Inside This Issue - Opinion
Regional chains can still make an impact
February 1st, 2010
The sale of most of the assets of Snyders Drug Stores to Walgreens and the planned closure of the balance of the corporately owned outlets in the chain once again brings to the fore the difficulties regional operators confront in an era when the community pharmacy business is national in scope and ambition.
Executives at Snyders’ corporate parent, the Katz Group, say the divestiture was prompted by a desire to focus on the Edmonton, Alberta-based company’s home market, a reasonable proposition for a retailer that, prior to the sale, had some 1,500 stores in Canada and only 25 in the United States. Beyond Katz’ primary motivation, however, it is likely that other factors were at work.
Like regional retailers, Snyders had to contend with a formidable array of bigger competitors. They included the nation’s leading chains, Walgreens and CVS Caremark; the top two discounters, Walmart and Target; and Cub Foods, a division of food/drug combination store operator Supervalu. The resource gap faced by regional drug chains when vying with such rivals is a formidable obstacle to success.
The problem is exacerbated by relentless downward pressure on profit margins in the pharmacy department. With third-party payers doing everything they can to limit reimbursements to community pharmacies of all sizes, the burden falls particularly heavily on small chains. Such retailers are not large enough to take advantage of economies of scale or wield much clout in contract negotiations with pharmacy benefit management companies.
The situation at the front end is no better for regional operators. For years they have decried the trend among suppliers to devote more staff and other resources to their largest accounts at the expense of smaller retailers. While the protests have, in many cases, met with a sympathetic hearing, little real progress has resulted, leaving regional chains at a distinct disadvantage in such areas as access to new products at the time they are launched, category management and the alignment of business plans with manufacturers.
Also overmatched in marketing, technology and access to financial resources, it is surprising that so many regional drug chains manage to survive and prosper. What’s more, some of them are exhibiting the wherewithal to help push the entire industry forward.
Kerr Drug, which operates some 90 outlets in North Carolina, has emerged as one of the most effective proponents for the transformation of the traditional chain drug store into a neighborhood health care center. Its latest effort, a 13,500-square-foot store in Chapel Hill, N.C., includes dedicated facilities for medication consultations, vaccinations, diabetes care, education/hearing services and pharmacogenomics. The concept has won widespread acclaim throughout the chain drug industry.
In New York City, Duane Reade (which some might argue does not qualify as a regional chain because of its $1.77 billion in annual sales, but all of whose 256 outlets are in one metropolitan area) is reimagining the drug store. The retailer is gearing the design of its outlets and merchandise to meet basic needs related to how customers “feel,” “look” and “what they need now.” The results, best seen at the chain’s 14,000-square-foot, two-level outlet at 36th Street and Broadway in Manhattan, have caught the eye of shoppers and competitors.
A regional chain on the West Coast is exhibiting leadership of a different sort. Bartell Drugs took a stand against cuts in Medicaid reimbursements to community pharmacies last month when it announced that 15 of its 57 stores in Washington state would stop filling scripts under the program. In this latest round of the ongoing Medicaid fight in Washington, Bartell was in the vanguard, putting its initiative in place a week before Walgreens took a similar position.
Recent developments at Kerr, Duane Reade and Bartell demonstrate not only that regional drug chains can beat the odds and remain viable but also, at their best, influence the course of the entire industry.