At age 21, Drug Emporium learns to overcome growing pains

Drug Store News, July 6, 1998 by Rob Eder

He reflected on the key lessons the chain has learned as it has progressed through its 21 years: First, to succeed, one must learn to turn obstacles into opportunities; second, one must learn to be patient through frustrating growth pains. Drug Emporium has learned both lessons well.

"Many of you have come here today with one thought," he told shareholders, trustees, directors and executives assembled in the atrium of the company's Powell, Ohio office campus. "You are frustrated by our continued low share price, [and] you have every right to be," Kriegel said of the company's rather stagnant stock price, which continues to float between the $3 to $5 per share range. "But, despite the low share price, as chief executive officer of your company for the past five years, I know how remarkably far the health of this company has come ... how our impressive internal strategies are finally showing up in our financial performance, and the opportunities for growth are now on the horizon," he said.

Though the company has had its challenges, Kriegel noted that the significant investment Drug Emporium had made in technology over the past several years--particularly its Mission Critical logistics and supply initiatives, which have reduced both out-of-stocks and shrink dramatically--have finally begun to reach the company's bottom line in fiscal 1998.

Last year, net income rose some 38 percent. Comp-store sales, however, rose only 1.8 percent as the company's store base is primarily composed of mature stores.

The good news is that the company is taking several steps to jump-start sales growth. The deep discount chain has made dramatic merchandising changes in the cosmetics, natural care and vitamin categories, has narrowed its consumables assortment to be more convenient and is promoting its weekly specials on signs outside the store.

In natural care and vitamins, the chain has doubled the presentation and created two formats: one is a power valley of products running a few aisles in from the left side of the store; the other is an L-shaped set starting from the wail and wrapping toward the pharmacy.

In addition, new peach-colored signage in cosmetics creates a distinct, feminine tone to that section.

Another potential, daring move for the chain is its planned entry into the mail-order pharmacy business next month.

Despite the growth opportunities, Kriegel also addressed the financial health of the company's franchise network. The company projects that by the year 2000, it will have closed nearly half of the 100 franchise locations it was operating in 1995. Last month, the company announced that its nine-store Arizona franchise would be shutting its doors for good. Earlier this year, Longs Drug Stores agreed to buy Drug Emporium's Seattle franchise, a deal Kriegel expects to close some time this month. Further. Kriegel noted that five other franchise markets, including Richmond, Va., are in trouble, as well.

According to Kriegel, the problems besetting Drug Emporium's franchise stores are much the same as those that its corporately owned stores face. "They, very much like us, are withstanding very significant stress in the marketplace," he said, referring to the ongoing challenges posed by a consolidating and ever-more competitive marketplace, where managed care costs continue to drive down pharmacy margins and place additional stress on the front end.

However, on a positive note, he said that "most of our remaining franchises are doing excellent business, and we can count on them being productive members of our company for many years."