CVS woos shoppers with cheap wrinkle cream

A battle is raging on Manhattan's Upper East Side, where CVS Caremark Corp. is wooing cash-strapped shoppers with house-brand anti-wrinkle cream that's as much as 30 percent cheaper than L'Oreal SA's Advanced Revitalift.

As consumers scared by rising unemployment and declining asset values cut back on spending, pharmacy chains such as CVS, the largest U.S. drugstore chain, are stepping up offerings of less expensive, more profitable store brands.

"Customers are more willing to look at private label" during a recession, said Willy Kruh, who heads the consumer and industrial businesses at KPMG Canada in Toronto. "The consumer is hunkering down."

Store brands accounted for 21 percent of total sales at U.S. supermarkets, drugstores and mass merchandisers such as Wal-Mart Stores Inc. during the 2001 recession, up from 18 to 20 percent through most of the previous decade, according to the Private Label Manufacturers Association in New York. They also increased when the economy contracted in 1990.

Woonsocket, Rhode Island-based CVS, with facilities in Northbrook, plans to increase non-prescription sales from private-label products to as much as 20 percent during the next three to five years, from 14.5 percent in 2007, spokeswoman Joanne Dwyer said. The company's push coincides with a slowdown in pharmacy business.

CVS reported Jan. 9 that it would fail to meet its first- quarter profit projection by 17 to 22 percent because its pharmacy management programs were renegotiated at lower prices. The stock lost 12 percent to $25.69 in trading that day on the New York Stock Exchange, and it closed yesterday at $24.93.

The retailer has more than 3,000 store-brand products. About 500 were added last year, including the Vickery & Clarke Natural Apothecary makeup and body-care line and Earth Essentials environmentally friendly paper goods.

CVS's push into store brands is being mirrored by Walgreen Co., Rite Aid Corp. and Canada's Shoppers Drug Mart Corp.

"Consumers are looking for value," and private-label brands are hitting the mark, said Meredith Adler, an analyst at Barclays Capital Inc. in New York who rates CVS as "overweight/neutral."

Store brands now account for $80 billion in annual sales, or one of every five items sold in U.S. supermarkets, drugstores and mass merchandisers, according to the PLMA. Revenue from those products at pharmacy chains, which were slower to offer them than food retailers, jumped 33 percent to $4.9 billion from 2002 to 2007, the group's data show.

In the waning months of last year, drugstore sales of private-label goods in the U.S. and Canada got a boost from recession-wary consumers. Price increases on household and personal-care items by Procter & Gamble Co. in Cincinnati, New York-based Colgate-Palmolive Co., Dallas-based Kimberly-Clark Corp. and other manufacturers also pushed shoppers to lesser- known brands.

Sales of brand-name products in those categories declined by 0.7 percent in the four weeks ended Nov. 29, while private-label items climbed 6.6 percent, according to a Dec. 12 research report by Sanford C. Bernstein & Co. in New York.

P&G, which makes Cover Girl makeup, Pampers diapers and Tide detergent, has been able to maintain market share, the company said Dec. 11 during a presentation to analysts. In that discussion, the world's largest consumer-products maker characterized private-label growth as "modest." Spokeswoman Jennifer Chelune declined to comment for this story beyond referring to that event.

Even so, P&G turned to unusual marketing during the holiday season. It opened a temporary store in New York where shoppers could get free shampoos with Pantene products or an application of Oil of Olay moisturizers, said Kirk Perry, vice president of North America market development.

Private-label brands "have not had a significant impact on us," Rebecca Caruso, a U.S. spokeswoman for Paris-based L'Oreal, said in an e-mail. That's in part because of the "pricing, advertising and other types of promotional support" the world's biggest cosmetics company puts behind its mass brands, such as Maybelline New York and Garnier, she said.

Even with the lure of lower prices during a recession, some consumers won't substitute store brands for those they have used for years.

"I tried generic brands, and then just went back," said Laura Gallagher, a 43-year-old receptionist shopping at a Duane Reade Inc. drugstore in New York. "You get what you pay for."

Private labels can cost consumers at least 20 percent less than national brands and can be twice as profitable for retailers, depending on investment and marketing expenses, said John Williams, a partner with retail-consultant firm J.C. Williams Group Ltd. in Toronto.

For those reasons, Toronto-based Shoppers Drug has made increasing the number of house-brand offerings a top priority over the next five years.

Canada's largest pharmacy chain added 1,200 private-label items in the first nine months of 2008, including candy, organic snacks and cosmetics. That's six times the number that it put on shelves in 2003.

"There's not too much I wouldn't try" of the drugstore's lines, said Sheila Kellogg, a 46-year-old Toronto resident, as she reached for Shoppers Drug's Life Brand peanuts for 99 cents (83 U.S. cents). "I've had good luck with them. They've got a better price."

Shoppers Drug sells a 60-tablet bottle of Life Brand Kids Only chewable vitamins with extra C for C$7.49, compared with Bayer AG's Flintstones supplement costing $9.99. The chain's soft-mint mouthwash costs C$3.49 for a one-liter bottle, while a liter of P&G's Scope peppermint mouthwash was C$5.99.

Shoppers Drug raised profit for 18 straight quarters, and analysts surveyed by Bloomberg News estimate it will post its biggest annual sales gain in four years.

The retailer has "done a great job of penetrating the private-label brand," said Brian Yarbrough, an analyst with Edward Jones & Co. in St. Louis. "The key for them is higher margin, and that's helping them drive earnings growth." He declined to estimate how much those products have added to Shoppers Drug's profit.

Sales of the company's own brands will rise to 17 percent of non-prescription revenue in 2008, Shoppers Drug Chief Executive Officer Jurgen Schreiber, 46, said in November. They were 15 percent in 2007 and 10 percent in 2002. The chain wants those items to account for a quarter of sales within the next five years, the CEO has said.

At Deerfield, Illinois-based Walgreen, private-label purchases already represented about 20 percent of non- prescription sales in 2008, and the more than 2,000 store brands are "definitely being helped by the difficult economic climate," spokeswoman Tiffani Bruce said.

Walgreen expanded its own line of products by about 10 percent in 2008 and promoted small electronics, appliances and boxed candy during the holidays, Bruce said in an e-mail. She declined to give any projections for this year.