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Kantar study dissects category management

BY Michael Johnsen

WILTON, Conn. — As more consumers incorporate social media sites and other online shop-assist tools into their daily shopping routines, the concepts defining traditional category management — category schematics and optimized facings and assortments, for example — are fast becoming obsolete.

Replacing them is the concept of category leadership, as Kantar Retail reported in its recently released “2011 Category Leadership Benchmarking Study.” What is the difference between management and leadership? Management is about planning, organizing and coordinating; leadership is about inspiring and motivating, connecting the dots between consumer wants and needs, and examining actual shopping behavior. 

According to the report, retailers are most concerned today about what Kantar defined as the “path to purchase” — the decision matrix that Internet-savvy consumers use to choose what products to purchase in which venues, as well as what impulse offers would prove to be most appealing alongside that traffic-driving SKU.

“To really try to set the tone as to why those [category management] tactics matter, [that] requires leadership,” Grace Park, managing director at Kantar Retail, told DSN. “Not only for the category but really for the department or even the total store. What retailers are struggling with today is trying to find a true growth solution.”

“The leaders are really connecting the consumer’s usage occasions to the purchase occasions,” noted Ginny Valkenburgh, SVP at Kantar Retail. Spice maker McCormick provides a good example of that, Valkenburgh said. “They set their shelves to different usage occasions and call those [occasions] out,” she said, such as with the brand’s Grill Mates during the summer.

Kantar analysts advised retailers and their supplier partners to fold category management, shopper insights and shopper marketing all under one umbrella. Tomorrow’s success stories will be a factor of applied shopper insights and store-level execution. Integrating these two key areas will help drive total category leadership, the report suggested.

Creating a call to action out of shopper insights also will help foster success, according to the report. “CVS and Kroger have worked to mine their frequent shopper card data to better understand how consumers shop in their stores and how to capture a greater share of wallet,” the report said. 

Other examples of best-in-practice retailers include Target, H-E-B and Walgreens — all of whom have engaged their manufacturer partners in identifying the most valuable customers and catering to their needs through specialized programs, item assortment shelving and pricing.

Retailer-specific customizable programs and 
promotions are expected to be key growth drivers going forward, with 80% or more of both retailers and suppliers expecting suppliers to customize their programs for retailers five years from now. Those customizable programs might even be different across a chain, as more retailers view the utilization of multiple segmentation schemes (e.g., urban centers, food deserts) as an area most likely to be a main focus five years from now.

For the full report, click here.

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Beth Kaplan steps down at GNC

BY Allison Cerra

PITTSBURGH — General Nutrition Centers announced that its president and chief merchandising officer has resigned.

Beth Kaplan, who served in the role for 3.5 years, is leaving the company to pursue personal interests. As a member of the senior management team, Kaplan helped the company prepare for its recent initial public offering.

The role of president will be reassumed by GNC CEO Joe Fortunato.

"Since Beth arrived at GNC, GNC has developed a world-class management team, particularly in marketing and product development, which is much stronger today than it was when she first arrived," Fortunato said. "We are confident this management team will continue to drive the business without interruption. We are thankful to Beth for her contribution, and wish her well in her future endeavors."

In related news, GNC appointed Amy Lane to serve as a member of its board of directors, replacing Kaplan. Lane, who serves as director for off-price home and fashion apparel conglomerate TJX Cos., also will serve on the board’s audit committee, replacing Norman Axelrod. Axelrod, however, will remain on the board.

"We believe Amy will bring great value to the GNC board," Fortunato said. "She understands the challenges and opportunities of specialty retailing; at the same time, her experience as an investment banker in financing companies and helping senior management implement their growth strategies will be an important resource as we move forward."

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Walgreens’ hard stance against PBM dominates earnings call

BY Michael Johnsen

DEERFIELD, Ill. — Soon after reporting double-digit earnings per share growth Tuesday morning, Walgreens announced it would forego as much as $5.3 billion in annual sales, representing some 7% of the company’s business and 90 million prescriptions, as it walks away from its relationship with pharmacy benefit manager Express Scripts.

Wall Street reacted badly to the news — sales of Walgreens’ stock were down more than 6% to $42 and change in mid-morning trading.

Walgreens suggested negotiations around re-upping its relationship with the PBM broke down several months ago because of exceedingly unfavorable terms — specifically, unacceptable reimbursement rates and a provision that Express Scripts unilaterally could define what constituted a generic without input from Walgreens, a factor that would make it difficult to forecast. “As the largest provider, we no longer felt like a valued partner,” Walgreens president and CEO Greg Wasson told analysts Tuesday morning.

According to Walgreens’ analysis, the news would have had a greater negative impact over the long term than removing the company’s more than 7,900 pharmacies from the PBM’s network in the short term.

“We just can’t accept rates that are less than industry average,” Wasson said, explaining the decision to discontinue Walgreens’ relationship with Express Scripts. He added that it devalues the contribution Walgreens pharmacists and nurse practitioners make to overall health care. “The days of isolating and focusing on drug spend separate from medical costs is coming to an end,” Wasson told analysts.

