21st century retail: my trip to Rite-Aid

I went to Rite-Aid the other day to get some Aleve.  I was away from home, in a rural area more than 100 miles from the nearest Costco, and not at a place where I could get same-day delivery from Amazon (270 Aleve tablets for $18 ($0.07 each).

I had several choices:

–100 generic (naproxen sodium) tablets for $9 ($.09 ea.),

–200 generic for $14 ($.07 ea.)

–100 Aleve for $11  ($.11 ea.),

–200 Aleve for $20 ($0.10 ea.), or

–270 generic for $14.50 ($0.05 ea.).

I took the 270.

What really struck me was the fact that I got the final 70 tablets for a total of $0.50.  That’s $0.007 each.  Assuming that Rite-Aid wasn’t paying me to cart them away, the most it could have paid for the tablets was $0.007 apiece.  Multiply by 270 and you get about $1.90.

Doing the analysts’s mountain-out-of-a-molehill thing, and assuming Rite-Aid buys from the manufacturer, I conclude that $1.90 is the most it could have paid for the container of tablets I bought.

The $12.60 that remains is the cost of packaging, distribution, promotion …plus profit.  (Overall, Rite-Aid isn’t making money, even though it has a positive gross margin of about 22%.  SG&A pushes it into loss, so delete “profit” from the packaging… list.)

That Rite-Aid can’t make money despite a 600%+ markup says a lot about the company.  But it also says something about bricks-and-mortar retail, the way Rite-Aid gets its products in front of customers.

This is the AMZN success story in a nutshell:  all it has to do is deliver a $2 item to a customer and spend less than $12.60 to do it.

 

My trip to Home Depot tomorrow.

 

 

 

 

 

 

 

online ordering/delivery and supermarkets/drugstores

In Manhattan, where I spend a considerable amount of time, a reasonable rule of thumb is that household goods and food both cost about twice what they would in nearby suburbs.  Part of this premium, I’m sure, has to do with high rents and the logistics of getting inventory into the city.  But I also think that if we could see into the management control books of the firms involved, we’d see that these urban locations are extraordinarily profitable.

Online is changing this situation in two ways.  Anyone who is able to wait a day or two–and who has a way of accepting delivery safely–has been shifting away from bricks and mortar.  Just as important, fringe areas in the city, which have few (if any) drugstores/supermarkets, become more attractive as neighborhoods because traditional infrastructure is no longer as crucial as it once was.

 

On the other end of the population density spectrum, the Wall Street Journal recently reported that in rural areas online ordering is also supplanting supermarkets–at least for non-perishables–in much the same way that Wal-Mart disrupted mom-and-pop retailers a generation ago.  The Journal cites a Kantar Retail study that shows 30%+ of rural shoppers are now members of Amazon Prime and almost three-quarters are online shoppers of some sort.

What had once been protecting the margins of local rural retailers is the cost of shipping items to out-of-the-way locations.  But with the near-ubiquity of free/membership shipping (meaning the bargaining power of, say, Amazon to lower shipping costs), this barrier has been substantially reduced.

 

My guess is that the biggest winners from this rural trend are local convenience stores.  Since these are typically linked with gasoline stations, which have long benefited from lower oil prices, I think they’re no longer hidden gems.  The idea that locals will have more money to spend may mean the convenience stores will run for longer than the consensus expects.  During a correction maybe, but right now I’m not a buyer.