Drugstores See Growth Potential in Upscale Services

At a spot on Sunset Boulevard and Vine Street in Hollywood, visitors scoop up sushi, taste frozen yogurt and order lattes.

But this isn’t a restaurant or even a fancy supermarket. It’s that Main Street staple: Walgreens.

“It’s like an amusement park,” gushed West Hollywood resident Brent Leonesio, 30, as he eyed the line of people waiting to pick up caffeinated drinks to go. “They’ve kind of made this into a destination. It’s actually fun to come here.”

Once mainstays for late-night snack runs and toilet paper emergencies, drugstores are shaking off their stale image and going upscale.

Walgreen Co., for example, is opening glossy stores that feature sushi chefs and enormous alcohol selections. CVS stores have added fresh sandwiches and produce. Rite Aid Corp. has been revamping its locations and bringing in packaged organic and gluten-free food.

“Drugstores are trying to figure out what their role is,” said Ken Martindale, chief operating officer of Rite Aid. “We’re in a new environment where everyone is selling everything.”

Drugstores aren’t just competing with one another, they’re also taking on brick-and-mortar retailers of all sizes, analysts said.

The $220 billion industry is up against big-box chains such as Wal-Mart and Target, which are expanding their grocery sections. Even dollar stores are offering steak and fresh fruit.

On yet another front, drugstores are fighting online merchants that cater to tech-savvy customers who are comfortable ordering mouthwash and prescription medication over the internet.

“Shoppers are just getting more savvy and into buying things online, so drugstores have to evolve to keep customers just like other traditional retailers,” said Dane Leone, a senior research analyst at Macquarie Bank.

“They’re also learning that in places like L.A. and New York, people want the option of picking up high-end fresh food when they go fill their prescription.”

In an earlier time, of course, drugstores such as Schwab’s Pharmacy and five-and-dime chains such as Woolworth’s employed waitresses to dish up ice cream to teenagers and quick lunches to working stiffs.

Now they have morphed into cafes catering to on-the-go customers who expect gourmet fare made before their eyes.

To succeed, chains have to dedicate time to changing shoppers’ expectations of drugstores, said Judson Clark, an equity analyst at Edward Jones & Co.

“There is an adjustment period,” he said. “But back in the 1950’s, Walgreens had full-blown restaurants where our grandparents ate, and as they went away, entire generations forgot about them. But 10 years from now, people could very well think ‘How could CVS not have sushi?'”

At rival Rite Aid, a serious remodeling effort over the last two years has changed the look of 800 locations, adding more spacious layouts, better lighting and lower shelves. Kiosk machines, where shoppers can order contacts and eyeglasses, have been plopped down near the pharmacy, while organic and gluten-free snacks can be found in the aisles.

“There is definitely a move within the (drugstore) channel to upgrade stores,” Chief Operating Officer Martindale said. That was a sharp departure from the chain’s previous strategy for growth, which entailed opening new stores and spending little money keeping current locations up-to-date, he said.

For now, Alex Marx, 40, wrinkles his nose at the idea of raw fish from the neighborhood drugstore. He sticks to buying toothpaste and shaving gel on his runs to Walgreens.

“Walgreens sushi? No,” the Silver Lake cook said. “I would not eat that.”