Category Report: OTC Drug Reformulation

As more Americans look to over-the-counter remedies to treat what ails them, the OTC pharmaceuticals category continues its path of growth. The Nielsen Co. reported sales at $33.8 billion in 2008, up 3.4% over the previous year. Shoppers are redefining their health care rituals, explains Thom Blischok, president of consulting and innovation at Information Resources Inc., Chicago. "This issue of self-reliance-based treatment is a huge trend that's occurring in America."A September 2008 study conducted by Mintel, a market research firm in Chicago, found that for heartburn, indigestion and constipation, for example, OTC medicines were the remedies of choice across age groups, outnumbering prescriptions by three or four to one."Customers are not only looking to self-medicate, but they're looking more toward preventive health and for ways that will help them save money in the long term," says John Learish, senior vice president of marketing for Camp Hill, Pa.-based Rite Aid. "Our research is telling us that consumers want to take control of their health and wellness decisions, and they turn to the retailer that can arm them with the information, knowledge and education to make those decisions."Many of the major brands and retailers we contacted for this report declined our request for interviews. Consolidation on both sides, FDA regulations -- even on advertising and merchandising -- and increased competition may be some reasons why.While new products continue to flood the marketplace -- more than 2,300 in 2008, up from 1,700 just two years prior, according to Mintel -- the most direct competition comes from private-label products. Not only is the economy fueling this growth, but retailers are putting a lot of muscle behind their private-label lines.Explosive Private-Label GrowthPrivate-label products commanded 20.4% of total OTC sales in 2008, according to The Nielsen Co., but accounted for 52.3% of the growth."CVS, Walgreens and Walmart are all retailers for whom their brand is as important as anybody else's brand on the shelf," says Brian Sharoff, president of the New York-based Private Label Manufacturers Association. "These are retailers who are determined to make their brand the leader and to build their profits on it." (For more on these chains and their private-label marketing, read this month's strategist.)"In order to be competitive in this marketplace, you have to be able to offer that private-label brand," says Randy Schall, director of in-store merchandising for Lewis, which operates 10 drug stores and 22 pharmacies based in Sioux Falls, S.D. "It appeals to a large percentage of the market, and if you don't have it, that customer is gone."While Schall says these products aren't generally called out more than the national-brand products it sells, "we will have different promotions for our private-label brand because of the margin that's involved in those in the OTC area."However, one marketer for a major OTC brand says, "The success of private label is strongly correlated with the strength of the national brand." "Private-label products bring better margins for a more profitable business, but private label doesn't drive the traffic into the stores," agrees Michael Johnsen, senior editor of Drug Store News, New York. "It's certainly important to the mix, but branded manufacturers play the key role in generating traffic and interest on any particular shelf."Not so, argue some. "CVS and Walgreens are trusted pharmaceutical advisers," says IRI's Blischok, adding that when they bring out an OTC drug, the shopper believes there's some relevance in regards to competency, quality and reliability of that drug."As what I consider the 'retailer halo brand' continues to develop, OTC will come under continued stress from private label," he says. "At some point, the shopper will cross over and trust the retailer's brand as much as the national brand."The retailer's strategy is to integrate its private-label line with the national brands. "A lot of the marketing assets are more prevalent and readily available from the brands," says Rite-Aid's Learish, "but we also have to stand for value today, so our private-label products are part of everything we do."Branded CompetitionSo how are the national brands responding? With innovation, says Drug Store News' Johnsen. "The competition is driving them to innovate that much more and put a new product on the shelf that doesn't have a private-label equivalent to help capture those sales lost to private label.""That's where you see new forms and new functionality," adds Lynn Dornblaser, director, CPG trend insight at Mintel. "The major brands are finding new delivery mechanisms, new strengths or new sizes to try to maintain that edge."It's a tougher sell these days, though, notes Rick Sheppard, vice president, marketing, Novartis Consumer Health in Parsippany, N.J. "The economic situation can make new product launches more challenging because consumers are less inclined to take a risk."The stakes are high, says a former marketing manager for Coraopolis, Pa.-based GlaxoSmithKline. "We run the risk of losing every single one of our shoppers at the shelf unless we register a brand benefit to them since private label is a fairly well-entrenched and significant competitor."Many of the brands have also become more aggressive in promoting, notes Bob Kwait, chairman of Kwait & Associates in Beechwood, Ohio, who helped develop the CVS/pharmacy format in the early '70s, then called Consumer Value Store. "It's become a more competitive environment, and brands do a lot more in-store marketing and promoting to keep their brands front and center with consumers, especially in these times." Brand extensions help the CPG companies extend into deeper category penetration, notes Gary Forman, president, retail marketing solutions for Englewood, N.J.