CVS, Coutu move up in top-line drug chain rankings

DSN Retailing Today, April 19, 2004 by Mike Troy

CLEARWATER, FLA. -- The landscape of the chain drug industry is about to be altered dramatically pending completion of JCPenney's sales of its $15.1 billion Eckerd drug store division to CVS and Canada's Jean Coutu Group.

The drug store industry is accustomed to consolidation, but the deal involving Eckerd is the largest to date, considering the company's annual sales and store base of 2,799 units.

The purchase price of $4.525 billion is split fairly equally between CVS and Coutu, with the latter gaining more stores. CVS will acquire 1,260 Eckerd stores in 10 southern states, of which 1,059 are located in Florida and Texas. The acquisition dramatically increases CVS's presence in those states since it only operates 78 units in Florida and 72 units in Texas. CVS agreed to pay $2.15 billion for Eckerd retail operations and three distribution centers that generated sales of $7.2 billion last year.

The Jean Coutu Group, which operates 333 drug stores in the Northeast under the Brooks name, will pick up Eckerd's 1,539 stores in 13 Northeastern and Mid-Atlantic States, six distribution centers and Eckerd's headquarters where 1,600 people are employed. Coutu agreed to pay $2.375 billion for Eckerd operations that generated sales of $7.375 billion last year.

The reapportioning of the Eckerd stores transforms the drug retailing landscape in dramatic fashion because it moves CVS past Walgreens to become the nation's largest drug chain. The impact on Coutu's Brooks division is more dramatic since it transforms the company into the nation's fourth-largest drug chain behind CVS, Walgreens and Rite Aid. If the deal closes as anticipated in June, Coutu's Brooks division will become a major regional force operating 1,869 stores with estimated sales this year approaching $10 billion.

Meanwhile, the addition of 1,260 Eckerd stores to CVS's base of 4,182 units will give it a total store count of 5,442. The company's sales will increase to approximately $33.8 billion--with the addition of $7.2 billion in sales volume from the acquired Eckerd units added to CVS's sales last year of $26.6 billion. Walgreens operated 4,224 stores and generated sales of $32.5 billion at the end of its fiscal year last August.

"Clearly, through this transaction we will be the most convenient pharmacy retailer with more stores that fill more prescriptions than any pharmacy in America. We will be No. 1 or No. 2 in 80 of the top-100 markets in the country," CVS chairman and ceo Tom Ryan said.

Ryan and Michel Coutu, president and ceo of the Brooks division, contend their respective organizations will be able to improve the sales and productivity of the acquired Eckerd units. The subpar financial performance that prompted JCPenney to sell the chain that it acquired eight years earlier can be reversed, according to Ryan and Coutu, by moving Eckerd away from the highly promotional merchandising strategy it used over the past several years. Eckerd sought to drive traffic to its stores with aggressive pricing on consumables and commodity items, a strategy Ryan characterized as flawed.

"At the end of the day, this is Retail 101. You can't build a business selling 12-packs of Pepsi or Coke below cost," Ryan said. "This is about making sure the stores are staffed right, making sure we have the right products on the shelves, making sure that our everyday prices--not just our promotional prices--are appropriate and competitive in the marketplace."

Those are goals similar to ones expressed by Coutu.

"It is a question of focus," Coutu said. "I think by focusing the Eckerd stores a little bit more on the health and beauty, and maybe a little bit less on consumables, we will generate higher profits."

The Eckerd sale closes the books on one of the drug store industry's most storied companies, but the Eckerd name won't disappear immediately from the marketplace. It will take CVS between 12 and 18 months to convert the acquired Eckerd locations to the CVS format at an estimated cost per store of $300,000 to $350,000. In the case of Coutu, the company may opt to operate the stores under the Eckerd name, especially since Brooks is little known outside of the tightly concentrated group of northeastern states. "We will work with both names," said Coutu. "Both are very strong brands, but as we progress in our integration we will make our evaluation if it is necessary to combine the names. To start with, we are going to focus first on integration and stabilizing and improving the business. The name is only a banner."