products.
Lake pointed out the new competition for alcohol sales from drug stores would affect supermarkets more than c-stores, because the drug channel holds a strong presence in metro areas while the convenience channel is stronger in rural and suburban areas, which means less direct competition.
“In markets where more customers are on foot you don’t see many c-stores with gasoline that are really calling in those consumers,” Lake said. “Having more walkup stores is where Walgreens is going to really win with beverage and alcohol (in metro areas), but I just don’t see the drug channel being a destination for beer like it is for c-stores.”