Nothing's Fresh in Walgreen's Food Fight

Everyone wants to be a grocery store these days. Walgreen (NYSE: WAG  ) is the latest to say it wants to offer shoppers the convenience of fresh foods at its stores. While more choice is usually good news for consumers, investors might want to cast a wary eye.

Too much choice
Shoppers already have the choice of everyday low prices at Wal-Mart Stores (NYSE: WMT  ) , higher-end organics offered by Whole Foods Market (Nasdaq: WFMI  ) , or a broad-line crossover at Kroger (NYSE: KR  ) that tries to give the best of both worlds. Seeing convenience stores now trying to edge their way in doesn't sound so much like a frontal assault on these chains, but rather nibbling around the periphery.

That means it represents more of a threat to Target (NYSE: TGT  ) , which is also expanding its perishable offerings and is known more for its fashion than its food. It's opted to delay store expansion for the chance to roll out more grocery space to capture those dollars.

The risk for Walgreen is that while general merchandise accounts for about 25% of its revenue, freshly prepared food like that it's planning on introducing carries the potential for spoilage and shrinkage.

Thank heaven
Yet I've noticed 7-Eleven stores doing the same thing. Nachos and Spicy Bites have long been carried at the convenience store chain, but lately the chain has upped that to include chicken wings and pizza, as it moved to shore up flagging cigarette sales that have been hit by high taxes.

There is the hope that by selling sandwiches and salads, Walgreen will differentiate itself from CVS Caremark (NYSE: CVS  ) and other drugstore convenience centers. It's a movement reminiscent of when the dollar store and deep-discount chains began installing freezers to boost sales. Although that strategy was an apparent failure at Big Lots, others including Dollar Tree and Family Dollar (NYSE: FDO  ) have been able to preserve the average ticket per customer as shoppers purchased more consumables.

A non-drug drugstore?
Overcoming consumer reluctance to shop for food at a drugstore may be the biggest hurdle. Walgreen is not rolling the program out nationwide, but is instead targeting select areas for trial, giving it the opportunity to tweak the initiative without jeopardizing the entire operation.

"We're looking to capture that on-the-go consumer looking for a quick, convenient lunch," explained Jim Jensen, head of the new initiative. "We're also responding to the fact that 80% of Americans don't know what they're going to have for dinner at 4 p.m."

Non-pharmacy sales have been difficult over the past few months, even as the chain has been working to revamp its stores to make them more "customer-centric." The fresh food program is something many are eyeballing, and while Walgreen might distinguish itself from CVS, there's sufficient doubt it can rise above 7-Eleven, Subway, or the myriad other options available to shoppers looking for a quick, fast, fresh bite.

And even if it does work for Walgreen, CVS can simply mimic the strategy and dilute the effectiveness for Walgreen. So I think it's likely we'll see Walgreen wilt with this effort.

Wal-Mart Stores is a Motley Fool Inside Value recommendation. Whole Foods Market is a Stock Advisor pick. Try any of our Foolish newsletter services today, free for 30 days.

Fool contributor Rich Duprey does not have a financial position in any of the stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.


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  • Report this Comment On February 01, 2010, at 6:42 PM, Grocerant wrote:

    Fresh prepared food will sell, portioned for one or two and focused via region. Grocerant style food boost customer frequency. Walgreens is on the right track. www/grocerants.blogsopt.com

  • Report this Comment On February 05, 2010, at 5:16 PM, theSavageVisitor wrote:

    Investment Risks

    Although the pharmacy business in general is recession-insensitive, there are risks involved in your investment:

    1. The main downside about investing in pharmacies is there is little or no rent bump for a long time, e.g. 20-50 years, especially for Walgreens. So the rent is effectively reduced after inflation is factored in. This is one of the main reasons these properties do not appeal to younger investors.

    2. The 3 drugstore chains now have a new formidable competitor, Wal-mart. Wal-mart sells prescription drugs in more than 4000 Wal-mart, Sam's Club and Neighborhood Market stores in 49 states. The retail giant is known for launching in 2006 a highly-publicized $4 generic prescription drug program which now sells 350 generic medications for a 30-day supply. The actual number of medications is less as the medications with different strengths are counted as different medications. For example, Metformin 500 mg, 850 mg, and 1000 mg are counted as 3 medications. Wal-mart probably makes very little profits on these medications if any. However, the marketing campaign generates a lot of publicity for Wal-mart (Target now offers the same medications for $4 but few people know about it.) Wal-mart hopes to draw customers to its stores with other prescriptions where it has higher profit margins. In an unscientific survey with just one brand-name prescription of Lyrica, this author finds the lowest price at Costco, the highest price at Walgreens and Wal-mart at the middle.

    3. Chief Business Correspondent Rick Newman from US World & News Report predicted that Rite Aid might not survive in 2009. It looks like he might be wrong. The study by Audit Integrity gave Rite Aid about a 10.5 percent chance of filing for bankruptcy in 2010. However, its stocks seem to perform quite well in the second half of 2009. For the second quarter ended in August 2009, Rite Aid narrowed its loss to $116 million, compared with a loss of $222 million last year.

    4. Drugs are also sold in thousands of supermarkets, Target, and Costco.

    5. Many leases in areas with hurricanes and tornados are NNN leases with the exception of roof and structure. So if the roof is damaged, you will have to pay for the expenses.

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