1. Presented by: MANAGING DISRUPTION IN DRUG Jessica Campbell Analyst March 7, 2013 Chain Drug Webinar

2. © Copyright 2013 Kantar Retail Agenda 2 –Facing the Growing Threat of Dotcom Pricing –Making Amends: The Lasting Effects of Walgreens Dispute with Express Scripts

3. © Copyright 2013 Kantar Retail Shopping Basket Analysis –Study Details: Conducted December 2012 All prices collected on the same day Includes Marketplace (3 rd party) listings and sale prices Omits shipping charges –Basket Details: Only exact items included In certain instances some SKUs were purchased in multiples to match the quantity required by online retailers Methodology and Background Source: Kantar Retail anaylsis 3

4. © Copyright 2013 Kantar Retail Summary of Findings –Both CVS and Walgreens in-store pricing was significantly higher than online retailers –As shoppers become more comfortable shopping for HBA online and delivery services become more convenient, price will become an important factor to capture sales –Drugstore.com was the closest online retailer to matching in- store prices Online pricing causing disruption in drugstore HBA sales Source: Kantar Retail anaylsis 4

5. © Copyright 2013 Kantar Retail Walgreens Total Basket Results Amazon registered the least expensive total basket Source: Kantar Retail anaylsis 5 19 exact items; 10 personal care, and 9 OTC 22% of items collected were available for Subscribe & Save through Amazon. If taken into account for this study, savings from Subscribe & Save would have been USD 2.36 Walgreens total basket was 26% more expensive than Walmart.com, driven by the OTC sub-basket Walgreens indexed at 105 to Drugstore.com, the main difference being in the OTC sub-basket Promotions in-store lowered Walgreens basket by 3%

6. © Copyright 2013 Kantar Retail Walgreens Personal Care Sub-Basket Walmart.com had the lowest Personal Care sub-basket Source: Kantar Retail anaylsis 6 Walmart.com’s basket was driven by Nature Made

7. © Copyright 2013 Kantar Retail Walgreens OTC Sub-Basket Walgreens indexed highest to Amazon in OTC Source: Kantar Retail anaylsis 7 Nearly two-thirds of prices on Drugstore.com were within 10% of Walgreens

8. © Copyright 2013 Kantar Retail Walgreens Implications –Walgreens will need to develop its omnichannel strategies to consider these significant price gaps Including leveraging Drugstore.com and Walgreens.com –Walgreens will need to invest in areas beyond price to retain shoppers by: Analyzing true price competition Leveraging experience in digital innovation Examining the potential of stores to redefine convenience Can no longer depend on convenience & immediacy alone Source: Kantar Retail anaylsis 8

9. © Copyright 2013 Kantar Retail CVS Total Basket Results Source: Kantar Retail anaylsis 9 Amazon registered the least expensive total basket 18 exact items; 11 personal care, and 7 OTC 21% of items collected were available for Subscribe & Save through Amazon. If taken into account for this study, savings from Subscribe & Save would have been USD 2.36 CVS’s total basket was 25% more expensive than Walmart.com, and both sub- baskets were consistent CVS indexed closest to Drugstore.com at 104 The main differentiator was personal care, which indexed at 107 compared to 101 for OTC Promotions in-store lowered CVS’s total basket 4%

10. © Copyright 2013 Kantar Retail CVS Personal Care Sub-Basket Walmart.com Barely Beats Amazon in Personal Care Source: Kantar Retail anaylsis 10 Only one item was comparable across all three retailers

11. © Copyright 2013 Kantar Retail CVS OTC Sub-Basket CVS Indexes at 141 to Amazon, 122 to Walmart.com Source: Kantar Retail anaylsis 11 Amazon’s sub-basket was highly inconsistent

12. © Copyright 2013 Kantar Retail CVS Implications –CVS should look at pricing strategies and reconsider who their competitive set really is –CVS will need to draw shoppers into the store and promote loyalty by: Creating value beyond price Leveraging ExtraCare to better target promotions Is ExtraCare enough to keep shoppers from shifting online? Source: Kantar Retail anaylsis 12

