CNN Money published an article September 6th meant to alarm consumers that they may be paying too much at Walgreens: http://money.cnn.com/2013/09/06/pf/walgreens-prices/index.html. The article is based on a survey by the National Consumers League (NCL) and a labor union coalition Change to Win. There is no surprise that the survey results would be spun to imply Walgreens is doing something wrong. However from my perspective, they are doing things right.
The survey compared prices on 25 items in 485 stores within 4 major cities at Walgreens, CVS, and Rite Aid. Walgreens & CVS charged different amounts for the 25 items in different stores, and the price variations were greater at Walgreens than CVS, while variations at Rite Aid were minimal. Walgreens’ most expensive flagship store in New York City had a total price for the basket of items 20% higher than other stores in the New York. According to the NCL, “the expectation is you are going to have the same prices within a chain.” Why do they expect that? Certainly the cost of doing business varies from location to location. The article does not say which store is which, but it implies that Walgreens’ 57th street store in Manhattan is the most expensive. That seems appropriate to me, since everything is more expensive in Manhattan. Real estate, labor, insurance, transportation, etc. are all more expensive in Manhattan. If the prices did not reflect that, Walgreens would probably be losing money there.
The article does not say which of the chains had the highest total price for the basket of products, which leads me to believe in many locations Walgreens could have had a lower overall price than their competitors. However, price is only one of the competitive elements. Each chain decides how they want to compete, but the elements typically involve store locations, store layouts, product selection, service levels, prices, prescription drug management, and other factors. Each store then needs to capitalize on its specific competitive differentiation. For example, if Walgreens has the most convenient location compared to CVS and Rite Aid, they should compete on that basis. It is worth something to the shoppers to have a store that is easy to get in and out of, and they will usually pay a little more to avoid going to a less convenient store.
Walgreens is smart if they are analyzing their data and competitive prices to determine which products need to be low price leaders in which stores, and increasing prices on other items where they have room to do so. For example, if the core items in one location are baby products, it would make sense for Walgreens to be very competitive on those items. However, they should also realize that if those same customers are buying orange juice and coffee in Walgreens, they are probably doing so out of convenience and will pay a little more for the convenience products. Conversely, if in a different store the baby products are convenience items, the prices should be a little higher to reflect that convenience. My bet is that Walgreens is using their data to figure this out.
It is difficult to determine how Walgreens is doing financially compared to CVS and Rite Aid. They have different mixes of products, store names, acquisitions, and countries in which they operate. All three chains reported growth in the two years from 2010 through 2012. Walgreens and Rite Aid had slightly increasing gross profit margins, while CVS margins decreased. However, without knowing more details it is impossible to say which strategy worked best. My guess is Walgreens is doing a good job of segmenting their customers and using their analytics to guide their pricing moves, and it is working. I suspect if the price differentiation was causing them to lose market share, we would see much poorer results, or they would stop doing it.
I will ignore the alarm raised by CNN Money and the NCL. I know that like other shoppers I sometimes pay a higher price for an item than if I was willing to go somewhere else to buy it. I will continue to shop based on store locations, product assortment, service levels and the like. More importantly, I will applaud those firms who apply rigorous analytics to their pricing strategy.
Trackbacks & Pingbacks
[…] Finally, Walgreens wouldn't be becoming the largest global retail pharmacy chain if they didn't know what they were doing. "Walgreens is smart if they are analyzing their data and competitive prices to determine which products need to be low price leaders in which stores, and increasing prices on other items where they have room to do so…I applaud those firms who apply rigorous analytics to their pricing strategy, said Scott Francis in his note, Walgreens Pricing: Differentiation Is Smart. […]
Leave a Reply
Want to join the discussion?Feel free to contribute!