Discount Drug Mart finds ways to stand out in a crowded field

Chain Drug Review, May 2, 2005

MEDINA, Ohio -- With units averaging 22,000-square-feet, Discount Drug Mart has plenty of space to differentiate itself from other drug chains.

The retailer has been doing just that of late with imports from Asia, including T-shirts, sweaters and coffee mugs.

Imports--acquired directly from suppliers without middlemen or other secondary sources --are vital to boosting front-end margins, notes retail division president John Gans. Besides apparel such products can range from gifts to appliances.

Depth of merchandise in all categories, along with sharp pricing, helps 62-store Discount Drug Mart compete against larger drug chains, says Tom McConnell, the company's senior vice president of finance and chief financial officer. At the same time the retailer's locations and accessibility give it an advantage over supermarkets and discount stores, he adds, citing the company slogan: "The stores that save you the runaround."

After a flat year for Discount Drug Mart in 2004 due to the sluggish Ohio economy, McConnell has high hopes for this year based on an upturn in the state's manufacturing sector.

"There's a positive feeling that the economy bottomed out and things will pick up," he remarks. Already the retailer's newer units are showing growth, he points out.

The chain was hurt last year by reduced reimbursement rates in third-party prescription plans and by automakers mandating mail order for maintenance medications under their employees' pharmacy benefit. But McConnell says Discount Drug Mart is negotiating new contracts with pharmacy benefits managers for other companies. In the meantime, however, stores near auto plants along Lake Erie have seen their pharmacy volume drop 2% to 3%, when it should be up 4% to 5%.

One cause for optimism at the front end is the growth of Discount Drug Mart's digital photoprocessing capability. The chain has Kodak Picture Maker or Noritsu digital minilabs in more than a third of its outlets, and as its leases on conventional Gretag minilabs run out it is replacing them with more digital machines.

Another source of hope this year is the completion of the chain's warehouse expansion. The project--including a new automated conveyor system--took longer than expected because of software issues, but the retailer is ready to reap the return on its investments, according to McConnell.

Also, a 10,000-square-foot addition to the home office in Medina is being well used.

One enduring strength of Discount Drug Mart stores is their flourishing DVD rental business. The offering separates the chain from the competition while drawing customers inside to rent and then return DVDs.

"It's another incentive to come into the store," Gans says.

On the pharmacy front Discount Drug Mart has contracted for the installation of up to 20 Parata robotic units for its higher-volume outlets. One such unit has been operational for several months and is filling some 50% of its pharmacy's scripts.

The chain also has central fill for some stores and a perpetual inventory system with automatic replenishment, which executives hope will reduce pharmacy inventory 10% to 15%.

Meanwhile, the company's IPS Network Inc. pharmacy benefits management subsidiary is getting salespeople for new regions.

With prescription drugs generating 46% of the chain's sales, it is crucial to propel both the pharmacy and front end, says McConnell.

"We look at the pharmacy and front end as equals," he remarks. "With third parties dictating prescription margins, we need front-end shoppers just as much as pharmacy patrons. We used to say pharmacy drives the business, but it's important to have a lot to offer in the front end so we get regular shoppers. And if we have a good mix of over-the-counter drugs people will see the front end and pharmacy as complementary--two parts of a whole."

The company's front-end goods are promoted in weekly flyers via mail and newspapers and on radio, but Discount Drug Mart also circulates in-store rotos for items ranging from health and beauty aids to frozen food. High traffic justifies the promotions, which save on the cost of mailing.

While the chain discounts core drug store items, it also has such high-end offerings as designer fragrances. And Discount Drug Mart's offerings of traditional H&BAs are as broad as they are anywhere, says Gans. The chain's hair color collection, for example, is one of the largest in the nation. Even the selection of vaporizers and humidifiers is exceptionally diverse, he adds.

In fact, Gans compares Discount Drug Mart units to old-fashioned general stores, noting that customers can pick up parts for a broken sink, electrical switches, furnace filters, levels, bolts, pots, rental steam cleaners for carpets and boxer shorts as well as food, beverages and H&BAs.

"We bring a lot to the table, and yet you don't have to fight a mass merchandise store's traffic," remarks Gans. "We're near the street. You get in and out quickly and can count on customer service.

"What we do best is be convenient. While we have a big selection, we don't forget our corner drug store roots."