There's Phar-Mor to 'drug' chain than meets the eye - company profile

Discount Store News, Sept 2, 1991 by Arthur Markowitz

There's Phar-Mor to |Drug' Chain Than Meets the Eye

YOUNGSTOWN, Ohio - Phar-Mor, the mystery chain in the deep discount drug store field, continues to pursue its aggressive expansion program and unique merchandising that the company expects will push it to the $3 billion sales level in its current fiscal year.

But it's this unbridled growth that has raised the mystery of how profitable this nine-year-old privately held chain is and how long can it maintain its rapid expansion.

President Michael I. Monus, in a prepared statement earlier this year, said the company "continues to be profitable," but didn't release any figures. Phar-Mor sales were just over $2 billion in 1990.

His statement came shortly before Phar-Mor disclosed in June, when its fiscal year ended, that an investment fund had bought a 17% equity interest, composed of stock and warrants, for $200 million. The deal with Corporate Partners, a $1.6 billion fund associated with the Lazard Freres & Co. investment firm, "will enable us to fulfill growth plans well into the next decade," Monus said, and "bring us closer to reaching our potential as a national retailer."

Trade observers noted that investment houses make money either by sharing in the profits of a company or by selling their stake at a higher price. In Phar-Mor's case, a successful public stock offering, including some or all of Corporate Partners shares, could only come when the company produced a strong bottom line.

As has happened at other retailers, a public offering would also reward Phar-Mor's other investors whose equity in the retailer was cut by the Corporate Partners investment. These include Giant Eagle, with almost a 50% interest, Youngstown-based real estate developer Edward J. Debartolo Sr., with about a 10% stake, and other families from the two cities.

Giant Eagle, a Pittsburgh supermarket chain, is owned by the family of Phar-Mor's ceo David Shapira. He and Monus co-founded Phar-Mor.

The outside financial infusion - $125 million of the investment will be used "to increase the company's equity base" - also touches the other mystery, how long can Phar-Mor maintain its growth, particularly by relying on internally generated cash flow which the company said funds most of its expansion.

Phar-Mor expected to open about 60 stores in 1991, pushing its count to just under 300 units. Fueling this growth, at times, may be coming at the expense of paying vendors, some of whom temporarily stopped shipping to the chain earlier this year. Phar-Mor, which settled the problem, denied that cash flow caused the slowdown in payments and said it resulted from its sharp aggressive deal-making.

The chain once relied just on deals for merchandise, but has developed continuity buying programs as it expanded its mix to include more housewares and departments like team sports apparel, audio/video, as well as home office.

The company uses its buying power to squeeze suppliers for the lowest prices, greatest ad allowances and other savings on huge volume purchases so it can promote an everyday low price program called Phar-Mor's Power Buying. Aiding that marketing is a heavy advertising effort of ROP ads and weekly four-color inserts, handled by an inhouse agency, and radio and TV, an estimated $12 million program, that was just been assigned to the Saffer Advertising agency in Toronto.

The Power Buying program and chain expansion have a symbiotic relationship. Phar-Mor needs an expanding base of stores to sell the huge quantities of merchandise it purchases. At the same time, the increasing number of stores has generated the growing need for vast amounts of goods purchased at the lowest possible cost. The result is that Phar-Mor makes its profit on the buy, rather than the sell.

Phar-Mor's aggressive expansion has resulted in the chain blanketing a market with stores to quickly develop name recognition and economies of scale in advertising. The chain in 1990 invaded five states, Arizona, Nebraska, New Mexico, Nevada and Oklahoma to end up with stores in 28 states. This year it moved into four more states: Arkansas, California, New Jersey and New York.

The chain's merchandise and store expansion programs are being supported two different ways: It has installed a satellite communication system chainwide that is used to rapidly authorize credit card sales, provide in-store music broadcasts and sales training and is now phasing in point-of-sale scanning. It will also open its fourth distribution center, a leased 189,000-square-foot facility in Aurora, Colo.

The company's sharp buying and aggressive expansion is reminiscent of the programs that powered the early development of Wal-Mart and Kmart. And both of these chains shrouded themselves in mystery during their first decade of operation, revealing little about themselves as they outraced competitors.

Despite the mysteries surrounding Phar-Mor, executives asserted that the company can be the deep discount store mirror of these two discounter powerhouses, including becoming a similar national retailer.