Analysts Say Parent Firm Disappointed by Performance : Two Top Osco Drugs Executives Resign Over Strategy Differences
Citing “philosophical differences” over strategic direction and marketing style, two top officers have resigned from Osco Drugs, a subsidiary of Irvine-based American Stores.
The change in command was announced Friday by Osco, which said its board had accepted the resignations.
At a meeting last Tuesday, the board elected Richard A. Scott, formerly president of Osco Sav-on, as chairman and chief executive. He replaces Scott Bergeson. Terry Hanson, 41, who was Osco’s executive vice president, replaces Richard George as president.
George will leave the company to “pursue new business interests,” but Bergeson has been asked to take a position with the parent American Stores in Southern California, according to Osco’s statement. There were no further comments from either company or the executives.
Osco, based in Oakbrook, Ill., has about 650 stores in 27 states and is the nation’s largest chain of super-drugstores, with outlets averaging up to 25,000 square feet.
‘Below Expectations’
Industry analysts were not surprised by the changes, citing Osco’s under-performance since it was acquired by American Stores in 1984 as part of Jewel Cos., a large Chicago-based supermarket company. With annual sales of about $3 billion, it has never been unprofitable, analysts said--but it also has not performed up to American’s expectations.
Instead of improved performance 18 months after the acquisition, “operating results through 1986 and 1987 continued to be below expections,” noted John B. Kosecoff, senior analyst with First Manhattan Co., a New York investment firm.
Kosecoff estimated that Osco’s 1987 operating margins declined to about 3.2%. In 1988, he said, operating margins should rebound to 3.9%--which would bring operating earnings of $120 million.
“But American Stores already made the commitment to split Osco into Eastern and Western divisions” about six months ago, Kosecoff said. At the same time, American hired Scott, 53, then executive vice president of Longs Drugs--to head Osco Sav-on, the Western division of Osco.
While at Longs, Scott was instrumental in making it a well-merchandised, well-promoted drugstore chain. “Longs has more sales per square foot than anybody else in the country,” said Jonathan H. Ziegler, an analyst at Sutro & Co. “To get a top-notch operator like Dick Scott, Osco probably had to promise him a lot . . . And this was probably part of the package.”
‘Has a Challenge’
The questions that remain now are whether Scott can do as well with Osco--and whether the chain will continue to be run with Eastern and Western divisions.
“Dick George’s operating style for many years was to centralize,” Kosecoff said. “Dick Scott was very successful for years running a highly decentralized operation,” giving a high-level of operating autonomy to local managers.
To succeed now, Scott “will have to develop strong communication and good management effort at the local level . . . He has a challenge,” said Kosecoff.