13. © Copyright 2013 Kantar Retail Channel and Supplier Implications –Online retailers are disrupting the Drug channel by: Redefining convenience Creating new price reference points Changing shopper expectations –Suppliers should plan against these disruptors by collaborating with retailers to offer: Relevant and targeted promotions An engaging in-store experience Value beyond price Online offers are shifting how consumers think and shop for HBA Source: Kantar Retail anaylsis 13

14. © Copyright 2013 Kantar Retail Agenda 14 –Facing the Growing Threat of Dotcom Pricing –Making Amends: The Lasting Effects of Walgreens Dispute with Express Scripts

15. © Copyright 2013 Kantar Retail About One in Six Shoppers Has Changed Rx Destination in Past Year 15 Proportion consistent with past experience Have Changed Place Where Most Prescriptions Filled (vs. last year, among all shoppers who have prescriptions filled) June 2012 In 2008, 18% of all shoppers had changed places where most prescriptions filled vs. previous year Source: Kantar Retail ShopperScape ®, June 2012

16. © Copyright 2013 Kantar Retail Insurance Most Likely Reason for Change 16 Source: Kantar Retail ShopperScape ®, June 2012 Main Reasons Changed Place Where Most Prescriptions Filled, 2012 (among all shoppers who changed primary Rx destination, multiple answers allowed) Likely driven by the Express Scripts fallout

17. © Copyright 2013 Kantar Retail Majority of Express Scripts Shoppers Switched Pharmacies Source: Kantar Retail ShopperScape®, February 2012 17 *Note: small sample size (n = 126) Only 9% of respondents claimed to sign up for Walgreens Prescription Savings Club

18. © Copyright 2013 Kantar Retail CVS and Supermarkets Gained the Most Script Traffic From Split Source: Kantar Retail ShopperScape®, February 2012 18 *Note: small sample size (n = 85) Rite Aid only gained 9% of customer pharmacy traffic, well behind competitors such as Walmart and CVS.

19. © Copyright 2013 Kantar Retail Target Has Most “New” Rx Shoppers 19 Source: Kantar Retail ShopperScape ®, June 2012;, target.com Among Current Rx Shopper Base, % Who Has Changed Place Where Most Rx Filled in Past Year; June 2012 Target30% Mail Order/Online Pharmacy Associated with Insurance Plan 18% Supermarkets17% Walgreens16% CVS16% Walmart15% Other Retailer Types, incl. Clubs14% Rite Aid14% Nearly one-third of Target’s current Rx shopper base is new in past year Same proportion of Walgreens and CVS Rx shopper base is new in past year: about 1 in every 6 shoppers

20. © Copyright 2013 Kantar Retail TGT Pharmacy Rewards Differentiated Draw TargetWalgreensCVSWalmartSupermarket Gift card/discount offer w/new or transferred Rx* Better customer service Previous store no longer accepted insurance Ability to do more one-stop shopping Easier shopping experience Previous store no longer convenient Ability to do more one-stop shopping Better customer service New store opened that’s more convenient Better customer service Offer free/discounted generic drugs Easier shopping experience Previous store no longer convenient Easier shopping experience Previous store no longer convenient Offer free/discounted generic drugs Express Scripts impact also evident 20 Top Reasons Retailers Gained New Rx Shoppers, 2012 Source: Kantar Retail ShopperScape ®, June 2012 *Read as: The top reason why shoppers who previously used a different provider for filling most Rx but now get most Rx filled at Target changed to Target is gift card/discount offer

21. © Copyright 2013 Kantar Retail Target Expands Pharmacy Rewards –Now open to all guests –For every 5 Rx filled, guests receive a 5% off total purchase for a future visit –REDCard holders stack the 5% on top of their everyday 5% for a total of 10% –Supports E4 (Easy, Experience, Educational, Engaging) renovation pilot program/ redesign in OTC 21 Beyond REDcard holders in April 2012 Source: Target documents, Kantar Retail analysis and store visits