Community pharmacy increasingly is playing a significant role in holistically reducing total healthcare costs, and this is what forward-looking healthcare plans are looking to implement, Wasson noted.

To that end, Walgreens has brokered several collaborative relationships with a number of hospitals and health systems in the past quarter, all “aimed at improving patient care and providing greater access to important healthcare services while lowering costs.”

In May, Walgreens announced an agreement with Johns Hopkins Medicine designed to promote collaboration on population-based research and to jointly review and develop protocols to improve outcomes of patients with chronic diseases. In addition, JHM and Walgreens together will explore the development of new models for improving care for individuals.

Walgreens also has launched a program with Northwestern Memorial Physicians Group of Chicago, designed to improve patient outcomes and enhance physician decision-making. The program, implemented for Walgreens and Northwestern Memorial employees who have NMPG as their primary care provider, focuses on those with hypertension, diabetes, asthma and hyperlipidemia. Patients with these high-cost chronic diseases will receive point-of-care counseling as part of the integrated services offered. Information from these interactions will be provided to each patient’s primary care physician, giving physicians access to important clinical information from Walgreens.

And Take Care Health Systems, a wholly owned subsidiary of Walgreens, has developed relationships with Ochsner Health System in New Orleans and Memorial in Health of Jacksonville, Fla., through which physician practices will provide information on Take Care Clinics when their own offices are closed or they are unable to schedule an appointment within a patient’s desired time frame.

This isn’t the first time Walgreens has taken a hard stance in PBM negotiations. One year ago, the retailer announced it would terminate its provider relationship with CVS Caremark’s PBM. Two weeks later, Walgreens and CVS Caremark successfully renegotiated that relationship, keeping Walgreens’ pharmacies in the CVS Caremark network. Walgreens executives declined to draw correlations between those contract negotiations with CVS and present-day negotiations with Express Scripts, only saying that “Walgreens is very pleased” with its CVS deal, and the Chicago pharmacy operation continues to work closely with CVS Caremark.

“We’re prepared and ready to live in a world without Express Scripts,” Wasson said. “We’ve heard loud and clear from employers and health plans that they want Walgreens in their network.” Wasson said Walgreens would negotiate directly with employers and health plans.

Of those 90 million prescriptions through Express Scripts, 18% were Tricare/Department of Defense prescriptions, 26% were employers, 11% were Medicare Part D and 45% were managed care.

Walgreens may make up for some of those lost sales next year with continued front-end sales improvements — the company had completed the remodel of 4,000 stores to its new Customer Centric Retailing prototype in early June and is on course to complete 5,500 store remodels by the end of October. Customer satisfaction is up across converted stores, Wasson said. “We believe CCR is being reflected in positive front-end comp numbers,” he said.

Front-end comparable drug store sales increased 3.9% in the quarter ended May 31.

For the third quarter ended May 31, Walgreens reported earnings of $603 million, representing an increase of 30.3%. Net earnings for the first nine months of fiscal 2011 were $1.9 billion, or $2.07 per diluted share, a 26.2% increase from last year’s $1.64 per diluted share.

Third-quarter sales increased 6.8% from the prior-year quarter to $18.4 billion, a quarterly record for the company. Total sales in comparable stores increased 4.1%. “Our comparable-store sales this quarter demonstrated our business was resilient in an ongoing tough economy,” Wasson stated. “We saw healthy increases across our consumables, cough-cold, pain/sleep, personal care and beauty categories, along with continued strength in our private-brand products as we delivered the combination of assortment, accessibility and value relevant to our customers.”

Prescription sales, which accounted for 65.1% of sales in the quarter, climbed 6.4%, while prescription sales in comparable stores increased 4.1%. The company filled 210 million prescriptions, an increase of 5.8% over last year’s third quarter.

Prescriptions filled in comparable stores increased 4.6% in the quarter. The company exceeded by 3.5 percentage points the prescription growth rate of the rest of the industry during the same period, as reported by IMS Health. For the third quarter, Walgreens increased its retail prescription market share to 20.1%.

Customer traffic in comparable stores increased 1.7% for the third quarter, while basket size increased 2.2%.

Gross profit margins increased 50 basis points versus the year-ago quarter to 28.1 as a percentage to sales. Helping overall margins was the positive impact of generic drug sales and higher front-end margins. These increases were offset partially by continued pharmacy reimbursement pressures and an increased LIFO provision of $50 million in this year’s quarter, versus $18 million last year. Total gross profit dollars increased $405 million, or 8.5%, in the quarter, of which 1.5 percentage points was attributable to Duane Reade.

Walgreens opened or acquired 41 new drug stores, representing a net gain of 25 after relocations and closings, in the third quarter. Walgreens expects organic store growth of between 2.5% and 3% in fiscal 2011.

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