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Nothing's Fresh in Walgreen's Food Fight

By Rich Duprey – Updated Apr 6, 2017 at 2:10PM

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The pharmacy chain is trying to add freshly prepared food to stem sliding sales.

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. 

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.

Stocks Mentioned

Walgreens Boots Alliance Stock Quote
Walgreens Boots Alliance
$41.48 (0.41%) $0.17
Walmart Stock Quote
$153.22 (-0.10%) $0.15
Target Stock Quote
$164.16 (-0.53%) $0.87
Kroger Stock Quote
$47.57 (-1.74%) $0.84
Cvs Health Stock Quote
Cvs Health
$102.58 (0.92%) $0.93
Whole Foods Market, Inc. Stock Quote
Whole Foods Market, Inc.
Family Dollar Stores Inc. Stock Quote
Family Dollar Stores Inc.

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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