NEW YORK — The disappearance of the Drug Fair and Cost Cutters logos from New Jersey marks not only a loss for regional drug chains, but a blow to the cosmetics industry.

This story first appeared in the March 20, 2009 issue of WWD. Subscribe Today.

Drug Fair Group Inc. and its parent company, CDI Group Inc., announced Wednesday that they filed voluntary petitions for reorganization under Chapter 11. In connection with the Chapter 11 filing, Drug Fair entered into an agreement with Walgreens to sell substantially all of its assets associated with 32 of its stores. Walgreens plans to put its logo on those stores and close the remaining 11 units (Walgreens obtained the pharmacy files of those stores). Two Drug Fair stores closed prior to the deal and transferred those Rx files to Wegmans and ShopRite.

Beauty manufacturers said Drug Fair, which has larger than average cosmetics departments, has always been a chain willing to experiment with new brands or line extensions. The firm’s beauty merchandise manager, Gerri Pienta, is called a seasoned professional with more than 30 years of experience and solid industry relationships.

The first rumblings that something was up at Drug Fair, based in Somerset, N.J., came last weekend when two stores unexpectedly closed and prescriptions were transferred to nearby competitors. On Tuesday, 47 employees, including merchandise managers and buyers, were abruptly terminated at the corporate office and a memo was issued that Walgreens would buy the chain and close some doors.

“As you have been well aware, our company too has been struggling to maintain its viability. To this end, rather than close our doors like others, we decided to initiate a process to find a buyer for our business who is in a better position to continue the Drug Fair legacy,” said Tim LaBeau, Drug Fair’s chief executive in the memo. “After a great deal of searching, we have decided to enter into an agreement to sell most of the Drug Fair business, including the majority of our stores, to Walgreens.”

Drug Fair operates two different formats — the traditional Drug Fair stores as well as deep discount units under the name Cost Cutters. Both layouts have huge cosmetics departments. Cost Cutters, in particular, had a huge alcove devoted to beauty in the tradition of the deep discount formula, which stressed beauty at keen prices. The traditional stores also had a large beauty area.

In recent years, Drug Fair had been opening more upscale designs with an accent on cosmetics. A case in point is the Millburn, N.J., store which had many nuances such as coffee for pharmacy customers and a computer to research prescriptions. The beauty department has whimsical signs such as a woman in a tub to represent bath. There are three jumbo red lights and a mosaic design near cosmetics to set the department off from the rest of the store. In a sense, the area conveys the feeling of a living room or bedroom in a home.

Specially designed fixtures house prepacks which are abundant at Drug Fair. In recent years, Drug Fair launched a We Care loyalty program that was also linked to beauty deals. The chain was also aggressive with tie-ins to events such as Breast Cancer Month and Earth Day. The beauty department featured universal fixtures with a lineup including Revlon, Almay, Jane, L’Oréal, Maybelline, Cover Girl, Max Factor, Black Radiance, Styli Style and Milani. The wall is rounded out with nail care and other accessories. Just about any brand at any price point sold in mass can be found at Drug Fair.

Drug Fair was one of only a handful of regional powers left in the drugstore industry after the purchases of chains such as Longs Drug Stores and May’s Drug Stores in recent years. Countless other regional strengths have been consolidated into big chains over the last two decades including Revco, SuperRx, Harco, Fay’s and Brooks. Manufacturers, particularly those of upstart beauty firms, lament the lack of smaller chains willing to take a chance on new lines. “I really miss Longs because they’d give you a try with something new,” said one executive vice president. “The same can now be said for Drug Fair.”

On the opposite end of the coin, however, some suppliers said the reason Drug Fair had slipped in the last decade was that the retailer didn’t have anything to make it stand out from the competition. For example, its Cost Cutters deep discount format had a stranglehold on school supplies and a handful of other categories prior to the rapid growth of Target and Wal-Mart in the Garden State. “Drug Fair lost being good at what it was known for,” said one executive. “It got so people really only picked Drug Fair if it was convenient.”

In connection with the Chapter 11 filing, Drug Fair announced that it has arranged a four-month secured debtor-in-possession financing facility in the amount of $40 million. If approved by the court, proceeds from the DIP financing will be used by Drug Fair to fund its operations during the Chapter 11 proceedings and should enable it to continue to satisfy its obligations associated with its remaining operations, including payment of employee wages and benefits and post-petition obligations to vendors.

Although Walgreens has scaled back on its own growth in the tough economic times and has stated growth will come organically rather than via acquisition, the stalking-horse deal was seen as too good to pass up. The store locations dovetail nicely with Walgreens’ growth in New Jersey and the store sizes work with Walgreens’ format. In an ironic twist, one of the shuttered Drug Fair stores was a former Walgreens site that was relocated to a better location to add a drive-through. Walgreens operates 112 stores in New Jersey and still views the state as far from saturated.

“Drug Fair has been a respected pharmacy in this region for more than 50 years,” said Walgreens market vice president for the Northeast, Tim Anhorn. “We’re pleased to be able to keep most of the stores open and continue providing these communities with convenient access to high quality pharmacy services and basic needs. Customers will continue to see many of the familiar faces behind the counter they trust for their health care needs.”