MERGER FEVER CLIMBS, BUT DRUGSTORE CHAINS LEARN TO COPE
Byline: Faye Brookman
SUMMIT, N.J. — Kathy Selsi, a local shopper, used to go to Charline’s Drugs here for her nail polish. But Charline’s is now a Thrift Drug. Two blocks away, the SupeRx where Selsi once got her prescriptions filled now bears a Revco logo.
Scenes like these have been far from uncommon of late; they are the result of a wave of acquisitions that has been sweeping the chain drugstore industry.
In just the last year, 10 major mergers have taken place in the industry, most notably Thrifty’s buyout of PayLess a year ago, Rite Aid’s purchase of Perry Drug Stores and Thrift Drug’s acquisition of Kerr Drug, both in January.
Additionally, there has been a number of smaller buys, each of which involved fewer than 20 stores.
In all, the deals have affected more than 2,000 store doors and an estimated $400 million of beauty volume, nearly one-third of the $1.4 billion chain drugstore cosmetics business.
Acquisitions are nothing new to the chain drugstore industry, whose players have dwindled in number over the years. Gone are names like Gray Drug, People’s Drug and Cunningham.
But the pace with which larger chains have been gobbling up smaller, often regional, players has intensified since the beginning of 1994.
And with larger chains such as CVS Stores and Rite Aid hungry for more growth, experts expect the buying spree to continue over the next six months.
“It is easier to buy a chain than to open new stores,” said Ron Petrie, an analyst with Roney & Co. in Detroit.
Although the merger mania reduces the number of players in the mass market cosmetics retail business, experts said that without the consolidation the industry would not be able to compete against the power of huge discounters such as Wal-Mart Stores Inc.
“What’s driving the consolidation more than ever is the need for technology,” observed Petrie, referring to pharmacy computer systems, point-of-sale scanning and quick-response technology.
The need to implement technologies such as these is especially crucial in cosmetics, where there is an abundance of stockkeeping units, slow inventory turns and a hectic schedule of product launches.
Allen H. Kurtzman, president of Neutrogena Corp., predicted that the wave of consolidations will continue because many drugstore chains do not have the back-office technology necessary to keep costs in line while meeting the competitive challenge of the discounters.
One exception is Walgreen Co. of Deerfield, Ill., he said, which has installed computer systems and brought inventory under control. That has allowed Walgreen’s to protect its profits, Kurtzman said, and to be aggressive in its pricing, at the same time.
Robert Hiatt, president of Maybelline Inc. of Memphis, Tenn., agreed.
“I think the pain the drugstore industry is suffering in the transition will actually make the stores more effective in the long run,” he said. “The industry needs to upgrade its systems and install scanners for better inventory control. Consolidation will make it a more level playing field to compete with mass merchandisers.”
Discount chains such as Kmart Corp. of Troy, Mich., Target Stores of Minneapolis, Minn., and Wal-Mart of Bentonville, Ark., have been at the forefront of installing scanning and automatic inventory replenishment systems.
This kind of outfitting takes many of the costs out of the distribution system and has a direct effect on the bottom line, industry experts say.
In addition to giving drugstores the strength and size to afford the much-needed but costly technology, Hiatt said the mergers are affording chains the chance to learn from each other.
The purchasers are getting more than just an added number of outlets; they are gaining expertise, Hiatt said. He noted that rather than just stamp their own look onto the acquired stores, the purchasing parties have been trying to learn from the existing retailer.
“Chains are opening up to new ideas and learning from the chain they buy,” he said.
A prime example is Rite Aid Corp., based in Camp Hill, Pa., which acquired LaVerdiere’s Super Drug Stores of Waterville, Maine, in January 1994; Perry Drug Stores Inc. of Pontiac, Mich., in January, and several stores from the New York-based Red Apple Group in December.
Although Rite Aid’s traditional format had a minuscule cosmetics department, the stores it has recently acquired are opening up the opportunity to extend the beauty presentation.
Rite Aid is putting its own name on its acquired stores, but is keeping many of the existing store’s cosmetics layouts. In addition, the chain is incorporating aspects of the acquired stores into its own new units.
The model for the new Rite Aid look is a recently opened store near Baltimore that features a glass showcase of prestige fragrances and an 8-foot-long bath boutique, a much heavier emphasis than Rite Aid gave to beauty in the past.
Rite Aid had first discovered the beauty of cosmetics after an earlier acquisition of Wellby Super Drug, a chain that had an upscale beauty presentation. After reviewing how successful upscale fragrances had been in Wellby, Rite Aid decided to extend its own offerings.
The expansion has continued from there, and it is expected Rite Aid will gain in particular from Perry’s strong cosmetics presentation.
Thrifty has also been on the plus side since its merger with PayLess, according to suppliers.
The addition of the PayLess strategy “is bringing class to [Thrifty] stores where beauty was sorely overlooked,” said one supplier.
Another example of how the larger chains are keeping the local flair of the operations they purchase is Thrift Drug’s acquisition of Kerr Drug, based in Raleigh, N.C. Rather than replace the Kerr name, Thrift plans to retain the well-known logo.
Another chain following that same plan has been American Stores, “which is another chain that realizes what names mean to local markets,” according to Hiatt.
American Stores has retained the name of many of the stores it has acquired, such as Sav-On.
There are downsides, however, to consolidation that may leave a lasting imprint on the beauty business. With fewer competitors, many in the industry fear that cosmetics departments will all start to look alike and innovation will be diminished.
And the shrinking drugstore base could leave a void that would give discounters the edge they need to grow even faster in the race for the mass market beauty business.
With fewer chain drug players left, manufacturers said they will be forced to seek new distribution, most likely through growing channels such as discounters or even apparel off-price retailers.
For vendors, mergers can mean a big gain — or loss — of business. This especially squeezes makers of budget-priced lines, since most drug chains only stock one budget vendor’s products.
“We got lucky in the case of Rite Aid and Perry,” said Stuart Reiner, group sales vice president of Artmatic/Tropez Cosmetics of Brooklyn, N.Y. “We were just starting to make waves with Rite Aid and we were already in Perry.”
He added that he hoped the new, larger chains would see value in adding more than one of the budget lines, which traditionally produce higher turns and gross margins than brands like Revlon and Max Factor.
The consolidation fever also leaves vendors scrambling to figure out how to serve the chains. One manufacturer said he now has four or five different planograms for Revco in order to serve a patchwork of stores that were formerly Hook, SupeRx or Brooks.
“Of course that’s OK,” he added, “since we sold to Revco, but didn’t sell to SupeRx before the acquisition. So as long as I get more business, I’ll deal with the many planograms.”