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Execs: Drug chains should be wary of price trap. (Consumables).

NEW YORK -- Drug chains should be wary of lowballing prices on convenience food and beverages in the effort to compete with other trade classes, according to three chain drug retailers who were asked about the practice.

Duane Reade chairman and chief executive officer Tony Cuti says many drug chains are using consumables as a "crutch" by pricing them to lift front-end sales without corresponding increases in the bottom line.

Promoting Pepsi at 59 cents for a 2-liter bottle may generate eye-catching sales, but it will actually cut into profits, he asserts. "It's all below cost," Cuti says of such pricing. "You're pushing a lot of volume through that way, and it looks great on the monthly sales report, but you're not making any money."

To avoid that trap Duane Reade sells consumables at what Cuti calls competitive but still profitable prices. "Giveaways across the board week after week are not our thing," he says.

He blames the lowballing on a price war begun by discounters and then joined by supermarkets and drug chains. A domino effect has led to "everybody giving stuff away 15% to 20% below cost," notes Cuti. "Thank God we don't have to play that game, because we haven't got any of that competition in New York. Nationally it's a mess."

Snyder's Drug Stores had to quickly learn the grocery business with its acquisition of Drug Emporium, according to executive vice president John Greer, because Drug Emporium's large stores carry some 60 feet more of food and beverages than conventional drug stores.

To stay away from the lowball pitfall the chain prices consumables between the levels of a supermarket and a convenience store, Greer says. To make sure its prices generate profits Snyder's has stepped up its forward buying, he notes.

"We have made the conscious decision that when it comes to soft drinks we will be competitive, but there's no reason in the world to give it away," Greer remarks. "We cannot compete with clubs or grocers when it comes to the bottom line because of the tonnage they move. So it's more important to be priced right."

In fact he says 12-packs of popular soft drinks move the same whether they carry a fair price that produces a margin or are offered below cost.

One way Snyder's has improved its consumables buying is establishing a category management job devoted strictly to food and beverages. Mark Metzger has filled the position, and "his whole working life revolves around consumables," says Greer.

The chain has also been careful not to overextend its grocery offerings. While it may carry 5-pound bags of oranges on an in-and-out basis and stock milk, bacon, eggs, frozen pizza and TV dinners, its nontraditional drug store offerings end there. "We can't be all things to all people," Greer notes.

Pharmaca Integrative Pharmacy vice president of retail operations Don Summerfield agrees that carrying food that people ordinarily don't look for in a drug store is "problematic."

"Drug chains are getting into a situation where they're going head to head with the Safeways of the world," comments Summerfield. "Competing on price brand for brand is difficult. That's why we've gotten away from that and only look for unique brands. If we started carrying Coke and Pepsi, we'd be just giving it away like everybody else. With such low margins it would be just a convenience for our customers."
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Comment:Execs: Drug chains should be wary of price trap. (Consumables).(Brief Article)
Publication:Chain Drug Review
Article Type:Brief Article
Geographic Code:1USA
Date:Jun 10, 2002
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