-based Henschel-Steinau Inc., a display producer who produced more than 20 types of displays for Johnson & Johnson's successful Zyrtec launch. "We're also seeing larger launches on OTC conversions [Rx to OTC] in order for pharmaceutical manufacturers to grab a†larger share of the market before the store brands take hold." Differentiation becomes imperative, says a director at a major OTC drug manufacturer. "Whether through claims, primary and secondary packaging or P-O-P, we have to stay a few steps ahead of them all the time."Brian Mumau, vice president of business development for Edison, N.J.-based Rand Diversified, an OTC solutions provider and shopper marketing company, agrees, saying, "I think that's where the rubber meets the road and a lot of these companies are saying, 'Let's put our money into the point-of-sale.'"He points to Schering-Plough's continued display support of Claritin, which is not a new over-the-counter offering. "The reason is they want to differentiate themselves," Mumau says. "They are saying, 'We are Schering-Plough, we are Claritin, and we're spending a lot of money to promote our products. We're going to take that all the way down to the shelf level with the same excellence and high-quality feel as everything else we're doing."Solution-Based MerchandisingMerchandising around a need state has been a stronger focus for retailers of late as they attempt to be more relevant to consumers. "They're trying to position themselves as solution providers," says another marketer. Bringing different products together for heart health, diabetes or allergies, for example, is a common goal of cross-merchandising in the OTC category."This solution-based merchandising is going to be more relevant because our retailers are trying to promote that way, even in their advertising," she adds. Retailers approach the brands with schedules already in place. "We participate during those periods through promotional activity that includes relevant communication in our merchandising vehicles.""We see a lot of solutions being developed based on consumer need state and seasonality, particularly around cold and flu, allergy, sun care and holidays," adds Henschel-Steinau's Forman. "In a world of channel blurring, all retailers are trying to get shoppers to spend more in their stores, so bundling and seasonal solutions are proliferating wherever there's a legitimate opportunity."Case in point: Rite Aid's Health Condition Platforms aim to position the retailer as an authority on health and wellness, says Learish. One- to two-month events run continuously throughout the year, each of which is a "very focused effort on a specific health condition or disease state."Product displays merchandise all relevant items for consumers, and online support, advertising and in-store collateral materials round out the 360-degree approach. CPG companies are invited in during the planning stage of each platform."We'll ask their marketing and market research folks to join us and share any new insights they have gotten through their research," says Learish. "We'll also talk about any additional tools or assets that could help leverage what we're doing. It's a very collaborative effort."Walgreens is spending 2009 laying out stores to be more customer-centric, with category resets and new aisle adjacencies based on how a shopper shops a store and category.Retailers are still willing to create brand-centric, year-round merchandising vehicles, say some we spoke with, for those "hero brands" that bring innovation into the store and drive significant trial and awareness. But, at the same time, the thematic approaches have become a stronger focus.Knowing the OTC ShopperAs is the case in most industries today, OTC marketers are increasingly aware of the need to know their shoppers.GlaxoSmithKline, for one, is increasing its continuity programs. "We're looking for ways to understand the shoppers and identify their specific retailer preferences and habits so we can, then, more appropriately match our expenditures against the folks we spend time with," says the former marketing manager. "I want to be able to tell Walmart, 'Look, we're spending this money on Walmart shoppers.' We may do different programs in different retailers depending on how we know the consumers who walk into those doors."As resources dedicated to shopper insights continue to increase, the companies are better able to study the differences between the consumer and the shopper. "We're using shopper insights to drive not just our promotions but our approach to consumers in stores," agrees another marketer.†There are three ways his company is trying to do that: Partnering with retailers at a much deeper level ("where we're collaborating, advising and working together to grow categories"); taking a more proactive category approach vs. brand approach; and changing the internal culture of the company. "There's the expectation from retailers," another OTC marketer says, "that not only should we be providing the insights and the research, but we should be prepared to come to the table with novel, unique, customer-centric plans that are clearly delineated, can be actualized and funded -- should it make sense. They'd like to see that from us and from all of the OTC competitors."The Future of OTCSome see partnering with retailers for aisle reinventions as a major change in the OTC market. "Even redesigning the OTC department to some degree with permanent fixtures that are more of a lifestyle, need-state solution center," says one marketer, i.e., the new Walgreens.SKU rationalization (stocking only the top two or three brands and private label) is a reality across all channels today. "There is this new lens of affordability that's essentially increasing every day that the economy worsens," says IRI's Blischok.Through fair share programs, retailers continue to make changes in managing the shelf space, notes Jim Cusmano, Henschel-Steinau's vice president of national accounts. "It seems to be a redirection of emphasis from freestanding displays to managing the existing store real estate so the store gets more of what it wants and the brands still have an opportunity to improve the category."

Category Report: OTC Drug Reformulation

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