OTC Squeeze Play

At Williams and Nassau streets in New York's Financial District, just four blocks from Walgreen Co.'s heralded Duane Reade "Drug Store of the Future," sits a Duane Reade that appears more drugstore of the past. There is no video-android greeter, no self-makeover computer in the cosmetics department, no sushi bar. The pharmacy is busy, but the lighting is dingy and the shelving units appear to hark back to the stock market crash of 1987. Yet on those well-worn shelves, a modern OTC drama is playing out.Brands Take a HolidayIt is a forced vacation, to be sure. On Williams Street, the term over-the-counter is being redefined as national brands are banished to the back room. The only smoking cessation products stocked on shelves in easy reach of shoppers are Duane Reade private labels. Two slots on the shelf are empty, taken up by a sign picturing GlaxoSmithKline's Nicorette and NicoDerm products with the message, "Available at the Pharmacy." (See photo below.)At CVS/pharmacy, where senior executives have pledged to grow store brands from 16% to 20% of front-end sales, more and more premium merchandising positions are being given to OTC store brands. End-aisle displays tying into the store's "Price Cuts" merchandising theme declare "Compare & Save with CVS/pharmacy Brand Allergy Relief" and invite shoppers to match CVS private labels against leading brands – Merck & Co.'s Claritin and Johnson & Johnson's Zyrtec. Dump bins offer BOGOs on analgesics, and in-shelf displays offer two-fers on CVS toothbrushes that are compared to J&J's Reach brand.In a letter to shareholders included in Rite Aid's fiscal 2011 annual report, chairman Mary Sammons and chief executive officer John Standley announced the conversion of 1,000 private labels to a "new architecture" aimed at value-driven consumers. They promised a total lineup of 2,900 store brands by year's end. They stated their case succinctly: "Store brands, from diapers to over-the-counter medicines, are less expensive for shoppers and deliver higher margins for us."Walgreens consistently piggybacks on national OTC launches with private brands that directly play off the competing brand's name. In-store, shelf talkers promote the private labels with messaging that calls out the national brands and reads, "Compare the active ingredient."Where, then, do national brands fit in the Drug Store of the Future? Several OTC pharmaceutical executives contacted by Shopper Marketing declined to comment on the current state of affairs. It's not surprising because the prognosis is not favorable, according to some insiders. "It's not a great business to be in anymore. If I were in it, I think I'd be looking for an alternative career," says Kevin Price, a longtime CPG marketing executive who heads the Market Performance Group, a branding consultant in Fairfield, Conn."The name of the game is to have relevant differentiation. If you are a branded product, that's what you try to do," says Price. "There are three ways you can differentiate yourself – through product, service or price. Retailers and their private labels are always going to beat brands on price and service. And private-label products are regulated to be identical to brands. So where do brands go to differentiate themselves? They are in a box."Minimized by RetailersRetailers rely on brands to widen their assortments, fund promotional events and help build excitement around new products through consumer marketing efforts. But in an age when drug chains are rapidly expanding their own consumer touchpoints and building their own brands through Internet sales and social media, brands just aren't as essential as they once were in creating excitement among shoppers."When there is innovation and it's heavily advertised, that is forcing retailers to put a product on the shelf," says Ron Schutt, an Alto, Mich.-based healthcare market consultant and former head of OTC marketing at private-label pharmaceutical manufacturer Perrigo. "But there is no question that retailers are looking at store brands as destination products. This whole idea that private label helps profitability but hurts the top line is changing. A good private-label program, well-executed, can enhance the top line as well."Policy concerns about healthcare costs may also favor retailers' lower-priced private-label products in the future. Pressure is being placed on the FDA by lawmakers and consumers to speed up the pace of Rx-to-OTC switches and limit the awarding of exclusive sales periods so that people with limited or no health insurance can take advantage of safe but effective drugs.A recent report released by Francesco International, an Rx-to-OTC consultant based in Long Branch, N.J., predicts that such efforts could influence the FDA to quicken the pace of switches on drugs used to treat hypertension, osteoporosis and arthritis over the next five years. If these drugs sell for as high a ticket as GlaxoSmithKline's nicotine-replacement products, there could be a lot more "Lane Closed" signs blocking the path of national brand products to drugstore shelves."I don't see how, long term, the drug chains can