By  on May 11, 2007

Will Pharmaca become the Whole Foods of the upscale pharmacy sector? Executives at Pharmaca and a venture capital firm seem to think so.Barry Perzow, chief executive officer of the 13-unit Boulder, Colo., pharmacy, and Tom Stemberg, a partner at venture capital firm Highland Capital Partners, are out to grow the high-end pharmacy, which sells everything from organic chocolates to over-the-counter cures and mineral makeup lines, into a chain of 150 to 250 stores in the next five to seven years.Stemberg, the founder and former chief executive officer of Staples, has joined Pharmaca's board. His Boston venture capital firm has already raised $18 million to fund Pharmaca's growth. In total, Pharmaca has accumulated $70 million in equity, bank and supplier financing to fuel expansion. "Many people refer to us as the Whole Foods of pharmacies," said Perzow. "They support [their stores] with the culinary passion and with the merchandising and the supply of food that conventional chains can never match. In a very analogous way, it is what we are doing in the pharmacy space." Whole Foods may not be an apt comparison in one regard: It restricts stock of products not falling under natural, organic or alternative lifestyle descriptors; Pharmaca strategically bridges mainstream, alternative and luxury categories. That means Pantene and Aussie shampoos and conditioners are available adjacent to Aubrey, John Masters Organics, Avalon and Modern Organic Products items.The integrative concept has the upside of retaining loyal customers, many of whom may have visited a Pharmaca store in their former incarnations (a Pharmaca location in Pacific Palisades, Calif., for example, had been a Bay Pharmacy for over 50 years), but also attracting those intimidated by organic labels. Once ingratiated into Pharmaca's concept, customers are educated by a well-trained staff — Pharmaca has 24 aestheticians to serve its stores. Aesthetician Ghizlane Jaouhar gives 30-minute facials for $35 and 15-minute makeup sessions for $15 at the Pacific Palisades' Pharmaca. "You want to have something for everybody, so, we have Pantene and Aussie that your typical person off the street is going to know, but we try to switch them on to things that may be healthier," explained the store's manager, Mindi Taylor, during a recent tour. Other hair care lines include ShiKai, Dr. Hauschka and Pharmaca's house brand.In natural products, the aim in beauty merchandising is to offer brands with limited, high-end distribution — Jurlique and Astara are spa skin care brands featured extensively — that appeal to Pharmaca's shoppers, nearly 90 percent of whom are women, predominantly in the Baby Boomer age range. Skin care and makeup brands, such as Zuzu, Jane Iredale and Dr. Hauschka, are highlighted in large, set-aside beauty areas with wood floors, signage and specialized lighting. "There is an emerging niche of organic luxury, and there are a tiny portfolio of brands that can step into that gap. Pharmaca is among the first of the retailers to recognize it and respond to it," said Mary-Elizabeth Gifford, vice president and creative director of Jurlique. "Make no mistake, this is a consumer-driven trend. It is different than anything we have ever seen before."Perzow argues that unique brands combined with long-term staff-customer relationships engender shopper loyalty. Strong relationships are possible at Pharmaca because, in contrast to specialty stores such as Sephora, the pharmacy's staff turnover is low. Dedicated events — such as yearly spa days — draw new customers to sample niche brands they may otherwise not know about. "Watching how the relationship grew with our customers and [health practitioners], we realized that there is no reason that the same thing shouldn't happen in the apothecary department," said Perzow. "It just fit right into our model." Certainly, low turnover comes with lofty staffing costs, and Pharmaca hires herbalists, doctors of naturopathy and homeopathic and traditional pharmacists in addition to licensed aestheticians. Perzow contends high employee bills are justifiable because Pharmaca's average basket is three times the size of traditional pharmacies. "We get very few customers coming in to just buy a bottle of Coke or a bag of chips, which we don't even sell," he said. As customer-staff relationships mature and natural beauty products become integral to customers' regimens, JoAnn Issenman, Pharmaca's category manager of health and beauty and its primary beauty buyer, noted the chain had been able to narrow its mainstream beauty selection mostly to Neutrogena, Aveeno, Nivea and Noxzema. At the same time, same-store sales in the skin care and cosmetics departments at Pharmaca have been up 80 percent year-over-year, according to Perzow. Overall, the chain has consistently experienced same-store sales growth of over 10 percent since its 2000 founding. Health and beauty sales make up 11 percent of Pharmaca's overall sales. In traditional drugstores, beauty usually accounts for less than 10 percent of sales.Perzow estimated that higher-margin, front-store sales or sales not directly related to medicines make up half its total and are even up to 70 percent of the total in newer stores. At most pharmacies, he said front-store sales hover at around 30 percent of total sales, but have dipped to the 20 percent range as the aging population boosts pharmacies' medically oriented business. Brisk front-store sales at newer stores are partially due to a change in real estate tactics. Initially, Pharmaca only moved into former independent pharmacies that suffered as behemoth chains squelched competition. Old pharmacies had the benefit of a ready-made contingent of customers, but made store layouts less flexible. Upcoming stores are being placed at the best sites, not necessarily pharmacies, to allow Pharmaca to institute its preferred store plan with prominent beauty and skin care elements.Perzow has clear requirements for store locations: Residents in a one- to two-mile radius around sites must have an average household income of $100,000 or more and at least 50 percent must have college or graduate degrees. Big-box shopping centers are avoided. A typical store is 4,000 to 5,000 square feet; the largest Pacific Palisades store is 10,000 square feet. Pharmaca clusters units in regions hospitable to natural products and where schools of homeopathy, to name one discipline, are plentiful for staffing purposes. There are several stores in Colorado, where Pharmaca started, the Pacific Northwest, and northern and Southern California, which will soon get locations in Irvine and La Jolla. Ideal sites are next door to grocery stores like Trader Joe's or Whole Foods, a neighbor to two California stores set for Napa and Sonoma. "Do we believe that this concept could overtake CVS? I don't know, but there is definitely a market for their products and areas for expansion," said Patricia Santos, a partner at Highland Capital. "Even just staying on the West Coast, we saw enormous potential for them. If you look nationally, they could start moving into the East Coast. The Midwest will take a little longer." Santos explained Highland Capital's interest in Pharmaca stemmed from general expansion in the natural and organic category — natural personal care, she pointed out, has steadily grown in the double digits per year — its clear consumer message and an experienced management team. Perzow has 40 years in the retail business under his belt and was president of Canada's Capers Natural Food Markets before it was bought by Wild Oats in 1997.Perzow doesn't mince words about Pharmaca's fate. An initial public offering, he said, was definitely in the future. "It all depends on our future growth and how quickly we have our stores ramping up to the levels we want them to be. We are not there yet," he said. However, he added, Pharmaca "has the potential to be a very sexy IPO someday."

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