Drug chains' glory days still ahead

Drug Store News, April 3, 1995 by Marie Griffin

Like the "ugly duckling" that grew naturally to become a beautiful swan, the drug chain is finally being appreciated as the desirable, long-term retailing format it is.

In recent weeks, I've attended two financial analyst conclaves, hosted by Raymond James & Associates in Florida and Merrill Lynch in New York. Both organizations made it a point to put the spotlight on four top public drug chains-Walgreen, Revco, Rite Aid and Eckerd - through individual presentations as well as panel discussions specifically dedicated to chain drug retailing.

"Food and drug store stocks outperformed almost everything last year," said Gary Vineberg, first vice president/Global Securities Research & Economics Group for Merrill Lynch, at Merrill Lynch's recent "Retailing Leaders" investor conference. Then, he apologized to the supermarket chains present before adding, "major drug store operators still seem safer to me."

And drug chains are also starting to look good in comparison to mass merchants, the retail "darlings" of the past several years. While mass merchandisers were having their glory days, drug chains were going through a difficult but necessary internal restructuring. Drug chains did have a lot of catching up to do in the areas of point-of-sale technology, store renovations, competitive pricing and promotional strategies, and merchandising focus.

It is interesting that now, when drug chains are beginning to reap the benefits of their hard work, some of the shiny veneer may be starting to chip off the "darling" mass merchants. Certainly, Joseph Antonini's long-anticipated ouster at Kmart is a sign that a turnaround at the nation's number-two retailer will not happen quickly or easily.

Moreover, the dynamic duo's latest strategy may create the biggest opportunity yet for chain drug operators. Wal-Mart and Kmart are racing to build bigger and bigger boxes, hoping to continue their growth rate at the expense of the supermarkets. (And this could hurt combo operators, at least some of them, at least in the short term.) On the outskirts of this battleground, though, drug chains have identified a gaping window of opportunity in the "convenience" area.

Walgreen, Rite Aid, Revco and Eckerd are all concentrating on improving the convenience aspects of their stores: increasing store size so that aisles can be widened for easier shopping; stepping up convenience food assortments and adding more coolers for consumable basics like milk, ice cream and beer; installing drive-up pharmacy windows and one-hour photo processing; and building freestanding units at busy intersections with quick and easy in-and-out access to compete with congested malls and strip centers.

Meanwhile, despite diminishing margins on pharmaceuticals, leading drug chains are working to increase their dedication to the health care business. As all of the key drug chain executives pointed out at the recent analyst meetings, the number of prescriptions that will be required by an aging populace will increase naturally but incrementally.

Because pharmacy is their primary business, drug chains have the motivation and wherewithal to dedicate both capital and manpower to the pharmacy business while mass merchants and supermarkets inherently have different priorities. At the Merrill Lynch conference, one supermarket CEO told the story very succinctly as he responded to a question about his company's efforts in managed care: "Our main goal is to get people to buy food in our stores," he said.

Where it might have looked a few years back as if the drug store format would go the way of the dodo, the "climate" has already started to change because the consumer values her time every bit as much as her money. It makes me wonder: Don't those omnivorous, fast-growing, ever-expanding retailers that have recently dominated the landscape have something in common with the dinosaurs?