Walgreens Can Add Fiz to Sales with Private Label Beer Offering

Drugstores are no longer a place to get just cough drops, tablets, toiletries, groceries or even photo prints. Walgreens (NYSE:WAG) in December 2010 quietly added a new product to over 4,600 of its 7,655 drugstores spread across the nation – its very own in-house beer! Winery Exchange, a private label alcohol company based in Novato, California, developed Big Flats 1901 and offers similar private label brands to clients like Costco (NASDAQ:COST), Cost Plus World Market and Trader Joe’s. ^[1] What’s more, it’s priced at 50c per can, $2.99 for a six-pack and $11.49 for a 24-pack of cans. ^[2] Walgreens’ biggest competitor, CVS Caremark (NYSE:CVS) also sells alcohol in about 4,300 of its over 7,000 drugstores ^[3]. This leads to the question… why are these drugstore chains pushing alcohol?

What is the strategy behind selling alcohol?

Drugstores leverage the convenience they offer the shoppers as they are often located throughout most cities where super markets and grocery stores are more sparsely located owing to their space requirements and high rental rates in densely populated urban areas. This explains why drugstores had also started stocking up their grocery supplies and increased the in-store space allocation and the product assortment for groceries (CVS Stocks More Food Which Could Add More Beef To Our Upside, Trefis, Feb. 8, 2011).

Expanding its offerings beyond prescription drugs leads to more traffic at drugstores. With increasing competition in pharmacy services and rising real estate rental rates, drugstores aim to increase sales albeit at lower margins to meet the rising operating expenses. So, selling alcohol is another way of attracting consumers with the hope of cross selling other goods, thereby increasing overall sales.

We currently estimate the OTC drugs & general merchandise (which shall now include beer and wines) revenue per square foot at Walgreens stores to grow at a moderate rate of 2% from $281 in 2010 to $323 by the end of 2017.

With liquor sales, if however the revenue per square footage were to rise by 10% to over $330 by 2013 from $330 in 2011, it would lead to around 8-10% potential upside to our current $43.30 Trefis price estimate of Walgreens’ stock. You can drag the above graph to see the impact on Walgreens’ stock price.

Why beer? Why a private label? Why so cheap?

Walgreens exited the liquor business in the 1990s and has focused on growing its beer and wine business. For wine, it launched Southern Point in December 2009, David Stone in March 2010 and Colby Red in partnership with California-based Treasury Wine Estates.

Why beer? The answer lies partly in the reason why Walgreens discontinued stocking liquor in 1990s on account of inefficiencies in managing logistics and inventory. With advances in computer technology, it is now much more feasible to manage the stock and distribution of the numerous variants. Beer in cans is relatively easier to handle while loading and unloading and transporting to the drugstores. Beer also has a relatively quicker stock turnaround at the drugstore shelf compared to wines and hard liquor.

Why a private label? Why not when Walgreens can leverage its presence across the country to boost the sales of its own in-house liquor? Stocking up its own brand of beer automatically gives the brand more visibility and drives volumes by its mere presence at numerous locations all over the country. Although private labels in general command higher margins, we’re not convinced that at Big Flats 1901’s price point, there is scope for higher margins given its low brand awareness.

So, why is Walgreens beer so cheap? We believe Big Flats 1901’s price itself advertises the brand and draws consumer attention. Its cheapness makes it the most appealing over factors like a premium taste or higher quality. The beer has already attracted a lot of attention simply for being priced so low. We assume that the management believes increased traffic at the drugstores and the potential cross selling of other products makes up for the low margins on the 50c per can beer!

1. Walgreens offers Private-Label Beer, Jan 31’2011 [↩]
2. Walgreens’ 50c-beer, The Week, Jan 28 ‘2011 [↩]
3. Walgreens wants to add beer, wine to its Elgin stores, Feb 15′ 2011 [↩]