Bay area drug competition gets white-hot

Drug Store News, June 24, 1991 by James Frederick

Bay area drug competition gets white-hot

COLMA, Calif. - Hanging over the densely stacked aisles of the Drug Barn store in this suburb south of San Francisco is a fitting symbol of the new era in Northern California retailing. It is a huge overhead banner proclaiming everyday discounts of up to 50 percent.

Across the San Francisco Bay in suburban Walnut Creek, the Longs drug store closest to headquarters has taken a similar tack. The "Cadillac of drug stores" is now sprinkled throughout with shelf tags that shout low prices and unadvertised specials.

The signs that fill the market's first deep-discount drug store and its best-established chain drug stores used to be an anomaly in the once-quiet, well-defined world of Bay Area drug store retailing. Now, with their clarion call to lower prices, they symbolize all that has happened in this massive population center, and all the changes that are still to come.

Northern California drug retailing is quickly evolving from a state of friendly rivalry into a furious battle for turf. Traditional pricing patterns and traditionally high gross margins are under assault as never before.

Caught in the middle, as usual, are the handful of independents that remain here, and any retailers still sleeping at the wheel. Those that can't adapt quickly -- with technology, lower operating costs, better dealmaking abilities, lower prices and real customer service -- aren't likely to make it through the gauntlet of the 1990s.

Two major forces are scrambling consumer loyalties and retail strategies here. One is the rapid influx of new drug, combo and discount stores; the other is an economic slowdown that forced consumers into retrenchment and curtailed bank lending for new retail development.

"This is the first time in my 30-year career that I've had to manage through an economic slowdown," said Bill Eames, president of 24-store Bill's Drugs in the Bay Area community of Benicia. "The retailers here are into an area where we've all had to fight like hell to get a 2 or 3 percent sales increase."

Eames said the growing movement to control commercial and residential growth in many Northern California communities has also impacted the business.

Accelerating retail development is having an equally profound market impact. The influx of new stores is coming from established Bay Area players like Walgreens and Pay Less that have adopted an aggressive fill-in strategy here. It is coming as well from Drug Barn, which introduced the concept of deep discounting to consumers here for the first time a decade ago, and is now extending its considerable influence with a planned doubling in store count in the next two to three years, to 12 Bay Area off-price drug stores.

What's more, a strike force of major merchants is beginning to extend its reach into Northern California and the Bay Area, including Drug Emporium, Wal-Mart, Phar-Mor, Costco, Price Club and Target Stores. All will go head-to-head with local drug store chains.

"We are planning to move into that area early next year," said Drug Emporium ceo Gary Wilber. "We've signed one lease and we're working on several others."

Meanwhile, Oakland-based Safeway is grabbing aggressively for a bigger chunk of the drug store business with its new Marketplace superstores, and is adding pharmacies to older units as it remodels its store base. Safeway's chief supermarket rival here, Dublin, Calif.-based Lucky Stores, is already a major combo store player.

All are lured by the dense populations and rapid growth of Bay Area cities and towns like San Francisco, Oakland, San Jose, Palo Alto, Berkeley, Richmond and Walnut Creek. But all are competing for a dwindling number of retail sites in a region whose astronomical rents can quickly separate winners from losers.

"The deep discounters are starting to move in, but it will take them three years or more to build their business, and I know how much it costs to operate here," said Milt Sloban, founder and president of Drug Barn. "It takes $6.5 million in annual sales in the Bay Area for a large store just to break even."

Beyond the growing competition for store sites, however, the growth in Bay Area store count is forcing price more and more into the picture as retailers compete for customers as well as real estate. The result has been increasing pressure on gross margins, forcing established players like Longs to cut prices to maintain market share and stay competitive.

"In today's environment, a low-price image is essential to [customers'] perception of value," noted Longs president Steve Roath at the company's annual meeting last month. "Presenting a high-value and low-price image is essential to building customer loyalty."

Longs' competitors say it is Walgreens and Pay Less, in particular, that are impacting Northern California's premier drug chain. Both have targeted the Bay Area for further expansion, and both are getting high marks from their competitors.

"Walgreens is doing very well here: they're servicing the convenience-oriented niche with smaller stores than Longs or Pay Less, and they're looking for a lot of stores in the Bay Area," said one chain drug executive.