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How Can Retail Pharmacies Differentiate Themselves?

When Rite Aid (NYSE: RAD), CVS (NYSE: CVS), and Walgreens are all in the same strip mall, what determines which one customers choose? Efforts like loyalty programs and choosing to be tobacco-free can make all the difference in securing a competitive advantage.

Motley Fool analysts Vincent Shen and Kristine Harjes discuss these retailers' strategies in this clip from crossover week on the Industry Focus: Consumer Goods podcast.

A full transcript follows the video.

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Vincent Shen: I want to touch briefly on loyalty programs. On the consumer retail side, everybody can look in their wallet or keys and see a lot of different things, credit cards, maybe their airfare, supermarket, plenty of options. How is that playing out in terms of the healthcare space?

Kristine Harjes: For that, I would really point to the retail pharmacy space. In particular, you have these stores that are essentially the same. CVS, Walgreens, Rite Aid. For me, and for a lot of people, proximity is what determines which one of them you're going to use to fill your prescriptions, or to walk in and buy Tylenol or whatever it is you're looking for. But, there are little things these companies can do to try to keep their customers loyal. The best example of this that I can think of is Rite Aid with their Plenti program. This is something you might have discussed previously. It's a group effort among a bunch of big name companies: Exxon, AT&T, Macy's, Hulu --

Shen: There's a ton of retail partners in this.

Harjes: They all got together and they made this co-op loyalty program so you can share your loyalty points throughout all of them. Whether that's going to be enough to encourage people to go to Rite Aid as opposed to the CVS that might be a little bit closer, I'm not sure, particularly when you consider that these stores are often right next to each other, or at least in the same strip mall -- it might be enough.

Shen: On top of the Rite Aid Plenti program, which I think is particularly attractive because of what you mentioned -- its network of retail partners -- I was looking at CVS, they have their ExtraCare Rewards, Walgreens has its Balance Rewards. I'm curious, in terms of the retail pharmacy business -- I feel like when I go to each of these stores, they're all very similar. If it's not proximity, how much does product selection, in terms of magazines, candy, or other products beyond the prescription counter, have a draw, if it's not just proximity?

Harjes: I think it's so easy for these companies to offer the same stuff, the stuff that works the best. One thing I will point out here, though, is CVS having gotten rid of cigarettes. That was a huge move for them.

Shen: Oh yes, I remember that.

Harjes: This was a while ago. I can see that having both positive and negative impacts on consumers. I can see people saying, "That's a great brand," if you're a non-smoker and you support healthy things like that. But if you're a smoker, then you're not going to go to CVS because you can't pick up a pack of cigarettes on the way out. Realistically -- this is another thing we talked about on the Healthcare show previously -- that move for CVS was a branding move, but it was more for their PBM side of the business, which is their pharmacy benefits management, which essentially negotiates drug prices. For that, it mattered a lot more that they had this brand image of, "We're cigarette-free."

Shen: Sure. If I recall correctly, they had estimated that would have something like a $2 billion impact on their sales. For a company the size of CVS, their top line is multiples and multiples of that. So, it should have been minimized. You may argue that there may have been an effect in that people who previously would have bought cigarettes and other products, now they lose on some of that revenue. But, like you mentioned, it seems like that wasn't really their main concern.

Harjes: And I think that was factored into the estimate. And, the PBM is the majority of their revenue, so if it helps them a little bit there and dings them more on the retail pharmacy side, that's OK, that probably nets out.

Kristine Harjes has no position in any stocks mentioned. Vincent Shen has no position in any stocks mentioned. The Motley Fool owns shares of ExxonMobil. The Motley Fool recommends CVS Health. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.