Beer Competition Brews

The invasion of c-store territory continues as drug and dollar stores begin to stock beer and wine

The sluggish economy is the clear culprit for the industry's flat beer sales this past year, but new competition from major drug and discount players threatens to dull the buzz even more.

Drug-channel titan Walgreens and small-box discounter Dollar General are moving along with new beer and wine programs, trying to capitalize on their "one-stop" advantage with persistently price- and gas-conscious consumers. As of early October, Deerfield, Ill.-based Walgreens had completed most of the beer-and-wine rollout it announced in mid-2009, bringing a low- to mid-priced product mix to about 4,200 of its 5,000 stores. Each participating Walgreens (some can't get liquor licenses) is devoting about 2 percent of its shelf space to the category, and the chain expects beer and wine to constitute less than 5 percent of overall sales. Goodlettsville, Tenn.-based Dollar General, meanwhile, started getting its buzz on in some Southeast- and Southwest-region stores, with plans to expand to about half of its 8,800 stores nationwide. And Charlotte, N.C.-based Family Dollar has been quietly testing beer in some of its Florida stores for almost a year now, according to a spokesperson for the 6,800-store discount chain.

This additional beer and wine competition is still pretty new in many regions, and it hasn't arrived yet in others, but its impact on this key c-store category could be significant as the rollouts proceed and gain shopper attention.

"If you look at c-store beer sales over the past year, case volume is down about 1 percent and dollar volume's up a point and a half. It doesn't have much to do with Walgreens or Dollar General but rather the economy," said industry watcher Nick Lake, vice president and group client director of beverage alcohol at The Nielsen Co. But the playing field could look quite different a year or two from now. "Walgreens has [beer in] 4,200 locations now and will have more by year-end, and you have to imagine the rest of the dollar channel will follow Dollar General," Lake noted. "So when you look at the sheer number of additional outlets that could be carrying beer within the next couple years, it could be another 20,000-plus." He predicts the new channels will have the greatest impact in urban areas where there's significant foot traffic and close proximity to competitors.

Indeed, some metro-area c-stores are already feeling a chill from their new competitors' coolers. "Besides the pressure on beer from the economic downturn — which is continuing because Bubba's still not back to work — the new direct competition is definitely hurting our [beer] sales, typically in metro areas where the competition is across or down the street," said Mike Zielinski, president of Lisle, Ill.-based Royal Buying Group, which works with small c-store retailers. While the downturn has knocked beer sales off a bit, he worries about the new channels taking more share and driving margins down. "Where there's that direct competition, you could see 10- to 20-percent of your beer-category business leave, more at the higher end of that range if you're not competitive with pricing," he warned.

Nielsen's Lake agrees that competitive pricing will be key to c-stores' response. "The drug channel will be aggressive but not out of control," he said. "But it will be really interesting to see what the dollar stores do."

Matt Paduano, vice president of category management for the 76-store Nice N Easy Grocery Stores chain in upstate New York, echoed Zielinski's concern about margins. "[Aggressive pricing by the new competition] could make for further deflation and pull the whole local beer market down."

Walgreens entered his territory only a few years ago, and they haven't added beer and wine yet, as far as he knows from his trusted beer-distributor sources. "If and when they do, they'll be looking at what Rite-Aid is doing in the area and trying to match them," he predicted.

Dollar General hasn't rolled out its liquor program in Paduano's markets yet either, but he doubts their ability to do much damage anyway. "Unless there's some retrofitting, they're just not equipped for the cold space they would need [to be a competitive threat to c-store beer sales]. It would take some serious capital investment."

In fact, it's "hot" product being sold at most Dollar General stores. Two months ago, Alan French, manager of a Dollar General store in Abilene, Texas, the first in Northern Texas to get the new liquid line, cleared four feet of shelf space for beers such as Bud and Natural Ice (priced "cheaper than 7-Eleven because they're not cold," he noted) and another four feet for low-priced wines from Texas-based distributor Glazers. When the "corporate-designated" product mix hit French's shelves in August, it made the front page in the local paper as well as local TV and radio segments, and he has seen "a steady increase in sales as word spreads."

At Walgreens, the new libations are a bit more sophisticated to appeal to the higher-end customer the chain attracts: a limited, chilled selection of low- to mid-priced wines and domestic, imported and craft beers.

"[Walgreens] might have the same lower-end Mondavi or Woodbridge as a c-store nearby, but they're doing it with pretty shelves and nice lighting," said John Call, president of Convenient Food Marts in Cleveland, lamenting what he sees as the c-store industry's persistent lack of attention to the female consumer. "As much as we clamor about it every year and profess we'll do better to cater to women, most of us just never do."

Responding to the news that Walgreens was starting to carry beer and wine, a visitor to a popular Web site for women commented: "This makes perfect sense because as the leader in 24-hour drugstores, Walgreens is almost like a convenience store." And another woman on the same site commented: "It would be wonderful to go into Walgreens for a few things, and know I could get so much more in just one trip."

While Lake contended the consumer who shops Walgreens isn't the c-store customer, Call suggested the drug chain's new program will still have some impact on c-store business "just because they do everything better." "Maybe over time we'll see some erosion," he said, "but I think [Walgreens] will really be much more of a threat to liquor stores."

For c-stores where the threat from the category newcomers is already real, or imminent, said Lake, operators must "get sharper on the four Ps" — price, product, promotion and placement. He cited a c-store in Atlanta that's fighting back loudly and effectively with radio promotions, signage at the pump, and "all kinds of advertising letting consumers know they have cold beer." Royal Group-member stores in impacted areas are also touting the "cold" in new counter-competitive promo efforts, as well as lowering their margins "to keep the beer customer coming through the door," Zielinski said, noting how important that customer is to ancillary sales. "We're asking our bottlers/distributors and manufacturers for more promotional help; heavily advertising our cold beer cave; and accentuating the key advantage we offer the customer: Our checkout is still much faster than at a Walgreens."

Bottom Line

  • Walgreens and Dollar General are expanding their beer and wine offerings.
  • Competition from drug and dollar stores could be significant as they roll out national programs.
  • Sharp pricing is key to protecting share in alcoholic beverages.
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