Alternative Channels Offer Brands Growth As Retail Falters

Branded products try to expand distribution through online, convenience stores, dollar stores and other alternative channels as growth in traditional food, drug and mass channels slows. The outlets offer different benefits and drawbacks for different OTCs, supplements.

Unhappy with sluggish growth at major retailers, branded OTC drug and supplement firms are exploring nontraditional channels with mixed results, according to recent research from Kline & Co.

“The three main retail outlets – drug, food and mass merchandisers – continue to hold a larger market share” of OTC and supplement sales, “but they don’t offer a whole lot of growth from branded companies,” Laura Mahecha, Kline’s health care industry manager said during a Sept. 12 presentation on consumer insights and retailing of OTC products.

But outlets such as “the Internet, convenience stores, health food stores and warehouse clubs offer fair competition … and should be explored for select categories and brands.”

These alternative categories accounted for about 16% of the total sales in the OTC retail marketplace, including vitamins, minerals and supplements, home diagnostic tests and nonprescription drugs, an online survey of 342 consumers conducted by Kline last winter reveals. Additionally, 18% of the respondents reported they most frequently buy OTCs at alternative outlets, which indicates the outlets may soon reach 20% market share, Mahecha said.

“We’ve got every part of a chance that we’ll see store brand continue to accelerate” because “the data tells us once you try our products, 91% of the time you will stay with our products.” – Perrigo CEO Joseph Papa

This may seem relatively small compared to the 35% of consumers who reported most frequently buying OTCs and supplements at drug stores, the 35% who shopped for these products at mass merchandisers and the 12% who favored food stores during the same time, Mahecha acknowledged.

But the alternative channels offer relatively high growth rates for some categories of OTCs, she said.

From 2010 to 2011, the compound annual growth rate of all the alternative channels combined grew 9.3%, with online sales leading the way with a 16.1% increase. Specialty stores were up 11%, dollar stores increased 10.9%, warehouse stores 8.6% and health food stores 8.5%.

This is “pretty good growth” considering the CAGR of the overall OTC and supplement market increased only 2.4% through all retail channels combined, Mahecha said.

Category-Specific Pros & Cons

Not all alternative channels are right for all product categories, she noted.

Research in Kline’s July report “OTC Retailing: U.S. Alternate Channel Analyses and Opportunities” and another recent report from the firm “OTC U.S. Consumer Research” suggest nutritional products are the most successful in nontraditional outlets.

Vitamins, minerals and herbal products are widely available through health food stores, warehouse clubs and online. About 30% of vitamin and mineral sales in 2011 came through these outlets and 60% of herbal product sales were through them, according to Kline. Sales of home diagnostic tests also do well through these channels, she added.

Of these channels, online distribution for vitamins and minerals is particularly strong, with 24.7% of survey respondents reporting that they shop and buy these products online. An additional 16.4% said they shopped for these products online, but never bought them.

OTC drugs do not fare as well online.

More than 81% of consumers said they never shopped for allergy relievers, cough and cold products, antacids, laxatives, topical products or sleeping aids online. And less than 8.5% said they bought these products online, according to Kline.

Mahecha said the discrepancy between online sales of vitamins, minerals and supplements and OTC drugs comes down to why consumers buy certain products.

“The online channel is growing rapidly for some categories where consumers like to basically stock their medicine cabinet, so vitamins and minerals, herbals and analgesics tend to have more online purchases,” she said. Whereas consumers “still buy OTCs from brick and mortar stores for immediate relief, such as allergy relief, cough and cold and laxative products.”

Alternative Channel Drivers

Some consumers also began shopping for OTCs and supplements online and at alternative channels because of the recession, according to the research.

The search for less expensive OTCs pushed 21% of study respondents to switch where they buy OTC drugs, according to Kline. Among those, 17% are buying OTC drugs more frequently at dollar stores, 8% are purchasing more online and 8% are buying OTCs from warehouse clubs as a result of the recession, the study found.

The recession also is a major contributor to the reduced growth opportunities for branded products in traditional food, drug and mass channels, Mahecha said.

Consumers’ hunt for value products during the recession spurred retailers to offer more private-label products that cost consumers less than branded products, she said. This pressures brands to create novel and competitive products to win back shelf space from store brands, which can drive up research and development costs without the promise of strong returns.

High commodity costs and price-point competition from private label continue to stifle profits increased competition from private label in food, drug and mass outlets likely will not stop when the economy improves, private labeler Perrigo Co. PLC CEO Joseph Papa said Sept. 10 during a presentation at the Morgan Stanley Global Healthcare Conference.

“We’ve got every part of a chance that we’ll see store brand continue to accelerate” because “the data tells us once you try our products, 91% of the time you will stay with our products,” he said.

He adds that retailers also will want to retain as much possible space on store shelves for their products because the average margin on store brands is significantly better than the national brands.

Retailers also bulked up their private label selection in response to the widespread recalls of multiple OTC drugs by Johnson & Johnson, Novartis Consumer Health Inc., Bausch & Lomb Inc. and others because “they have to fill the shelves with something,” Mahecha said (Also see "Perrigo Launch Investments Hold Income Back, As Firm Girds For 2013" - Pink Sheet, 20 Aug, 2012.).

Of the consumers Kline surveyed, 40% said they switched to private-label products when J&J products disappeared from store shelves. Another 47% defected to competing national brands that were still available. The remainder were not sure what they did.

Many of the J&J and Novartis products recalled for quality control reasons should return to shelves in the next year, but that does not mean retailers will automatically remove some private-label products to make space or that consumers will switch back, Mahecha said.

When J&J relaunches its products it will need to invest in advertising and promotions on the same scale as if it were launching a switched Rx-to-OTC brand, she said. Even at that level, “we expect it will take several years for Johnson & Johnson to reach a portion of its past consumers and regain some market share,” Mahecha said.

Finally, smaller, lesser known health food stores, convenience stores and specialty stores may be more willing to negotiate with branded firms than the major food, drug and mass outlets because they are more fragmented and therefore do not have as much leverage.

The main retail outlets are highly consolidated with a small number of chains, which allows them to apply more pressure on suppliers for better service, Mahecha said. So with the alternative channels, manufacturers may face a more level negotiation table.