By  on August 21, 2009

Duane Reade, Manhattan’s scrappy hometown chain, has stepped squarely into the drugstore wars.

Protecting its turf against encroaching national chains and aiming for a profits turnaround, the retailer is rolling out an aggressive overhaul featuring an upscale face and more prestige beauty brands, thrusting it to the forefront of an industry trend as drugstores aim to eat into the market share held by department stores.

On a recent afternoon, the cheerful suggestion by a Duane Reade employee, “Would you like a complimentary facial?” stopped one shopper in her tracks.

The beauty adviser, outfitted in a white lab coat, stood alongside a sleek white display of upscale skin care brands — This Works, Yu-Be and Rilastil, to name a few — in Duane Reade’s Water Street store, located at the mouth of the heavily trafficked South Street Seaport.

The earnest beauty adviser and new store prototype represent an about-face for Duane Reade, known for convenience, but notorious for lackluster customer service.

The store at 200 Water Street is one of about 20 locations that showcases Duane Reade’s overhauled image, and six to seven more are planned by year’s end.

In this location, natural light spills into the store through large windows — which typically are the province of promotional items, ranging from potato chips to hand soap — and aisles are wide and easy to navigate. A slate-colored floor has replaced white-and-red linoleum tiles. Upon entering the store, the pharmacy is clearly visible beyond undulating gondolas stocked with personal care items.

The merchandising philosophy of “stack them high, and let them fly,” has been replaced by a streamlined assortment organized into three distinct color-coded areas of the store: How Do I Feel (blue), How Do I Look (purple) and What Do I Need (green). These colors have replaced royal blue and red in the company’s logo.

The heavy lifting is the work of a new management team, led by chairman and chief executive officer John Lederer, who joined Duane Reade in April 2008. Lederer previously was president of Loblaws Cos. Ltd., a $30 billion Canadian grocery chain. Soon after arriving at Duane Reade, Lederer tapped Joe Magnacca as senior vice president, chief merchandising officer from Shoppers Drug Mart Corp., Canada’s largest drugstore chain. Shoppers Drug Mart made inroads in prestige beauty by selling department store brands in its Beauty Boutiques and in its stand-alone Murale concept, which Magnacca helped to conceive.

Duane Reade’s effort to reintroduce the 250-plus store chain to the denizens of New York City also includes an advertising campaign guided by consumer research and the tag line, “Your City. Your Drugstore.” Ads across the city read, “Prescriptions. Easier to get than taxicabs,” “The one place even a tourist can find,” and “All the medicine you need, from aspirin to chicken soup.” The tone of the ads is intended as almost an inside joke between Duane Reade and New Yorkers. Both Lederer and Magnacca, who hail from Canada, now reside in Manhattan. In the evenings, Lederer makes a habit of popping in and out of Duane Reade stores.

The retailer is owned by the private equity firm Oak Hill Capital Partners, and has bondholders. Oak Hill bought Duane Reade in 2004 for about $748 million.

For fiscal 2008, the chain’s net sales gained 5.4 percent to $1.77 billion, from $1.68 billion the prior year, with total same-store sales increasing 4.2 percent.

For the full year, the chain’s operating loss was $15.8 million, compared with a $24.6 million operating loss in the prior year.

Duane Reade’s near-term liquidity concerns have been lessened by a $300 million debt issuance earlier this month, as well as a $125 million cash injection by Oakhill Capital Partners.

At the time of the announcement on Aug. 7, Lederer stated, “We are very pleased to complete this financing, which reduces our leverage, improves our financial flexibility, and provides long-term capital support for the continued transformation of Duane Reade.”

Lederer told WWD the rollout of the new prototype, which began in the fall, will take place over the next three to four years, with Duane Reade completing about 30 to 35 units a year (the number includes remodels, relocation and new construction).

Referring to the changes, Magnacca said, “This is a brand transformation project. It’s about taking a stake in the fact that we are New Yorkers’ drugstore, one that people have trusted for 49 years.”

Duane Reade’s Achilles’ heel, as Magnacca put it, is service. New Yorkers have long grumbled about the lack of service inside the stores, but had few other options for where to pick up prescriptions or razor blade refills. That has changed in recent years, as national chains have made a more aggressive effort to penetrate the New York market. For instance, both CVS Pharmacy and Walgreens have flagships in Manhattan, located by Grand Central Terminal and in Times Square, respectively. Both stores seek to elevate the shopping experience for New Yorkers, who had come to expect little from their neighborhood drugstore.

“A market that Duane Reade had more or less to itself is filling up with competition,” said Neil Stern, a senior partner at the retail-consulting firm McMillian Doolittle. “The good news for Duane Reade is New York is still an incredibly difficult market to penetrate.” Referring to the changes, Stern said, “It’s all part of an effort to change the image of an iconic retailer. You can be iconic for good and bad reasons. For Duane Reade, it was a little bit of both.” He added, “Ultimately, if you want to change your image [as a retailer] you have to change the attitude of the people who work in your store.”

Lederer said, “The customers in New York put up with an awful lot.” He added the company’s strategy is guided by the mantra, “New York Living Made Easy.” That said, in addition to clean, well-lit stores, Duane Reade had added conveniences, such as shopping baskets with a retractable handle and wheels. And to ameliorate confusion (and to tame tempers) at the checkout, the drugstore has installed a corral system — lined with impulse items, including magazines and candy.

To improve service, management has made a concerted effort to directly communicate the business plan to store employees, and to hold brand pep rallies in the stores to drum up excitement about the changes taking place.

Duane Reade overhauled its assortment to make room for the improvements, the wide aisles and open windows in particular. As for what stays and what goes, Magnacca said discussions were guided by “variety versus duplication.” “We just don’t need 14 sizes of Pepto-Bismol in our store,” he said. “We don’t need to over-sku our store. In the past, we would have tried to jam everything in, and that creates a very difficult shopping experience for the customer.”

Now, the company is looking at the mix, category by category, making edits if necessary, and then rolling out those changes chainwide. For instance, in the snack aisle, Duane Reade now merchandises the assortment by snack type — potato chips, pretzels, etc. — rather than by brand as it did in the past.

“Even if you are not experiencing a new store [concept], you are experiencing a new assortment, new thinking about adjacencies and a more robust, productive product line up,” said Magnacca.

The company would not comment on performance except to say the prototype stores are outperforming key metrics, including store traffic, customer satisfaction and sales.

In the beauty department — which in this store, runs at an angle off to the side of the cash registers — Duane Reade emphasizes skin care. It’s Skin Wellness Center — stocked with French imports, namely Lierac, Vichy and La Roche-Posay — has been broadened to include more brands with premium price points, such as Skin by Monica Olsen. Duane Reade also is dropping the Skin Wellness Center moniker from the concept, which is in 50 doors. Each skin center is manned by a beauty adviser.

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