Prescription Reads More Drugstores

Coming to a street corner near you: one of the nation’s biggest chain drugstores.

The big chains--including Walgreens, Rite Aid and CVS, among others--are on a building spree, promising to open hundreds of new, relocated or remodeled stores annually for the next several years.

Profit margins on prescription drugs are narrowing, so the big chains are betting that additional stores will enable them to grab a larger volume of drug sales to bolster their bottom lines.

And with each prescription customer comes the opportunity to sell such higher-margin goods as Pringles, cosmetics and pingpong paddles, items that the drugstores increasingly are stocking.

As the chains expand, however, they face the challenges of trying to differentiate themselves, earn customer loyalty and find a balance between having the right number of optimum-size stores and building themselves into oblivion.

No one at the moment seems worried about overbuilding.

“There is not enough saturation yet,” said Rite Aid Chief Executive Martin Grass, whose 3,900-store chain plans 500 new and relocated stores per year for each of the next three years--with 100 new stores on the West Coast alone.

“There is market share to be taken away from the supermarkets, discount department stores and smaller stores.”

After two decades of consolidation--in which Camp Hill, Pa.-based Rite Aid acquired more than 40 smaller and regional chains and CVS took over more than a dozen other chains--one analyst estimates that more than half of the entire drugstore business is controlled by the top six chains.

And each of those companies wants an even greater share, so they are pouring money into building hundreds of bright drug emporiums within a short distance of customers’ homes and offices. Easy to park at and easy to navigate once inside, the stores feature wide aisles, accessible shelves and everything from rose bushes to free vaccinations.

“The customer is time-starved and wants convenience,” said Jonathan Ziegler, a retail analyst with Salomon Smith Barney in San Francisco. That will give the chain stores innumerable opportunities to entice shoppers with a variety of staple and impulse goods, he said.

Walgreens, the country’s sales leader, eschews the broad acquisitions favored by its competitors and has the fewest outlets of the top four chains, operating 2,625 stores in 36 states and Puerto Rico. But it has pledged to open “a store a day” in 1999, including new or relocated outlets, said Yvette Venable, a spokeswoman for the Deerfield, Ill.-based chain.

Venable said that acquiring existing stores, a tactic favored by other chains, means inheriting some older, poorly located outlets. Walgreens, she said, prefers to build its stores from the ground up at locations it chooses.

The Walgreens formula has some risks, however. Competitors nipping at its heels gain instant market toeholds with each group of stores acquired.

What’s more, Walgreens has encountered square-footage problems. Starting in 1994, Walgreens began opening tiny, 2,000-square-foot, pharmacy-only drive-thru stores in Southern California. There are 41 of them now.

And while the drive-thru format is one that each of the chains is pledging to expand, the small stores proved to be a miscalculation. The drugstore chains, Walgreens included, are increasingly building stores in the 10,000- to 15,000-square-foot range.

Walgreens has said it will convert its Southland stores to bring them in line with the company’s 15,000-square-foot full-service model over the next five years.

“It sometimes seems silly to have a drugstore on every corner,” Venable said. “But if you’re going north on Main Street and you remember you need toothpaste, hair spray and milk, and you can turn left, cross traffic and go to the grocery store, or turn right, right into the Walgreens parking lot, which is easiest?”

Wider Aisles, More Products

Meanwhile, Rite Aid is rapidly converting its more than 1,000 Thrifty PayLess stores, adding drive-thrus, more products and an angled, wide-aisle format that makes just about every piece of merchandise in the store visible to a customer on the way from the front door to the pharmacy counter.

“There’s more than one way to skin a cat,” said CEO Grass, contrasting Rite Aid’s conversion plans to Walgreens’ build-from-scratch model of growth. “We do know [that] through acquisition, you get instant market share. . . . The jury is out on whether you can go into new markets . . . build new markets from scratch and garner any significant market share.”

Sav-On--whose parent company, Salt Lake City-based American Stores Co., is awaiting final government approval on its sale to Albertson’s Inc.--is in somewhat of a holding pattern that one analyst likened to a lull before a building boom.

“There will be a brick wall at some stage, but these guys will all be driving about 70 mph when they see it,” said Mark Husson, a retail analyst with Merrill Lynch & Co. in New York. “We don’t see it yet, but it’s over the next hill.”

As the chain stores race to build brick-and-mortar stores and win loyal customers, they will soon face challenges from “virtual drugstores” that plan to sell prescription drugs online.

Many in the industry say that the immediate threat to the chain stores is minor. Although the Internet may offer some convenience to customers in refilling prescriptions, shoppers who need their medicine right away will still turn to the traditional drugstores, some chain executives and analysts say. What’s more, the chains are better equipped to offer other staples that can bring traffic into the store.

Several of the chains are also exploring establishing their own Web sites that could offer the sort of volume discounts that only the giant chains can provide.

The chains also have moved to ensure themselves a growing piece of the prescription drug business by buying or creating benefits management companies, which negotiate drug prices between manufacturers and managed-care companies. That lets the chains cut out a middleman and gain still more negotiating power with the HMOs.

Last November, Rite Aid announced it was buying Eli Lilly & Co.’s PCS Health Systems unit, the nation’s largest pharmacy benefit manager, and merging its Eagle Managed Care benefits manager into PCS.

And while they have a captive audience in their stores, most of the big chains have increased their offerings of what the industry calls front-end merchandise--everyday items such as beauty supplies, gardening aids, toys and food--placed strategically toward the front of the store.

The Right Mix Is a Challenge

The challenge for the chains, said Merrill Lynch’s Husson, is to find the right mix of front-end and prescription merchandise and find a way to differentiate themselves from their rivals.

With those goals in mind, Rite Aid in January announced an agreement with General Nutrition Cos. to open 1,500 “stores within stores” during the next three years. The plan includes development of an exclusive line of GNC vitamins and dietary supplements that will be available only at the two retailers’ outlets and at a joint Internet site.

Sav-On, meantime, has launched a rewards program in conjunction with sister chain Lucky supermarkets, modeled after grocery store frequent-shopper cards, that offers coupons for use at either store. Longs Drugs, with stores averaging 23,000 square feet, has some of the largest stores and bills itself as a “destination store,” luring customers in need of nonprescription goods with a broader array of products.

Woonsocket, R.I.-based CVS is launching a test of HealthTracker, a Web site that stores important health information for free, such as allergies, medical records and medications. For an annual fee, the site will add other information, allowing customers to track everything from nutrition to information on their EKGs.

Most of the chains acknowledge that rewards programs, promotions and additional health-care services are secondary. In the end, when consumers are choosing where to buy their medication and household necessities, store location is paramount, analysts say.

“There are a lot of people to get sick and buy soda pop,” said Ziegler at Salomon Smith Barney.

“What it’s going to come down to is, where is the store located and is there a pharmacist you trust?”

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Adding Links to the Chains

The nation’s biggest chain drug stores are on a building spree, fueled by consumers’ increasing purchases of prescription drugs and their demand for convenience.

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Checking Out chain drugstores:

Total retail sales in billions:

1998: $79.6 billion

Number of chain drug stores in thousands:

1998: 19,638

Prescription Sold in billions:

1998: 1.08 billion

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Source: National Association of Chain Drug Stores