American Stores looks for higher drug store profits

Drug Store News, July 6, 1998 by Lisa I. Fried

Lund's remarks and a spirited performance by a local dance troupe provided a clear message that American Stores' corporate team continues to believe that its ongoing centralization strategy will ultimately lead to bright success.

"I know I have told you many times before about the success that lies ahead for the company," Lund told shareholders. "Today will be no different, except that now we have so many plans that have become reality, that we are more confident than ever before that our plan for growth is working and is squarely on track.

In reviewing the company's progress over the past year, he noted that while it has been a difficult year financially for the company, "we defended market share and did not rush into hasty, short sighted decisions."

Reflecting on some of the challenges of the past year, Lund noted that profits were challenged in part by the relocation of drug store functions from Chicago to Salt Lake City this year and the fact that several of the chain's recently opened free-standing drug stores have yet to reach profitability.

While the company continues to open new free-standing drug stores--30 are planned for the California and Chicago markets this year--"we are working hard to bring these stores to profitability quicker," said Lund.

To accomplish that, American Drug Stores aims to pump up profits in new stores by aggressively buying prescription files from independents, capitalizing on its front-end loyalty cards, using technology in new ways and searching for ways to bring down operating expenses, Teresa Beck, American Stores president, and Kevin Tripp, executive vice president and general manager of American Drug Stores, told Drug Store News after the meeting.

"Profitability in new stores, or average, takes two to three years generally, depending on the market," said Tripp, who took over the top spot at the drug store division early this year. "One of the challenges we have this year going forward is to convert new stores out of that range, to be more aggressive from a marketing capacity and to work in new ways."

One marketing opportunity is the company's loyalty cards, Tripp said. "We have an advantage in the marketplace. Coast to coast, we are the only drug chain with a loyalty card, and we have learned from our food partners that there are enormous opportunities there."

When asked about additional profit opportunities in the front end of the store, Tripp said, "The front end is important, but we have to be realistic about what the front end can bring. Our culture has been to operate big drug stores and for many, many years sold los of seasonal merchandise and things outside the traditional drug store categories.

"Frankly, the marketplace in the last 20 years has changed," Tripp said. "Customers go to Wal-Mart and other discounters for things like that. That's not to say that there isn't a market for things like that. There is, but the emphasis that we have on that has changed and needed to change over time."

Changing marketplace

Indeed, American Drug Stores continues to tinker with its free-standing drug store prototype as customer needs evolve, Tripp said. "We are not building 25,000-square-foot stores anymore. We are building a 16,800square-foot prototype right now.

"You have to question everything, from the receiving area to the front end to the pharmacy. The question is, are we presenting to our customers what they want?"

Some modifications now being made to the company's drug stores include a more prominent presentation for one-hour photo, a stepped up emphasis on convenience and new approaches for beauty.

"One-hour photo has become more and more of an expectation for customers, and you need to change the prototype," Tripp said. "We have rolled out more one hours, and we are emphasizing more of a photo shop [presentation]."

American Stores' pharmacy strengths also comes from its food combo operations. Jewel Osco continues to expand in Chicago and Milwaukee, and the company is also quite optimistic about the expansion of its Lucky Say-on food/drug combo concept in southern California, according to Lund.

In the Philadelphia, New Jersey and Delaware markets, American continues to roll out new combo stores. Today, 50 of the 56 Acmes there have pharmacies inside. Recently, the drug store side of these combos was expanded in a new design, signed as Pharmacy Plus. What it means is customers are now getting a Lull-size vs. scaled-down drug store within Acme's walls. By 2001, the company plans to be operating 101 food/drug combos here.

Overall, Lund is pleased with the progress of the drug store division, particularly in the area of managed care reimbursement and expense control. "I am confident that our new management team can prepare our drug stores to produce results to rival their competitors," said Lund.