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Drug stores have a lot in common with c-stores. They are both small boxes, have convenient locations and generate the bulk of their sales from a handful of margin-pressured categories. Prescription medicines are to drug stores what motor fuels are to c-stores. The good news is that the more progressive drug chains have figured out that they have no future if they are nothing more than c-stores with a pharmacy attached. The increasing differentation between the two channels will help both flourish.
Drug stores are popping up on every corner. More than 11,000 drug store locations are operated by the top two drug store chains – Walgreens and CVS. Nearly 500 new drug stores were created from 2004 and 2005, according to the National Association of Chain Drug Stores (NACDS). With their deep pockets, drug chains can spend whatever it takes for high profile, corner locations, and their build costs are less because they do not require the installation of underground fuel tanks and dispensers. Additionally, drug stores generally don't run into the same type of community opposition to new store expansion that c-stores often face due to historic negative perceptions.
Single-serve and convenience-sized beverages, snacks and candy take a bite out of c-store sales. It is easy to understand that drug stores would look to the relatively higher margins of these types of products because of the slim profits they make on prescription drugs – which account for about 60 percent of their total sales.
Heavy regulations affect both convenience stores and drug stores. While the c-store industry deals with tighter tobacco, alcohol and petroleum regulations, drug stores juggle new policies on prescription and over-the-counter drugs. As regulations increase, margins will decrease due to limitations on products' sale and price points. This can only cause more competition as drug and convenience stores overlap strategies to gain back lost profits by upping the ante in other categories they share.
Both industries also face increasing competition from supermarkets and big box retailers. While the convenience industry sweats over a new gas island at the local Wal-Mart, Costco, or Kroger, drug stores bite their nails over discounted prescriptions coming from the same retailers.
Convenience stores can differentiate from encroaching product offerings by focusing on fresh, fast foods. By offering exceptional foodservice, convenience stores can pull away from the snacks, packaged beverages and candy that are also offered down the road at the local CVS.