Unlocking the door to profitability

Drug Store News, Sept 27, 2004 by Rob Eder

Call it a made for retail version of the classic cliffhanger, "The Lady and the Tiger."

Ahead lie two doors. Behind one, an undertamed, underfed tiger, ready to devour the first thing that looks even remotely like a meal; behind the other, a maid of unparalleled beauty, a fairy tale wedding, happily ever after...

Which does he choose?

That is more or less the situation now for Michel Coutu, president and chief executive officer of Brooks Pharmacy, the U.S. division of Canada's The Jean Coutu Group, which now includes 1,539 Eckerd stores, stretching its boundaries from New England to Georgia and from Long Island to Pittsburgh. Except for one thing. It's not just two doors.

Once Coutu and the team of executives that will carry forth the mission of improving the fortune of the Eckerd stores unlock that first door, there are nine more right behind it.

By Drug Store News' estimates, if the company is going to be successful in its transition from small but powerful regional chain that is strong enough to compete head to head with the likes of CVS and Walgreens to the fourth largest drug store chain in America, if the company is going to have any real chance of improving the performance of the stores it acquired, there are 10 keys--10 critical issues that Brooks must address over the next several months.

And as this epic journey begins, it is not as if Coutu has only the divine hand of providence to guide the company. Coutu and his senior management team, which includes senior vice president of marketing David Morocco, chief operating officer Bill Welsh, chief financial officer Randy Wyrofsky and vice president of pharmacy and professional affairs Dan Haron, understand the road that lies ahead. It's more or less the same road they traveled to get to where they are today.

Each member of Coutu's team has been with the company for at least 10 years to 15 years. On average, they have about 30 years in retail pharmacy. And Coutu? Michel Coutu literally grew up in drug stores. Pharmacy is not just a business; it's a tradition in the Coutu family.

"We are drug store guys," Coutu told Drug Store News in the first of a series of interviews, conducted last month, just seven business days after the official close of the deal. "From the minute you wake up in the morning you have to do something. We run drug stores. That is what we do."

It's the only business Coutu has ever known, a family business in the truest sense of the word. The Coutus gamble with their own money. It's one of the reasons that the company has been able to make Wall Street believe when it needs to. While much has been made about the company's ability to secure financing for the $2.38 billion deal, in reality, the process went a lot smoother than has been suggested. Coutu was able to secure $100 million more than it expected at an interest rate some 56 basis points lower than previously was forecast.

There are the basic fundamentals of the pharmacy business--the trend lines are quite favorable, and the financial houses are well aware of it. "Every day we get older by one day, and as we get older, we have a higher reliance on drug store products--pharmaceuticals, OTCs, health and beauty items," Coutu said. "This is something the financial community understands very well."

But more important, Brooks Pharmacy as it is known today only exists at all because of Coutu's ability to take over and successfully operate acquired drug stores. The banks also understood that very well. "If we had very little track record making money from the stores we acquire, then I imagine the financing process might have been more difficult," he said.

It's not just its experience managing acquisitions; it's the company's proven ability to absorb companies exponentially larger than itself. And it really shouldn't come as much surprise, Coutu insists. While some may have painted Brooks as a minnow trying to swallow a whale, "I like to think of us as pirhana--we have sharper teeth," he said.

"We had to grow somehow," he continued. "How are you supposed to go from zero stores in 1987 to almost 1,900 stores in 2004; how do you go from a single individual to over 45,000 employees without buying a company bigger than you? When we were just 20 stores we bought 220. Everybody said it was a recipe for disaster. You know what? We never made so much money."

Looking back, Coutu will tell you that making the leap from the 20-store Maxi Drug chain to 240 stores behind the Brooks acquisition was a much greater leap. "There was more work to do because we had no real systems in place to handle that kind of volume," he explained. "We had a borrowed pharmacy system. It was pretty good, but it wasn't ours. Today we have one of only two completely live, totally centralized pharmacy management systems in the industry.

"Back then, we had no POS. Today we have POS in all of our stores, and we also have per haps the top data warehouses in the country--totally interactive. I can tell you right now where I sell anything in any of our stores--pharmacy as much as front-end.