Dollar stores used to be somewhat of a joke. You’d go there for gag gifts, cheap cleaning products and slightly suspect food items. But in fact, chains such as Dollar Tree (NASDAQ:DLTR), Family Dollar (NYSE:FDO) and Dollar General (NYSE:DG) are a force to be reckoned with. Now under siege: drugstores.
Deals, part of the Dollar Tree brand, has opened a South Florida location featuring pharmacy services provided by a third-party partner, PharmaGo. In addition to prices that are in line with the competition, Deals/PharmaGo offers a home-delivery service.
These discount chains are big business. In fact, the number of DLTR, DG, and FDO stores combined exceeds the combined number of Walgreens (NYSE:WAG), CVS Corp. (NYSE:CVS) and Rite-Aid locations by more than 1,300 stores, according to commercial real-estate firm Colliers International. If the pharmacy trend takes root, traditional drugstores’ pharmacy sales could take a hit.
Walgreens already faces a challenge after exiting the Express Scripts (NASDAQ:EXPS) network. In March the chain’s comparable-store pharmacy sales dropped 11.4%, while the number of prescriptions filled declined 11.1%. Meanwhile, as recently as 2009, CVS generated more than two-thirds of its revenue from the pharmacy business. (And here I thought all the makeup I buy was contributing something.)
The encroachment of dollar stores would be just the latest test of traditional drugstore chains. Wal-Mart (NYSE:WMT) debuted $4 generic medications in 2006 and most Target Stores (NYSE:TGT) are equipped with pharmacies, as are many grocery stores.
So if someone can pick up their medication along with all of their groceries or their dollar-store wares, why would they ever need a drugstore?
Responding to this rhetorical question, Walgreens has tried to evolve into more of a one-stop spot. Pre-packaged food items, household supplies, and in many cases beer and wine line the shelves along with family health and beauty aids. So you can pick up your Lipitor where you get your milk and eggs, and grab milk, eggs (and screw-top wine) where you go to get your Lipitor.
Walgreens also take up less space than Wal-Marts, dollar stores, or grocery stores, so they can pop up in more spaces. Here in downtown Chicago, it seems like there is a Walgreens or CVS (sometimes both!) on every corner. The convenience factor for customers in metropolitan areas is high.
Walgreens’ one-year earnings growth rate is just 2.7%, compared to standard average earnings growth of 8.6% across all S&P 500 companies. In the past year, the stock has dropped 16% and shares are off 23% in the past five years. And yet, the stock recently scored a place on the UBS “most preferred” list. Maybe the analysts know something about the Walgreens model that we don’t.
Where do you prefer to go for your prescriptions? A local drug store, a chain drug store, a grocery, a discount store, or somewhere else?
As of this writing, Beth Gaston Moon does not own any shares mentioned here.