MedMax: healthy margins

Discount Store News, May 5, 1997 by Richard Halverson

Take Good Care opened a beautiful, 20,000-sq.-ft. store in Springfield, N.J., in early '96 with department-store-quality fixtures and displays, but no pharmacy. It followed with another store in Edison and intends to open a third sometime this fall. However, it appears it won't reach its plan to open 30 stores in three years.

Walgreens opened its first Home Medical Center in 1980 and four more during the decade. Growth stalled, however, until the '90s when it bought out an existing business that operated two stores in Indiana. Walgreens now operates seven Home Medical Centers, including four in Chicago. Most are close to a Walgreens drugstore, and most of the revenues come from third party billings. Walgreens is "exploring" the idea of expansion.

Stores that specialize in equipment to alleviate back problems have been "lumbaring" along since 1981, when The Better Back opened its first and only company store in Denver. Since then, it has franchised 15 more stores, including units to open soon in Fort Wayne, Ind., and Puerto Rico. A major category is ergonomics products designed to reduce back pain and repetitive motion strain, the two most common workers compensation claims.

Klau-Med, Beaverton, Ore., is taking a niche market to the max: sales and repairs of wheelchairs. It even offers classes on how to play tennis, basketball and rugby from a wheelchair. It is opening a second store in Eugene, Ore., and plans a third a Medford, Ore.

MedMax, a 1996 startup in the emerging medical supply superstore category, stands poised to ride the wave of health care cost containment. Health insurers are pushing patients out of hospitals as soon as possible to recuperate at home, often with equipment and supplies they must purchase out their own pockets.

Prospects of more spending for home care, along with spending to stay healthy, are helping to drive the ambitions of MedMax to dominate the superstore category within 2 1/2 years of opening its first store.

With deep-pocketed capital partners, Southfield, Mich.-based MedMax expects to be operating 32 stores in six markets, including Philadelphia, by the end of '98.

Over the next five years, MedMax plans to open 200 stores throughout the country.

In a major distinction from other health care specialty stores, MedMax is a hybrid concept that combines normal retail with the delivery of health services through registered nurses, respiratory therapist (to advise an oxygen needs and asthma preparations) and sports trainers on duty in every store. And the company has set a goal of selling 40% of its goods and services to institutional customers, such as hospitals and nursing homes, with the remaining 60% of revenue coming from retail.

Health supply superstores also enjoy another advantage: the category has yet to become a discount concept. Chains can get high margins on durable medical equipment, such as hospital beds and wheelchairs, and still undersell traditional hospital supply stores, where gross margins run more than 70%.

The concept of a medical supply superstore has been sputtering along since 1980 when Walgreens opened its first Home Medical Center. But Walgreens has opened only seven of its centers, and they ran about half the size of the MedMax prototype of 17,500 sq. ft.

MedMax stocks some 20,000 skus, with 200,000 more available through special order, said founder and chief executive officer Kevin Browett.

A registered pharmacist, Browett previously was vice president in charge of pharmacy and H$BC merchandise for Kmart.

Browett's vision for MedMax is for it to become a business that manages the whole person. For example, it will offer every product and service that an exercise and fitness buff might need, or every product and service that a person who has had a hip replaced might require.

By July, MedMax will have reached its goal of operating six or seven stores in the Detroit market, he said. Its marketing strategy is to target mid-sized markets, such as Philadelphia and Detroit, and ring them with about six stores operating around a central warehousing hub.

Philadelphia drew MedMax's attention because it scored well in terms of having large proportions of residents older than age 50 and with high incomes. It is also a growth market in terms of spending for medical services, health insurance and retail goods, Browett said.

By the time the second and third players get into operation, MedMax already will have its real estate and products in place, Browett said. "I don't intend to be a third player."

With just two stores, MedMax already is garnering 20% of its revenue from institutions, Browett said. That percentage will increase now that hospitals and nursing homes can actually see what the stores offer. Of the retail portions of sales, about 10% is special order.

Customers can have merchandise delivered either to their home or to a store. Delivery within a 10-mile radius of a store is free, and MedMax charges to cover its costs for emergency deliveries, such as tanks oxygen.

MedMax customers would have to go to six different stores or places to get the goods and services it offers, Browett said. They would have to shop at: a pharmacy; a nutrition store; a uniform shop (for nurse and medical technician uniforms); a book store (for health education computer programs. CDs and books); a hospital supply store (for durable medical equipment). It also offers services usually provided by a hospital or clinic, such as health seminars and artificial limb fittings.