Reality Check: Walgreen's Nice! Challenges Grocery & Convenience Stores (WAG, CVS, RAD, KR, SWY, WMT, TGT)

Walgreen Co. (NYSE: WAG) is just a drugstore… Right?  Maybe not any longer in entirety.  As of last year, the company operated 7,650 drugstores and it owned 37 strip shopping malls.  It turns out that the company wants to migrate away from just being a drugstore.  With the launch of Nice!, Walgreen is setting itself up to differentiate itself from CVS Caremark Corporation (NYSE: CVS) and Rite Aid Corp. (NYSE: RAD).

The new company is going to eventually look perhaps more like a Kroger Co. (NYSE: KR) or a Safeway Inc. (NYSE: SWY), but perhaps the real targets are Wal-Mart Stores Inc. (NYSE: WMT) and even Target Corporation (NYSE: TGT).  Yes, Walgreen is going after more and more of the lower-end grocery and consumer products market.

Walgreens is now planning to open some 400 Nice! stores that sell its private label products in grocery and household product categories.  The company is claiming that it will offer its grocery and household products at prices which are up to 30% below other national brands.  The company plans to have most of the Nice! product on its shelves by early 2012.

Walgreen has always been a place to get a flu shot or to get your medical prescriptions or consumer health and body products.  While it carries some basics in food and consumer products, this really sounds like it is going a step farther.  The company said its Nice! label will be on soups, sauces and bakery items, and it will add more and more Nice! brand products over the next few years.

The current store brands include Café W, Deerfield Farms, W and others, but these will be phased out and transitioned to Nice! brand products.  The company has already had its private label brands under dry grocery items like tea, dried fruit, rice and even macaroni and cheese.

The drugstore chain is also going to launch a national marketing campaign in 2012 to drive awareness and generate trial and it is going to have employees promote Nice! products.  This sounds a bit ambitious on the surface, except that it does have some solid data behind its news.  The company noted, “Nielsen consumer research shows that 75 percent of Walgreens shoppers purchase store brands in Walgreens.”  It also noted that the total private label sales market segment has grown from about $64.9 billion in 2005 to $88.5 billion in 2010 and the fastest growing private label segment is actually households with incomes of more than $100,000.00.  The company also backed it up by consumer testing and new design packaging with strong reviews.

Frankly, this seems a bit of a stretch on the surface.  Perhaps there is room for yet one more brand in shopping for grocery and consumer product goods.  The question is whether or not this will cannibalize sales and just create another small format grocery and consumer products store.

If you ever saw the cult film “Repo Man” in the 1980s you may remember a shoot-up scene in the convenience store.  The movie was such a low-budget and undesired production that all of the white-box products on the shelves had no labels and just had a physical name like “Soap” and “Cereal” and on and on.  Walgreen is highly unlikely to fall into that category, but it would be easy to argue that there is a big risk here even if the launch is only 400 stores.

Maybe the real target is just 7-Eleven.  This may turn out to be a profitable move for the company, but it is far from being a riskless move.

JON C. OGG