Prognosis: More HBC Competition

Retailers should stick to strengths when competing against dollar, drug chains

Is competition healthy for health and beauty care (HBC) product sold in c-stores? Other categories actually thrive on—and are inspired by—competition. It keeps retailers and manufacturers on their toes and guides them in making strategic and tactical adjustments.

With HBC, cross-channel competition currently represents a potential dagger to category fortunes, several industry players proclaim. 

In identifying the bugaboos that batter HBC, look no further than dollar stores as the latest threat, state two industry experts. “Dollar stores now carry two of our destinations drivers: cigarettes and beer. That means they are taking trips away from c-store retailers,” says Steve Montgomery, president of Lake Forest, Ill.-based b2b Solutions LLC. “Given their larger footprint, broader selection and lower price points, they are definitely a very strong competitor for the HBC category.”

According to Nielsen U.S. Retail Trends, the total store counts from the three largest dollar-store chains grew from 16,715 to 22,480 between 2005 to 2012—nearly a 35% increase. This rapid expansion, coupled with the increased brand focus and broader price points, make dollar stores a channel to watch, says Tom LaManna, vice president of merchandising services for Melrose Park, Ill.-based HBC broker Convenience Valet.

“With the exception of the higher percentage of females that shop dollar stores, their customer demographics match up with c-store demographics when it comes to household income, smaller household size and race,” LaManna tells Convenience Store Products.

However, not all industry participants believe dollar stores are giving c-stores a run for their HBC money. Despite the continued growth of dollar stores and their expansion into the food segment, c-stores remain the “most convenient option for shoppers [for HBC],” says Paul Rossberger, vice president of sales and marketing for Lil’ Drug Store Products, Cedar Rapids, Iowa.

“The person who stops by a c-store for a last-minute HBC purchase chooses that store because of its location and ease of use; it’s to solve a problem at the time and place of need,” Rossberger says. “Maybe it is on the way to work or a travel pass-by. C-stores fulfill a different need than the customer who visits a dollar store to stock up. Also, convenience stores are offering the most popular HBC brands and value alternatives, whereas dollar stores have additional space to provide a more diverse offering within categories.”   

At the same time, sales data indicate the HBC business is contracting. The cold/allergy/sinus subsegment within the consolidated category of 31 segments saw unit sales in c-stores drop 30% from 2008 through 2012, according to data from Chicago-based IRI.

Drug chains meanwhile pose a prevailing threat—historically and even moreso today as the leading chains evolve the shopper experience with foodservice and more. As such, Rossberger says, it behooves c-stores to “stick to their niche. Drug stores have more space and a broader range of customers, which justifies a wider assortment of HBC, personal care and general merchandise items,” he notes.

Aside from the obvious space limitations in a c-store, Rossberger says it makes more sense to not only focus on the most popular brands and value alternatives to ensure consistent sales, “but to emphasize the smaller, convenience-size and mid-size versions of these products.”

Indeed, c-stores are at a loss, literally and figuratively, when trying to match the drug chains’ merchandising muscle. “No one has ever been able to show me how c-stores can compete with drug stores on HBC items,” says LaManna. “When you factor in the bracket purchase advantage, the ‘reduced’ up-charge advantage and the fact that drug stores probably operate on a 30% to 40% mark-up, it would seem to me that c-store retailers start off at a 20% to 30% cost disadvantage.

“I wish someone could show me how that math works,” he adds. “Another reason that the HBC category is viable is because of the high gross margin (45% to 50%), which generates sufficient gross profit dollars.”