Cost-cutting Phar-Mor retooling its competitive edge

Drug Store News, Jan 17, 1994 by James Frederick

YOUNGSTOWN, Ohio -- Fortified with new technology and shorn of excess, unprofitable stores and markets, Phar-Mor appears to be off the critical list and well on its way to recovery as a smaller but better-managed retailer.

The humbled off-price giant -- which navigated the tumultuous aftermath of one of Ohio's largest financial scandals by shedding close to half its stores, firing most of its top managers and declaring Chapter 11 bankruptcy -- has clearly made progress in its turn-around efforts.

The chain has cut costs dramatically. It has revamped its merchandising and marketing strategy with new, technology-assisted buying systems, a renewed focus on basic drug store merchandise and a new, more aggressive ad agency. It has vastly improved its financial oversight and information systems to avoid any repetition of the bookkeeping disaster of '92, which led to $499 million in charges against earnings and the company's near-demise.

What's more, Phar-Mor has outpaced the sales and cash flow projections of its 1993 business plan, according to chief executive Tony Alvarez.

"We have been operating favorably against plan. We're $5 million to $7 million ahead of our EBITDA (earnings before interest, taxes, depreciation and amortization, or cash flow)," said Alvarez in an exclusive Nov. 30 interview with Drug Store News at Phar-Mor headquarters, which included president and chief operating officer David Schwartz.

What remains to be seen is what kind of plan Phar-Mor will devise to pay its numerous creditors -- including the many vendors left with unpaid bills when the chain filed for court protection in August 1992.

The vast majority of those vendors have renewed normal or close-to-normal credit terms with the chain, Alvarez said. But to emerge from bankruptcy, the company will need a workable payment plan and a demonstrated ability to generate earnings to support that plan.

In addition, the company has yet to work out its complete operating strategy in the unforgiving, supercompetitive era of '90s retailing. Although Phar-Mor has shed unwanted and unprofitable units, it remains saddled with some stores that are simply too large for its merchandise mix and consumer base. The company is evaluating solutions -- which could include subletting some space or relocating -- on a store-by-store basis.

Showing progress

Despite these lingering concerns, the deep discounter has made clear progress. "We've reduced our administrative costs more than 50 percent...and also managed to lower our operating costs substantially," Alvarez told Drug Store News.

Added Schwartz, "The old Phar-Mor proved to us you can generate big volumes by offering value and substantial savings to the customer. The trick is to make your cost of operating so efficient you can do that at a consistent profit." Along those lines, he said, "In our stores, we've increased productivity more than 20 percent."

Improvements elsewhere

The company has also made substantial progress on other fronts. One of the biggest, not surprisingly, has been in the area of financial oversight and accounting. The chain undertook two complete physical inventories of all stores in the wake of the scandal and completely revamped its accounting department under the direction of former Fay's president Dan O'Leary, who became chief financial officer early last year.

Phar-Mor has also taken steps to improve its competitive edge and sharpen its focus on a core retail mission that puts it in direct competition with the nation's drug stores.

For example, stores are acquiring a stronger service image via in-store Customer Service Centers that the chain is retrofitting to its stores at a rapid pace. The centers offer such services as one-hour photofinishing, refunds and exchanges and carpet cleaner rentals.

The chain's commitment is such that it has sacrificed some prime checkstand space to make way for them at the front end. "We lost a couple of check-stands, but we think the tradeoff was well worth it," said regional vice president George Szabo.

Under the tutelage of chain drug veteran Schwartz and senior vice president of merchandising Rich Juliano, meanwhile, Phar-Mor's merchandise mix has been shorn of slow-turning GM categories, like sports apparel and knockdown furniture, in favor of higher-demand basics. "We've identified where we are and where we're going, and we're keying in on the conventional drug store categories," said Schwartz. "HBA, greeting cards, cosmetics, video -- we intend to be power merchants in those categories."

To target consumers with those products, Phar-Mor has enlisted Yaffe & Co., the ad agency that also serves Perry Drug Stores. "We're devoting a tremendous amount of money to promotion...and we're very event-driven in our advertising, "said Alvarez. "And more and more, we've gone from doing things uniformly to being more local-market-driven."

Phar-Mor power buying still key

YOUNGSTOWN, Ohio -- Phar-Mor president David Schwartz said the chain's well-known "Power Buying" concept will remain a key ingredient of its marketing and merchandising strategy.