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Ho-ho-hum holiday season looms for retail

BY Michael Johnsen

NEW YORK —For retailers, the Grinch this year is the American economy, as several retail prognosticators have predicted a less-than-merry Christmas sales season. Higher-than-last-year fuel prices; ever-increasing prices for such necessity items as food, medicine and basic household goods; the evaporation of easy credit as a crippled financial industry tries to put the pieces back together; it all means one thing. Retailers can expect consumers to tighten their belts, spending what last year would have been discretionary income to pay heating bills, buy milk and eggs and keep the creditors at bay.

Further complicating the present state of the economy is the very real impact of this year’s hurricane season on communities throughout Texas and parts of the Southeast. Gustav and Ike sent nine offshore oil refineries offline leading into the last week of September, contributing to a loss of about 20 percent of America’s refining capacity and an inventory drop of some 3.3 million barrels of gasoline, according to the U.S. Department of Energy. The result: above-national-level increases in gas prices across Florida, Georgia, Tennessee and the Carolinas, and severe gasoline shortages in some areas.

A late September Department of Energy report noted that gasoline reserves haven’t been this low since November 1967, suggesting that any further disruption to the nation’s oil supply could significantly impact the price of heat this winter.

That kind of volatility does not bode well for a consumer who clearly is shaken up already. Consumer confidence in August reached a low of 56.9, down from 105.6 the year before.

That shaky consumer confidence already has been felt across the retail sector. “Food and drug retailers made it abundantly clear that they are by no means immune from the challenges of a consumer under pressure,” noted Goldman Sachs analyst John Heinbockel last month following a Goldman Sachs’ retail conference. “Surging food inflation continues to impact unit growth and, given a solid pipeline of vendor price hikes, things could get worse before they get better.”

Thom Blischok, president of consulting and innovation at Information Resources Inc. predicted that more rounds of industrywide price increases were in the very near future. “We’re expecting to see another round of price increases to the consumer in Q3/Q4 and in Q1 of next year,” he said. “It is our current thinking that 2009 is going to be a pretty difficult time for retailing and manufacturing.”

As far as the consumer goes, Blischok said the worst already has begun for many. “The average family of $55,000 a year [in household income] will, by the end of 2008, have lost between $3,000 to $4,500 in buying power because of the increases in food and gas,” Blischok said.

One particularly nasty aspect of all this consumer belt-tightening has been the impact on patient compliance. “There was recently a report put out by the National Association of Insurance Commissioners saying that 11 percent of people are actually splitting pills,” said Jeff Rein, chairman and chief executive officer of Walgreens. “They’re delaying taking their medication, maybe every other day, just trying to extend that particular fill. In that same report, they also said that folks had cut down the number of doctor visits by 25 percent. This has really picked up steam over the last six to seven months.”

According to recent research conducted by IRI, about one-quarter of all consumers and 40 percent of lower-income consumers said they are visiting doctors less and turning to self-treatment more frequently.

Consumers are likewise adjusting their front-end purchasing habits in light of the economic times, Rein said. Walgreens, like many retailers, has responded with more aggressive promotions, but that hasn’t quite worked the way it has in other recent recessionary periods, he said. “What is much different about this time…is the consumer typically buys a lot of promotional or discretionary items. This time, they’ve really focused on the need-to-haves. Shoppers are cherry-picking promotions across retailers, and that has put the crimp on margins and profitability across the store.”

“We are a high-low retailer. We depend on impulse sales and we depend on people to walk around our store,” Rein added. “We depend a lot on our merchandising to make that sale. Once again, if people are going to come in and cherry-pick, it gets to be very, very difficult to raise the margin.”

Industry watchers like Blischok expected retailers to respond with merchandising strategies that emphasize everyday value in place of broader and deeper selections. There will be a movement toward assortment redesign, he added, focusing on product relevance to the channel and overall affordability. That doesn’t necessarily mean abandoning a “good-better-best” strategy, but it does mean effectively justifying to the consumer the higher price associated with “best.”

That do-more-with-less concept already is happening at Walgreens, which leads the drug store industry with some 25,000 SKUs per store, according to Wade Miquelon, Walgreen senior vice president and chief executive officer. Last year Walgreens targeted an overall SKU reduction of 2 percent—this year it’s 5 percent. “The shoppers are telling us that we probably have too many,” Miquelon told analysts during an investors conference last month. According to Miquelon, those cuts could actually help Walgreens grow category sales, “through simplification of the portfolio over time, simplification of how we do promotion, better targeting and pricing.”

For vendors, that will mean convincing retailers why their items need to remain in the mix.

“We make it too hard for our customer to shop,” Rein said, adding that it made more sense to make an abrupt reduction as opposed to gradual. “[But] what we have to be careful of is we don’t throw everything out. In other words, we don’t throw the niche items out and some of the tertiary items that are important to our drug store business.” Walgreens plans to use the vacated space to showcase existing products, as well as create a billboard effect throughout the store and introduce new items, Rein said.

It’s also an opportunity to feature more store brands. Another disappointing aspect of the current state of the economy, from the point of view of consumer packaged goods companies, has been increased interest in private label.

“Private-label demand surged in the second quarter as consumers across income segments moved from belt-tightening to belt-notching,” Blischok said. “We expect this trend to accelerate throughout the balance of the year.” Rite Aid aims to bring private-label penetration in the acquired Brooks/Eckerd stores up to 12 percent—the current level for core Rite Aid stores. Meanwhile, CVS and Walgreens currently have store brand penetration of 15 percent and 20 percent, respectively.

All is not doom and gloom, however. Even in recessionary times, people still buy toothpaste and underarm deodorant, OTC pain relievers and cough-cold products. Even beauty categories like lipstick enjoy relatively stable sales in the toughest of times. If anything, drug stores tend to see upticks in beauty sales, as consumers cut trips to expensive department store cosmetics counters in favor of cheaper prices at mass.

In part one of a two-part series, Drug Store News examines the impact that the present state of the economy is having on the retail pharmacy business.

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Wegmans begins trial of self-checkout lanes in New York store

BY Michael Johnsen

ROCHESTER, N.Y. Wegmans is testing four self-checkout lanes for the first time near company headquarters at its Penfield, N.Y. store based on consumer demand, according to published reports.

We were never in a rush to introduce self-checkout,” Jo Natale, Wegmans spokeswoman, told the Rochester Democrat & Chronicle. “We had never seen one we liked or offered features for customer convenience.”

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Wegmans stores close all photography centers

BY Jenna Duncan

ROCHESTER, N.Y. Supermarket chain Wegmans is closing down its photo operations, reports this week said. After more 20 years serving its communities with photo services, the company will no longer offer full-service in-store photo development.

The closures affect 12 stores in Wegmans’ Rochester market. This will affect 18 full-time employees and 52 people who work in photo part-time in Rochester, the company said, as well as 63 full-time photo employees and 173 part-timers companywide. Wegmans has said it will try to make adjustments to keep some of those employees in the company.

So far in the past year, Wegmans has closed 9 of its photo departments. The company has said that the closures are largely due to the growing popularity and accessibility of digital photography.

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