Presented by: MANAGING DISRUPTION IN DRUG Jessica Campbell Analyst March 7, 2013 Chain Drug Webinar.

Presented by:

MANAGING DISRUPTION IN DRUG

Jessica CampbellAnalyst

March 7, 2013

Chain Drug Webinar

© Copyright 2013 Kantar Retail

Agenda

2

– Facing the Growing Threat of Dotcom Pricing

– Making Amends: The Lasting Effects of Walgreens Dispute with Express Scripts


Shopping Basket Analysis

– Study Details:• Conducted December 2012

• All prices collected on the same day

• Includes Marketplace (3rd party) listings and sale prices

• Omits shipping charges

– Basket Details:• Only exact items included

• In certain instances some SKUs were purchased in multiples to match the quantity required by online retailers

Methodology and Background

Source: Kantar Retail anaylsis 3


Summary of Findings

– Both CVS and Walgreens in-store pricing was significantly higher than online retailers

– As shoppers become more comfortable shopping for HBA online and delivery services become more convenient, price will become an important factor to capture sales

– Drugstore.com was the closest online retailer to matching in-store prices

Online pricing causing disruption in drugstore HBA sales



Walgreens Total Basket ResultsAmazon registered the least expensive total basket


• 19 exact items; 10 personal care, and 9 OTC

• 22% of items collected were available for Subscribe & Save through Amazon.

• If taken into account for this study, savings from Subscribe & Save would have been USD 2.36

• Walgreens total basket was 26% more expensive than Walmart.com, driven by the OTC sub-basket

• Walgreens indexed at 105 to Drugstore.com, the main difference being in the OTC sub-basket

Promotions in-store lowered Walgreens basket by 3%Promotions in-store lowered Walgreens basket by 3%


Walgreens Personal Care Sub-BasketWalmart.com had the lowest Personal Care sub-basket


Walmart.com’s basket was driven by

Nature Made

Walmart.com’s basket was driven by

Nature Made


Walgreens OTC Sub-BasketWalgreens indexed highest to Amazon in OTC


Nearly two-thirds of prices on Drugstore.com were within 10% of Walgreens

Nearly two-thirds of prices on Drugstore.com were within 10% of Walgreens


Walgreens Implications

– Walgreens will need to develop its omnichannel strategies to consider these significant price gaps

• Including leveraging Drugstore.com and Walgreens.com

– Walgreens will need to invest in areas beyond price to retain shoppers by:

• Analyzing true price competition

• Leveraging experience in digital innovation

• Examining the potential of stores to redefine convenience

Can no longer depend on convenience & immediacy alone



CVS Total Basket Results


Amazon registered the least expensive total basket

• 18 exact items; 11 personal care, and 7 OTC

• 21% of items collected were available for Subscribe & Save through Amazon.• If taken into account for this study, savings from Subscribe & Save would

have been USD 2.36

• CVS’s total basket was 25% more expensive than Walmart.com, and both sub-baskets were consistent

• CVS indexed closest to Drugstore.com at 104• The main differentiator was personal care, which indexed at 107 compared

to 101 for OTCPromotions in-store lowered CVS’s total basket 4%Promotions in-store lowered CVS’s total basket 4%


CVS Personal Care Sub-BasketWalmart.com Barely Beats Amazon in Personal Care


Only one item was

comparable across all

three retailers

Only one item was

comparable across all

three retailers


CVS OTC Sub-BasketCVS Indexes at 141 to Amazon, 122 to Walmart.com


Amazon’s sub-basket was highly inconsistentAmazon’s sub-basket was highly inconsistent


CVS Implications

– CVS should look at pricing strategies and reconsider who their competitive set really is

– CVS will need to draw shoppers into the store and promote loyalty by:

• Creating value beyond price

• Leveraging ExtraCare to better target promotions

Is ExtraCare enough to keep shoppers from shifting online?



