THE PENNEY’S–ECKERD SYNERGY
Byline: Faye Brookman
NEW YORK — J.C. Penney’s planned takeover of Eckerd Corp., one of the jewels of the chain drugstore industry, could result in one of the most riveting beauty formats in mass market retailing.
The combination of Penney’s department store merchandising expertise with Eckerd’s prime locations, strong name recognition and winning track record with the beauty industry could add up to a potent formula.
Penney’s, as reported, plans to combine its Thrift Drug stores with those operated by Eckerd, which is based in Clearwater, Fla., through a cash and stock acquisition valued at $3.3 billion.
This is the latest in a rash of drugstore acquisitions over the last six months, including Thrift’s purchase of Fay’s Drug of Liverpool, N.Y. In other major moves, Revco D.S. of Twinsburg, Ohio, acquired Big B in Bessemer, Ala., and Rite Aid made a deal with Thrifty PayLess of Wilsonville, Ore.
The acquisitions are being fueled by the need for drugstore chains to operate more efficiently, especially at the pharmacy counter, the heart of the drugstore business. A larger power base is needed in the prescription drug business to attract and bargain with the managed care health insurance operations. Health maintenance organizations and the proliferation of third-party prescription plans in recent years have put intense pressure on drugstore margins and eroded profitability.
The drugstore chains are also bulking up through acquisitions to help them handle hard-charging competitors, such as discounters like Wal-Mart Stores.
So the result is a flurry of takeovers, reminiscent of the department store implosion triggered in the late Eighties.
“The chain drugstore industry is consolidating before our eyes, and we’re excited to be a player in it,” said James E. Oesterreicher, Penney’s chief executive.
Indeed, the industry’s hierarchy today looks vastly different than it did just four years ago. Rite Aid, for example, was the nation’s fifth largest chain, with sales of $3.4 billion and 2,438 stores in fiscal 1991. Now it has grown to about 3,850 stores with sales of $10 billion, putting it just behind industry leader Walgreen Co.’s annual sales of $11.8 billion.
Thrift Drug was the 14th largest player in 1992, with sales of $1.2 billion in 531 stores. With Eckerd under its belt, the new entity becomes one of the top three in sales, with about $10 billion and a 2,800 store count.
Penney’s deal with Eckerd differs from many typical takeovers for several reasons. For one thing, according to a Penney’s spokesman, it appears likely the company will be operated out of Eckerd’s base in Florida versus Thrift’s Pittsburgh headquarters.
“They have a large and a sophisticated facility,” observed John Farr, senior vice president for Bonne Bell Inc. in Lakewood, Ohio.
In addition, Frank A. Newman, Eckerd’s president and chief executive, has been tapped to head the combined chain. That raises questions about Robert Hannan, Thrift’s highly regarded president and chief executive officer.
Penney’s officials said Hannan is “on the transition team,” suggesting he’ll have a prominent role in the new organization.
Another novel twist is that the new chain will probably adopt the Eckerd logo rather than Thrift’s. The Eckerd name, especially in Florida, is almost synonymous with drugstores. The Thrift banner is less known in its markets.
While most chains slap their logos on newly acquired stores, Thrift has not. When it bought Kerr Drug last year in Raleigh, N.C., it retained the Kerr name. The same is true for its recent buy of Fay’s Drug.
“We think there’s a large advantage to utilizing the equity that’s in the Eckerd name,” said Oesterreicher. Retaining Newman and the Eckerd name were important elements to the Florida drugstore chain, which reportedly had also been courted by CVS of Woonsocket, R.I., while Penney’s was approaching Eckerd.
The stores are a good fit, said those familiar with both chains. As for the beauty business, Thrift can greatly benefit from Eckerd’s format, which emphasizes service in most stores and a sizable cosmetics presence.
“Both chains would obviously learn from each other and each has its own strengths,” said John Wendt, Maybelline president. “Combined, they can be much stronger merchants.”
“It’s a good fit, and Thrift has been successful at integrating stores, such as what it has done since acquiring Fay’s,” said Tom Winarick, vice president of marketing for Prestige Cosmetics, Deerfield Beach, Fla.
The beauty department in a typical Eckerd unit is right at the entrance and features a glass service counter, prestige fragrances housed under glass and a vast array of pegged cosmetics.
Over the past four years, the average department has been redesigned so that other beauty aids such as skin care are adjacent to the cosmetics merchandise.
Although Thrift has several stores where it has presented an upscale beauty department with brands such as Revlon’s Ultima II — a strategy inspired by the prestigious approach taken at Penney’s — most of Thrift’s units have small beauty departments bearing little resemblance to the upscale format.
The merger of drugstore chains resulting in mega-powers is sending shivers down the spine of the cosmetics industry. Some beauty manufacturers fear that with the consolidation at retail, the surviving chains will show less flexibility and tolerance for experimentation and small manufacturers will be frozen out of the distribution.
Bigger chains demand more from suppliers, especially when it comes to distribution technology.
“New [manufacturers] just getting into the beauty business now won’t be able to keep up with the technology or the financing these chain powers need,” said Winarick of Prestige Cosmetics. “It will weed out the business.”
He noted that Prestige added processes like electronic data interchange inventory management system several years ago and is therefore equipped: “We’re a few steps ahead, but someone starting would have trouble.”
“I don’t small players will be forced out (by larger chains), because this industry ensourages new products and suppliers,” added Maybelline’s Wendt.
Still, the mergers are forcing many drugstore beauty buyers to seek jobs in other areas — sometimes with vendors. Penney’s said it plans to cut $100 million in costs through shared computer systems, increased buying power and other efficiencies.
Although no job cuts were announced at the time of the merger, sources expect there will be reductions in staff.
“However, as drug chains put a greater emphasis on the front end, they are looking for a higher degree of specialization, and that could create new positions, especially at the new Eckerd,” said Bonne Bell’s Farr, referring to nonpharmacy cosmetics like beauty.
The deal doesn’t have the same Federal Trade Commission concerns that surfaced just before a Rite Aid-Revco merger was scuttled this year. Their combination involves little overlap in units.
“We were impressed with the excellent geographic fit with Thrift and its strong presence and brand name recognition in markets with large and growing populations,” said Oesterreicher.
For Penney’s, the drugstore business — in which it has a 27-year history with Thrift — offers a way to augment its department store operations. With Eckerd, Penney’s drugstore business will be about one-third of its total sales. Penney’s believes its retail experience will be a boost to the nonpharmacy portion of its drugstores.
Penney’s management said there may be additions to Eckerd stores such as Penney’s catalog services, which are already offered in many Thrift units. Other additions could include more women’s hosiery and children’s novelty goods like those Penney’s sells, said a Penney’s spokesman.
The financial community thinks the move makes sense for Penney’s, which is seen as a department store company acquiring new growth opportunities. Eileen Leary, a vice president at State Street Research in Chicago, said, “Department store retailers have two choices: either consolidation or diversification.”
A lot is at stake, particularly for those doing business with each of the soon-to-be-merged units. Revlon, for example, “has enjoyed an excellent relationship with J.C. Penney, Thrift and Eckerd,” said George Fellows, president and chief operating officer. “We wish them well and look forward to growing with them in their joint association.”
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