In the field: new focus for operations team

Drug Store News, Dec 13, 2004 by James Frederick

It's one thing to buy a huge chunk of stores from a foundering drug chain and weld them to your operating results. But really integrating those stores--and getting the people who ran those stores to adopt your operating systems and culture--is a far more challenging proposition.

At CVS, much of the job of managing that vast mission falls to Larry Merlo. As executive vice president of stores, Merlo oversees operations and support functions for some 5,300 CVS and Eckerd drug stores in 36 states. But since CVS' buyout of Eckerd's stores in Florida, Texas and other southern states in April, a prime focus has been the rapid conversion and integration of those stores with a sprawling but highly sophisticated retail operation that now runs from New England to Los Angeles, from Minneapolis to the Gulf of Mexico.

The Eckerd integration presents three significant challenges for Merlo and his operations team: the physical conversion of the interior of the former Eckerd stores to accommodate a store layout that does more to play up CVS' strengths as a health and beauty retailer; the expansion and general reorganization of the field operations in the former Eckerd markets to reduce spans of control, making the job more manageable and raising accountability; and assimilating the former Eckerd people. And get it all done as fast as possible. Because Wall Street is watching this one very closely and they aren't likely to wait too long to see the turnaround in these stores as they have been promised. CVS executives said it would take 12 to 18 months; by next year they expect the deal will add 15 cents to 25 cents per share to its earnings in 2005.

Bolstered by the addition of some 1,260 Eckerd drug stores, CVS now operates in 39 designated regions, each run by a region manager who oversees a number of district managers. Overarching that regional structure is a total of eight area vice presidents, each of whom reports to Merlo.

"When we went into Florida and Texas, we began the framework of treating each of the new markets as an area," he explained. "So we've now created an area just for Florida and carved out another area for Texas, Oklahoma, Louisiana and Mississippi."

Behind that restructure: rapid growth in both markets even before the purchase of Eckerd's southern operations. CVS first entered Florida in November of 2000 and roared into Texas the following year. "We were growing rapidly. So there was a lot going on in those markets, even prior to acquiring the Eckerd stores," Merlo said. "At the end of this year, we'll have about 150 'core' CVS stores in those areas."

The Eckerd deal made Florida CVS' biggest market, with some 600 CVS and Eckerd stores in the state, most of them under the direction of Area Vice President Brian Bosnic. Next in line are Ohio and Massachusetts, each with about 400 CVS stores.

Following the Eckerd takeover, CVS closed a number of stores that didn't make strategic sense or that overlapped with existing CVS units. "We closed 140 stores in the third quarter. But that's pretty much it," said Merlo. "There will still be a handful that will close as new stores are constructed, but those will mostly be relocations. We've done all the heavy lifting in terms of closings."

Indeed, most of the acquired stores show plenty of sales and profit growth potential, Merlo told Drug Store News. "One of the things we found as we got out into the markets and looked at the Eckerd stores was the high quality of real estate. We found there's no reason why we can't operate a very successful store here."

CVS' projections for the Eckerd stores in Florida and Texas, he added, provided plenty of justification for "taking the large number of stores that we did," Merlo added.

To get there, CVS faced a number of hurdles--and that effort continues today. "I think our biggest challenge," said Merlo, "was the situation we faced" in trying to turn around Eckerd's business and its cultural climate, both of which had been in a tailspin in recent years as former parent company J.C. Penney withdrew support and openly shopped the chain to potential bidders. That climate, he noted, "was tough for a lot of the Eckerd folks who were looking at their numbers and results" under the old regime.

"Certainly they couldn't have been pleased with what they were seeing. But on the positive side, we've met several times with the field and store managers and with the pharmacists. And I've been very pleased with what I've seen in both the quality of those people and their commitment and their level of engagement," Merlo continued. "They were looking for some leadership and direction. They were saying, 'Tell us what you want us to do, and we'll do it. We want to be successful.'"

Merlo had high praise for the former Eckerd employees who are undergoing the conversion to CVS. "I can't say enough about the level of cooperation and commitment that they've given us, because obviously we're throwing a lot at them," he said. "You've got the training and all the 'hearts and minds' issues, especially for the pharmacists. They've done a great job managing through it."