NEW YORK — When Michel Coutu, president and chief executive officer of the Jean Coutu Group USA Inc. walks into meetings at next week’s National Association of Chain Drug Stores Annual Meeting in Scottsdale, Ariz., he’ll gain a whole new level of respect.
While Jean Coutu’s Brooks Pharmacy chain of 330 stores has always commanded attention from the supplier community, the chain suddenly got more powerful when it was propelled from the eighth largest drugstore operation to the fourth following Monday’s announcement that the Jean Coutu Group of Quebec had acquired 1,539 former Eckerd drugstores. Jean Coutu snared the Eckerd stores in 13 Northeast and Mid-Atlantic states and the Florida headquarters for $2.38 billion.
CVS snapped up the remaining 1,260 stores and support facilities in Texas, Florida and several Southern states for $2.15 billion from J.C. Penney, which unloaded the ailing drug chain for a total of more than $4.5 billion.
J.C. Penney put the operation on the auction block last year, citing a desire to direct its efforts into department store retailing. Nine stores in Colorado will close because they didn’t fit the strategies of either of the buyers, according to Penney’s spokeswoman Christi Byrd Smith.
With the additional stores, CVS gains the crown as the largest drug chain by store count with more than 5,000 doors, surpassing Walgreens’ 4,336 units. CVS is no stranger to digesting large operations. The chain grew by acquisition in 1997 when it purchased Revco D.S. and its 2,600 units.
And, even though Jean Coutu assimilated 80 Osco drugstores it bought in 2001 from Albertson’s, this is a mammoth move for the Warwick, R.I.-based chain. “This [acquisition] was four years in the making,” said François J. Coutu, president and ceo of the Jean Coutu Group, in a conference call Monday. “We were looking for an acquisition that would allow us to pursue growth at an attractive price for our shareholders. The Eckerd drugstores were exactly what we were looking for.” The deal gives Brooks the number-one or number-two market share in 60 percent of its markets.
The stores Brooks purchased are generally considered to slightly outperform Eckerd’s Southern units. Brooks also purchased Eckerd’s headquarters in Largo, Fla., despite the fact its closest store is in Georgia. According to François Coutu, the company will continue to operate the Florida headquarters for “a period of time.’’ According to personnel at Eckerd headquarters, Michel Coutu flew to Florida to address employees and answer questions. Many are meeting with both CVS and Brooks to discuss future employment.
CVS purchased the mail-order pharmacy business and will license the Eckerd name from Brooks for the immediate future. For now, Brooks will continue to fly the Eckerd banner over the stores. In many of the markets, Eckerd represents a strong retail brand, despite the fact the stores had been faltering.
Brooks feels it can improve Eckerd’s performance by boosting front-end sales, gross margins and sales per store and improving in-stock positions. During the past few years, Eckerd has fallen into low inventories on hot items.
The store footprints are similar — about 11,000 square feet. But, Brooks squeezes out average sales of $600 per square foot where Eckerd’s is currently closer to $500 in sales per square foot. According to Michel Coutu, the concept and offering in Brooks and Eckerd is “similar in size and depth.”
There is virtually no overlap in store locations and Michel Coutu said no stores would be closed.
While many areas of Eckerd’s operations need tweaking, beauty should require less effort. “I think of any of the departments at Eckerd, beauty will require less work in the transition,” observed Wendy Liebmann, president of WSL Strategic Retail in New York.
From a beauty standpoint, Brooks and Eckerd are a nice fit. Eckerd has always had large and attractive beauty departments. In the late Seventies and early Eighties, the beauty business was nurtured by the late Ruth Wolfgang, then considered one of the best in the business. Since many of the stores were in Florida and served a mature population, Wolfgang was able to strike deals with manufacturers such as Elizabeth Arden, which at that time did not sell to drugstore chains. Eckerd was renowned for its well-trained cosmeticians.
In recent years, under the talented eye of Kathy Steirly, the beauty department has benefited from the launch of Mira private label cosmetics and an easy-to-shop universal fixturing program. “Kathy and her team have done a lot under challenging circumstances,” said Liebmann.
Brooks is also highly regarded in beauty. The chain was the first U.S. retailer to import European skin care to the drugstore world. Brooks now operates six Derma Skincare Centers featuring L’Oréal’s Vichy, Avène and Dermablend. Interestingly, the only other U.S. drug chain retailer also installing upscale skin care boutiques is CVS. The Eckerd stores purchased by both should present opportunities for upscale skin care growth. “There is a high concentration of dermatologists in Texas and Florida,” added Liebmann.
During the phone conference announcing the deal, Michel Coutu said Brooks would boost the emphasis on health and beauty care, including cosmetics, at the acquired Eckerd stores. He said it would take six months to see Brooks’ influence on seasonal merchandise and 12 months for Brooks to institute its best practices philosophies. A part of that will be a “first to market” strategy that could prove instrumental in building beauty sales.
Although candy will be an emphasis, management hopes to ease off on the presentation of consumables at Eckerd. The mix Brooks envisions should lead to higher gross margins, the team said.
Beauty manufacturers welcomed both deals. Vince Colonna, vice president of sales and marketing at Puig Fragrances, is pleased to see a smaller chain achieve megastatus. “It is good to have another player and it is difficult when the customer base continues to shrink,” he said. For Grant Berry, president of Intermark Cosmetics, the acquisition could help his chain extend its new distribution with CVS.
Few experts see problems for CVS in integrating Eckerd. However, even CVS president and chief executive Tom Ryan commented this week on how challenged Eckerd has been over the past few years. And, analysts point out that one problem Eckerd had was with its locations, which some term inadequate. CVS said it would take 18 months to two years and up to $350,000 per store in renovations to lift the performance of Eckerd stores. Still, CVS has shown it can handily revamp acquired chains. A few more eyebrows, however, have been raised over Brooks’ capabilities to assume the Eckerd stores.
“It is a big challenge. They have good people, but it will be a chore. I think it will be interesting to see who gets first dibs on the good people at Eckerd,” added Liebmann. But for now, both Ryan and Coutu will represent dramatically more buying power as they walk the tents and attend the soirees at NACDS.
They’ll will be just one of 2,200 industry retail and manufacturer executives expected to attend NACDS’ Annual Meeting to be held this year from April 17-21 at the Phoenician Hotel in Scottsdale. Top of mind will be ways to reinvigorate front-end departments, including beauty. Special session speakers include historian Michael Beschloss, documentary filmmaker Ken Burns, business guru Jason Jennings, public opinion strategist Bill McInturff and corporate strategy expert Michael Treacy. Naomi Judd will be a featured luncheon speaker and the closing entertainment will be provided by jazz singer Diana Krall.
Celebrity makeup artist Scott Barnes, who launched an eponymous color cosmetics collection on QVC April 4, enjoyed a stellar debut on the television shopping channel, nearly tripling initial sales expectations. The line, which bowed during what was originally scheduled to be a one-hour broadcast, sold out within 45 minutes, according to QVC, racking up sales of 26,000 units. With an average price point of about $34, sales volume amounted to roughly $884,000 — or a little less than $20,000 a minute. Featured items included Scott Barnes’ Canvas Kit, Chic Palette and Body Bling. Other highlighted kits were, IlluminEye, Lip Service, Maximum Mascara Duo, Glow and Falsettos Lash.