March 26 (Bloomberg) -- Shoppers Drug Mart Corp., Canada's biggest pharmacy chain, will introduce a smaller store format focused on health and beauty products to lure consumers as stand-alone cosmetics and bath shops expand in the country.

The first location is set to open in Ontario in July and will provide another platform to add higher-priced cosmetics, Toronto-based Shoppers Drug Mart said today in a statement. The stores will also have pharmacies.

The strategy expands on the retailer's five-year-old strategy to add beauty boutiques within its locations. Shoppers Drug Mart wants to lure consumers with higher-priced Lancome, Dior and Shiseido cosmetics from department stores and shops, such as LVMH Moet Hennessy Louis Vuitton SA's Sephora chain.

``We view this announcement as potentially positive given that both beauty and prescription products are destination categories, with high prices and margins,'' David Hartley, an analyst with BMO Capital Markets, said in a note.

The new stores may be an ``offence as a best defense'' against expansion by Sephora cosmetics shops and Limited Brands Inc.'s Bath & Body Works sites, the Toronto-based analyst said.

Shoppers Drug Mart gained 29 cents to C$52.08 by 4:10 p.m. in trading on the Toronto Stock Exchange. The shares fell 2.2 percent this year.

Smaller Store Size

The new format will be 5,000 square feet, about half the average size of its locations. The retailer appointed Shelley Rozenwald to head the stores, whose name hasn't yet been revealed.

Shoppers Drug Mart may eventually build ``hundreds'' of the outlets in malls and busy city streets after introducing ``a handful'' in the next two years to test the concept, Joe Magnacca, vice president of merchandising, said in a telephone interview. The company isn't releasing specific targets.

The retailer has more than 140 beauty boutiques in its 1,080 locations across Canada. Chief Executive Officer Jurgen Schreiber, 46, has said that offering a wider assortment of luxury cosmetics is part of his strategy to boost sales by about 10 percent a year.

``Beauty Boutique has been huge,'' Magnacca said. ``One of every two stores we open has one, and it's really been really well received by the consumer. It's taking that concept to the next level.''

The ``beauty shopper'' visits a store almost twice as often and spends twice as much on each visit, the company has said.

Shoppers Drug Mart has about 20 percent of Canada's market for ``prestige'' cosmetics and about 60 percent for skin-care products, Magnacca said.

To contact the reporter on this story: Brad Skillman Kevin Bell in Toronto at Kbell2@bloomberg.net.

Last Updated: March 26, 2008 16:27 EDT