lose by acing out the brands," Price says. "If I were a retailer, I would accelerate this move to get the brands minimalized and off the shelf as soon as I could. I do recognize that brands may hold value in people's minds. But the natural course of things over time is that the brand is going to go away."The Big ThreeIncreased profitability is the prescription for the Big Three drugstore chains during trying economic times. Rite Aid posted a $555 million loss for its fiscal year ending February 2011. Net earnings declined 7.3% at CVS in 2010, and while Walgreens reported a 4.2% income gain for the year, it came against a 7% decline in 2009.Prescription drugs are the stallion that led the charge at drugstores, accounting for as much as 70% of sales compared to a mere 5% or 6% for health and beauty aids. But few generic drug approvals came their way in the past year, so drug chain executives are looking to the higher margins provided by own brands to bolster bottom lines. "The front end is proportionately more important. Everybody is trying to figure it out," says Bill Bishop, a Barrington, Ill.- based category management consultant who has worked with CVS and Rite Aid.First on their priority lists are medications and remedies, the top-grossing private-label category for drug chains with $1.4 billion in sales in 2010, according to Nielsen Co. figures compiled for the Private Label Manufacturers Association. Indeed, six of the top 10 private-label categories at drugstores are in the health and beauty aisles. It should come as no surprise, then, that CVS and Walgreens are the new product powerhouses of consumer healthcare. According to Mintel's Global New Product Database, CVS introduced more new products to the category in 2009 – 126 of them – than runner-up Johnson & Johnson. Walgreens came in third.National brands still dominate the shelves in health and beauty aisles, but their shares are decaying at a rapid rate. Between 2007 and 2010, according to Mintel, private-label OTC remedy sales increased by 56% across all channels, lifting their dollar share to 29% – an unheard-of 8-point gain in a mere three years.In the drug channel, the share gain was even more dramatic, with private labels capturing 32% of the dollar share. "The norm through 2009 had been a share split of high 70s for national brands and low 20s for the private labels," says Molly Maier, Mintel's senior analyst for health and wellness.Ready at the SwitchMarket dynamics played a large role in this category plot development. The 2008 patent expiration of Procter & Gamble's heartburn remedy Prilosec and the 2010 product recalls of big-selling Johnson & Johnson brands such as Tylenol provided private labels a huge opportunity. Between 2005 and 2010, Mintel reports, private-label shares of gastrointestinal remedies rose 10.5 points and internal analgesics gained 8.4 points.Drug chains are about to receive a similar boost from the emergence of Sanofi Aventis' Allegra allergy medication in the OTC market, the Rx-to-OTC switch of the year. Stores nationwide were awash in purple Allegra displays and shelf units during the product's introduction in March and April, and allergy sufferers did a good job emptying them. Allegra-D sales totaled $13.5 million for the 12 weeks ending Aug. 7, according to cross-channel tallies from SymphonyIRI.But the party did not last long for Sanofi Aventis. The FDA did not grant Allegra the three-year period of sales exclusivity that it had given to Prilosec, and drug chains are already selling or readying their own versions. Walgreens had its Wal-Fex version on store shelves by May (fexofenadine is Allegra's key ingredient), and in August, India-based Dr. Reddy's Labs announced that it had store-brand equivalents of Allegra-D 24 Hour poised to enter the U.S. market."Retailers have for a long time been interested in getting to market as rapidly as they can with a version of a major switch item," says Schutt. "Retailers see themselves as being in a race with other retailers."An important leg of that race involves catching up with recession-hardened shoppers armed with sophisticated information technology and searching for bargains. A study released over the summer by WPP market research arm TNS found that 80% of consumers planned to alter their shopping behaviors due to the high cost of gasoline. For nearly a third of them, that meant removing items from their grocery list and switching to private-label products. The effect could prove even more pronounced in the OTC segment. A consumer survey of attitudes on private-label OTC products conducted in 2010 by Mintel had 79% of respondents agreeing with the statement "Store brands work just as well as national brands."The point is not lost on those who run America's drugstore chains. "We believe the 'new' value-minded consumer is here to stay, [and] we have fine-tuned our merchandising to deliver greater value … including an expansion of our strong private-brand products," wrote Walgreens CEO Gregory Wasson and board chairman Alan McNally in the company's annual report.

OTC Squeeze Play

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