Channel and Supplier Implications

– Online retailers are disrupting the Drug channel by:• Redefining convenience• Creating new price reference points• Changing shopper expectations

– Suppliers should plan against these disruptors by collaborating with retailers to offer:

• Relevant and targeted promotions• An engaging in-store experience• Value beyond price

Online offers are shifting how consumers think and shop for HBA



Agenda

14

– Facing the Growing Threat of Dotcom Pricing

– Making Amends: The Lasting Effects of Walgreens Dispute with Express Scripts


About One in Six Shoppers Has Changed Rx Destination in Past Year

15

Proportion consistent with past experience

Have Changed Place Where Most Prescriptions Filled(vs. last year, among all shoppers who have prescriptions filled)

June 2012

In 2008, 18% of all shoppers had

changed places where most

prescriptions filled vs. previous year

In 2008, 18% of all shoppers had

changed places where most

prescriptions filled vs. previous year

Source: Kantar Retail ShopperScape®, June 2012


Insurance Most Likely Reason for Change

16Source: Kantar Retail ShopperScape®, June 2012

Main Reasons Changed Place Where Most Prescriptions Filled, 2012(among all shoppers who changed primary Rx destination, multiple answers allowed)

Likely driven by the Express Scripts fallout


Majority of Express Scripts Shoppers Switched Pharmacies

Source: Kantar Retail ShopperScape®, February 2012 17

*Note: small sample size (n = 126)

Only 9% of respondents claimed to sign up for Walgreens Prescription

Savings Club

Only 9% of respondents claimed to sign up for Walgreens Prescription

Savings Club


CVS and Supermarkets Gained the Most Script Traffic From Split

Source: Kantar Retail ShopperScape®, February 2012 18

*Note: small sample size (n = 85)

Rite Aid only gained 9% of customer pharmacy traffic, well

behind competitors such as Walmart and CVS.

Rite Aid only gained 9% of customer pharmacy traffic, well

behind competitors such as Walmart and CVS.


Target Has Most “New” Rx Shoppers

19Source: Kantar Retail ShopperScape®, June 2012;, target.com

Among Current Rx Shopper Base, % Who Has Changed Place Where Most Rx

Filled in Past Year; June 2012

Target 30%

Mail Order/Online Pharmacy Associated with Insurance Plan

18%

Supermarkets 17%

Walgreens 16%

CVS 16%

Walmart 15%

Other Retailer Types, incl. Clubs 14%

Rite Aid 14%

Nearly one-third of Target’s current Rx

shopper base is new in past year

Nearly one-third of Target’s current Rx

shopper base is new in past year

Same proportion of Walgreens and

CVS Rx shopper base is new in past

year: about 1 in every 6 shoppers

Same proportion of Walgreens and

CVS Rx shopper base is new in past

year: about 1 in every 6 shoppers


TGT Pharmacy Rewards Differentiated Draw

Target Walgreens CVS Walmart Supermarket

Gift card/discount offer w/new or transferred Rx*

Better customer service

Previous store no longer accepted insurance



Ability to do more one-stop

shopping

Easier shopping experience

Previous store no longer

convenient


shopping


shopping


New store opened that’s

more convenient


Offer free/discounted generic drugs




convenient



convenient

Offer free/discounted generic drugs

Express Scripts impact also evident

20

Top Reasons Retailers Gained New Rx Shoppers, 2012

Source: Kantar Retail ShopperScape®, June 2012

*Read as: The top reason why shoppers who previously used a different provider for filling most Rx but now get most Rx filled at Target changed to Target is gift card/discount offer


Target Expands Pharmacy Rewards

– Now open to all guests– For every 5 Rx filled, guests receive a 5% off

total purchase for a future visit– REDCard holders stack the 5% on top of their

everyday 5% for a total of 10%– Supports E4 (Easy, Experience,

Educational, Engaging) renovation pilot program/ redesign in OTC

21

Beyond REDcard holders in April 2012

Source: Target documents, Kantar Retail analysis and store visits


How Did This Affect Walgreens?