22. © Copyright 2013 Kantar Retail How Did This Affect Walgreens? 22

23. © Copyright 2013 Kantar Retail Walgreens 2012 Comps The loss of Express Scripts traffic significantly impacted both FE and Rx comps Source: Company reports, Kantar Retail analysis 23 Walgreens leaves Express Scripts network

24. © Copyright 2013 Kantar Retail Walgreens and Alliance Boots Partnership Lead to Agreement with Express Scripts Source: Company reports, Kantar Retail analysis 24 Synergy Opportunity

25. © Copyright 2013 Kantar Retail Walgreens Attempts to Regain Shoppers with Balance Rewards Source: Kantar Retail ShopperScape®, August2012 25 Balance Rewards launched as the dispute came to an end. How likely are you to move your prescriptions back to the Walgreens pharmacy? (among shoppers who moved prescriptions from WAG at end of Express Scripts partnership) Sample size296 Extremely/somewhat likely48% Not very/not at all likely41% Don't know12% If Walgreens had a loyalty card, would that make you more likely to move your prescriptions back to Walgreens? (among shoppers who moved prescriptions from WAG at end of Express Scripts partnership) Sample size296 Yes34% Maybe39% No27% Read as 48% of all shoppers that moved their prescription to another pharmacy due to Walgreens' split with Express Scripts said they are extremely or somewhat likely to move their prescriptions back to Walgreens now that the partnership has been restored. Read as 34% of all shoppers that moved their prescription to another pharmacy due to Walgreens' split with Express Scripts said that if Walgreens had a loyalty card they would be more likely to move their prescriptions back to Walgreens now that the partnership has been restored. As of January 2013 Balance Rewards registration was at 55 million

26. © Copyright 2013 Kantar Retail Walgreens is Regaining Shoppers at a Much Slower Rate than Originally Expected Source: Company reports, Kantar Retail analysis 26 Total Year 2012 Effects Sales Change-0.8% Rx Sales Change-3.1% Total Comp-3.6% FE Comp0.6% Rx Comp-6.1% Script Comp-5.1% Walgreens did not regain shoppers as quickly as anticipated, but is well positioned for 2014 Source: Walgreens 1Q 2013 earnings presentation

27. © Copyright 2013 Kantar Retail CVS Expects to Retain Majority of Express Scripts Transfers Source: Company reports, Kantar Retail analysis 27 Gained 24 million scripts ~ 4.0% of comps (total 7.8%) attributed to the Walgreens/Express Scripts impasse 85% of gained Express Scripts members are now enrolled in ExtraCare CVS now expects to retain 60% of scripts gained – more than the 50% originally expected Effects will continue into 2013, impacting same store scripts and pharmacy sales

28. © Copyright 2013 Kantar Retail Implications –Demonstrates the effect that changes in the health care landscape can have on retail pharmacy Increasingly important with the imminent health care changes –Retailers will continue working to retain shoppers into 2013 Suppliers should do what they can to drive traffic, grow the basket, and offer value to help keep shoppers –Alliance Boots partnership not only lead to an agreement with Express Scripts, it sets them up for new growth potential beyond the typical reliance on retail pharmacy Source: Kantar Retail analysis 28

29. © Copyright 2013 Kantar Retail Learn more about urban retailing Join us at our upcoming event we’ll take an interactive look at the urban retail opportunity and experience –We will look at the developing urban formats and learn by example: ƒƒ How do merchandising and communication change in the new urban store? ƒƒWhat are the display opportunities compared to conventional customer formats ƒƒAre there new and different opportunities for cross- merchandising and marketing? ƒƒWhich categories and departments grow, and which are challenged for space? 29 –Kantar Retail Experts will lead guided store tours and workshops to bring perspective and insight to help you capitalize on this unique and emerging opportunity.

30. © Copyright 2013 Kantar Retail 245 First Street Floor 10 Cambridge, MA 02142 F +1 617 499 2723 www.KantarRetailiq.com Jessica Campbell D +1 617 912 2874 Analyst Jessica.campbell@kantarretail.com