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Extreme Makeover

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As it approached 50, New York City drugstore chain Duane Reade was undergoing something of a midlife crisis. With crowded, cluttered stores, it was perceived as a handy but unpleasant shopping experience.

“Consumers told us that while DR was convenient and local, it didn’t always provide the best shopping experience,” says Joe Magnacca, Duane Reade’s president. “What they also told us is that they wanted us to change and to succeed, because our New York heritage was important to them.”

It would not be an easy road. The company struggled under a heavy debt load incurred when it went private in 2004. There were threats from Walgreen and CVS, both of which were making serious noise about taking Manhattan.

To save Duane Reade would take more than a mere facelift — it would take a top-to-bottom assessment of its entire business.

Remaking the private label
Duane Reade began the makeover process by researching its customers. Finding that they were largely affluent, socially responsible and looking for unique and different items at a value, Duane Reade staked its future on being a New York retailer. “The overall mantra is ‘New York living made easy,’” says Todd Maute, senior vice president and partner of Manhattan-based CBX, which was tapped to carry out the makeover. “That is all encompassing.”

So, too, would be the makeover.

“All elements — store design, private brand re-launch, merchandising mix changes, pharmacy re-focus, new departments, loyalty, customer service, etc. — were critical to Duane Reade’s brand transformation,” Magnacca says. “The business had to change inside and out to be successful.”
Underpinning the changes would be a renewed emphasis on private label merchandise.

“Private brands were identified early on as a key part of our corporate strategy to provide New Yorkers with better value and a unique point of difference from our competition,” Magnacca says. “We knew that a major push on our new private brands could transform our product assortment in all stores — both new and old — which would be an important signal to New Yorkers that real and positive change was underway.”

The company created four brands: DR Delish (unique and fresh food items); Apt. 5 (home goods); DR (health and beauty); and an officially unnamed brand referred to as “skyline,” which includes high-volume items like bottled water and snacks. The company also has a seasonal brand called Christmas in New York.

Most of the labels convey a strong city appeal. Skyline, for instance, includes barcodes made out of landmarks like the Statue of Liberty. (More standard barcodes on the back of the packaging are scannable.) It was this marriage of product and design that led Duane Reade to tap CBX.

“CBX was the clear choice when we wanted to launch a European-style private brand business,” Magnacca says. “They had to understand our strategy and deliver it in unique, creative terms that would break through to New York consumers. In other words, we needed them to make the packaging be as good as the products inside.”

Private labels afford retailers “an opportunity to market exclusivity and support the position they want to have in the marketplace,” Maute says. “Traditionally, private label was a follower … ‘Let’s see if I can get a manufacturer to replicate [its] product.’ Now retailers are becoming more intelligent and understanding their customer more. If you look at private label as a marketing tool, it’s an opportunity to own a unique brand.”

Duane Reade has established a clear commitment to its private label products. Each store carries virtually the entire 2,000-SKU private-label line, with only some exceptions in fresh food, Maute says.

“It’s astounding,” he says. “If you’d shopped their stores three or four years ago, their private brands were also-rans, some old, very dated, cheap-feeling,” says brand strategist Christopher Durham, who follows the private label industry on his blog, “A lot of retailers have fallen into that rut and very few have the guts to innovate on private brands. It was nice to see them take that leap.”

A booming business

The strong growth of private brands over the past few years is well documented. According to the research firm Nielsen, store brand unit sales reached an average 22 percent share across all departments for the year ending July 2010.

Duane Reade might not have seen the success with private label that it has if the line makeover hadn’t gone hand-in-glove with a store makeover, Durham says. “They were in disaster mode and had to do something. But if they’d just reworked their private brands and slotted them into their old cluttered stores, nobody would have noticed,” he says. “If they just changed the stores and had not enhanced the products, I don’t know that it would have worked, either. It was brave and ultimately necessary to bite the bullet and change it all at once.”

The changes at Duane Reade were enough to draw the attention of Walgreen Co., which had been angling to increase its Manhattan presence. Walgreen said it was attracted to the $1.08 billion deal by both the ability to expand in Manhattan and by the new ideas it could get from Duane Reade.

“The key to what CBX did for Duane Reade was to develop a real ownable brand positioning statement,” Durham says. “Most retailers in drug, mass and grocery are indistinguishable — they are the same experience, over and over again. The New York-centered positioning gave them a road map for store design, product design and ultimately private brand creation. It gave them something to rally around.”

While Durham is unsure whether a similar approach would work throughout the 7,000-unit company, Walgreen began testing the Delish brand in some stores last summer. “There are tactics they can pick right up and implement in Chicago or perhaps other urban stores, but they may not make sense for all” its locations, he says.