22


Walgreens 2012 CompsThe loss of Express Scripts traffic significantly impacted both FE and Rx comps

Source: Company reports, Kantar Retail analysis 23

Walgreens leaves

Express Scripts network

Walgreens leaves

Express Scripts network


Walgreens and Alliance Boots Partnership Lead to Agreement with Express Scripts


Synergy Opportunity


Walgreens Attempts to Regain Shoppers with Balance Rewards

Source: Kantar Retail ShopperScape®, August2012 25

Balance Rewards launched as the dispute came to an end.

How likely are you to move your prescriptions back to the Walgreens

pharmacy?

(among shoppers who moved prescriptions from WAG at end of Express Scripts partnership)

Sample size 296

Extremely/somewhat likely 48%Not very/not at all likely 41%

Don't know 12%

If Walgreens had a loyalty card, would that make you more likely to move your

prescriptions back to Walgreens?

(among shoppers who moved prescriptions from WAG at end of Express Scripts partnership)

Sample size 296

Yes 34%

Maybe 39%

No 27%

Read as 48% of all shoppers that moved their prescription to another pharmacy due to Walgreens' split with Express Scripts said they are extremely or somewhat likely to move their prescriptions back to Walgreens now that the partnership has been restored.

Read as 34% of all shoppers that moved their prescription to another pharmacy due to Walgreens' split with Express Scripts said that if Walgreens had a loyalty card they would be more likely to move their prescriptions back to Walgreens now that the partnership has been restored.

As of January 2013 Balance

Rewards registration was at 55 million

As of January 2013 Balance

Rewards registration was at 55 million


Walgreens is Regaining Shoppers at a Much Slower Rate than Originally Expected


Total Year 2012 Effects

Sales Change -0.8%

Rx Sales Change -3.1%

Total Comp -3.6%

FE Comp 0.6%

Rx Comp -6.1%

Script Comp -5.1%

Walgreens did not regain shoppers as quickly as anticipated, but is

well positioned for 2014

Walgreens did not regain shoppers as quickly as anticipated, but is

well positioned for 2014

Source: Walgreens 1Q 2013 earnings presentation


CVS Expects to Retain Majority of Express Scripts Transfers


• Gained 24 million scripts

• ~ 4.0% of comps (total 7.8%) attributed to the Walgreens/Express Scripts impasse

• 85% of gained Express Scripts members are now enrolled in ExtraCare

CVS now expects to retain 60% of scripts

gained – more than the 50% originally expected

CVS now expects to retain 60% of scripts

gained – more than the 50% originally expected

Effects will continue into 2013, impacting same store scripts and pharmacy sales

Effects will continue into 2013, impacting same store scripts and pharmacy sales


Implications– Demonstrates the effect that changes in the health

care landscape can have on retail pharmacy• Increasingly important with the imminent health care

changes

– Retailers will continue working to retain shoppers into 2013

• Suppliers should do what they can to drive traffic, grow the basket, and offer value to help keep shoppers

– Alliance Boots partnership not only lead to an agreement with Express Scripts, it sets them up for new growth potential beyond the typical reliance on retail pharmacy

Source: Kantar Retail analysis 28


Learn more about urban retailing

Join us at our upcoming event we’ll take an interactive look at the urban retail opportunity and experience

–We will look at the developing urban formats and learn by example:

• ��How do merchandising and communication change in the new urban store?

• What are the display opportunities compared to ��conventional customer formats

• Are there new and different opportunities for cross-��merchandising and marketing?

• Which categories and departments grow, and which are ��challenged for space?

29

– Kantar Retail Experts will lead guided store tours and workshops to bring perspective and insight to help you capitalize on this unique and emerging opportunity.


245 First StreetFloor 10Cambridge, MA02142

F +1 617 499 2723www.KantarRetailiq.com

Jessica Campbell

D +1 617 912 2874

Analyst

[email protected]

Presented by: MANAGING DISRUPTION IN DRUG Jessica Campbell Analyst March 7, 2013 Chain Drug Webinar.

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