August 9, 2007

Superdrug: Differentiation Strategy Showing Signs of Success

Specialist health & beauty retailer Superdrug has reported a 2.7% increase in sales and a 34.8% increase in profits for the year to December 2006. Its strategy of differentiation from competitors appears to be paying off, but, with a young customer base and low margins, it still faces challenges.

Superdrug is the second largest UK health & beauty specialist, behind Alliance Boots. However, both retailers have been hit over recent years by the supermarkets, who have built up their share of the market to account for nearly half of all health & beauty expenditure. Both retailers have followed strategies to differentiate themselves from the supermarkets; Boots with greater focus on its health credentials and Superdrug by building itself into the "TopShop of the health & beauty sector".

For Superdrug this has meant investing in new store formats to emphasize its fashion beauty credentials. Before current managing director Euan Sutherland joined in 2004, the retailer was on the verge of becoming a cut-price general merchandise store, with a wide mix of product and cluttered stores. Since then, the stores have reverted back to their health & beauty focus, but with additional products such as fashion accessories. Stores have been reconfigured and refurbished, making them much more attractive to shop in and the company has commenced an intensive training program for its staff to improve customer focus.

That said, the business still faces some major challenges. Though its sales for the year to December 2006 exceeded GBP1 billion (at GDP1,027,417), the 2.7% year-on-year uplift has been aided by new store openings - we estimate an additional 3.2% of sales space. While not of all this will have been in operation throughout the year, the company is still underperforming the market and therefore losing share. Furthermore, at 2.7% it has one of the lowest operating margins in the sector, less than half of Boots' 6.8%.

The problem with Superdrug's strategy is that is appeals mainly to younger women who, while inveterate shoppers, do not have high disposable incomes for health & beauty products, unlike Boots' more mature female shoppers who are prepared to pay much more for benefit-led skincare and premium brands. Therefore, Superdrug needs to generate high volumes, which means driving high footfall and improving its conversion rates, which is its aim through its combination of more attractive stores, more high profile marketing, and better customer service.

Source: Verdict Research