America's addiction to prescription drugs directly benefits pharmaceutical companies. But it also benefits the pharmacies, drug stores and even superstores like Walmart (NYSE:WMT) and Target (NYSE:TGT) who fill those prescriptions. Here are some of America's biggest drug store chains and the part prescription drugs play in their growth. At the end, we'll look at some excellent alternative to the usual suspects.

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Beyond Drugs
Most businesses constantly are seeking new and diverse streams of revenue to ensure their future growth. Drug store chains are no different. In the retail pharmacy business, you have two main revenue generators: the front of the store and the back of the store.

The back is where customers get their prescriptions filled and is the traditional source of revenue for most retail pharmacies. The front is where the large chains look to grow sales providing soda pop, chips, sun tan lotion and virtually everything else a consumer might buy at their local grocery store. The rationale is that once you're in their store, they have a captive audience and they better make the most of it. Many retailers call this upping its UPT or IPT (units/items per transaction) and it's a cornerstone of merchandising. In recent years, drug stores have made this a priority. How well have they done? Let's take a look.

Last fall, Walgreen (NYSE:WAG) made a presentation to analysts that emphasized growing beyond its core competency of prescriptions and drug merchandising. Its goal was to move the 15% of total baskets at checkout that were Rx only and 46% of the baskets that had 1-2 front-end items and both cross and solution-sell those customers so that they were purchasing five or more items that weren't drug related.

The goal is especially important given the current reform of healthcare. You can be sure that drug store revenues from the back of the store are going to drop in coming years (especially if price ceilings applied), making its front-end business that much more important. Here's a classic example of how Walgreen is building sales beyond its core. In 2008, its online digital photo service grew 54% primarily because its customers found Walgreen locations convenient to home or work. The trick is getting them to buy more once in the store to pick up their photos.

In October 2008, CVS/Caremark (NYSE:CVS) acquired Longs Drug Stores for $2.6 billion, adding 529 retail stores in California and Hawaii to an already impressive retail network whose front-store operations deliver 32.5% of its total revenues. Two areas it is working on growing are private label sales, which currently account for 16% of front store revenues, and beauty product sales by opening Beauty 360 stores immediately adjacent to existing CVS stores, in the hopes of extending its market share in this important front-end category. Clearly, the big drug store chains are continuing to transition from drug peddlers to much more.

Front-of-Store Comparison

Company Front-of-Store % Sales Operating Margin
Walgreen(NYSE:WAG) 35.1% 5.83%
CVS/Caremark (NYSE:CVS) 32.5% 6.28%
Shoppers Drug Mart (TSE:SC) 47.6% 9.37%

My final selection has a clear head start on its U.S. competitors and unlike Tim Horton's (NYSE:THI), is happy to control the Canadian market only. Its name is Shoppers Drug Mart (TSE:SC) and it's the largest drug store chain in Canada with 1259 locations.

The Bottom Line
Current Gap (NYSE:GPS) CEO Glenn Murphy began Shoppers' transformation in 2002, building 15,000-square-foot drug stores that not only filled prescriptions and sold over-the-counter drugs, but also cosmetics, convenience food and beverage items. The combination saves customers time while making it money. In its latest quarter, it made C$136.1 million on C$2.29 billion in revenue. Most impressive was its 7.4% jump in front of store same store sales to C$1.18 billion, accounting for 51.5% of its total sales. Despite this success, its stock is trading 22% off its 52-week high of C$56.99. I'd look more closely at this Canadian gem. (To learn more about what drives the Canadian economy, see Canada's Commodity Currency: Oil And The Loonie.)

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