SPECIAL REPORT

Pharmacy franchises: Still alluring or losing their luster?

While joining the ranks of leading companies such as St. Louis, Mo.-based Medicine Shoppe International (MSI) or Des Moines-based Medicap Pharmacies can offer myriad benefits, from providing financing to finding a location, there's growing evidence that the franchise concept is losing some of its luster. Topping a long list of complaints leveled by franchisees at these companies are high royalty or license fees, few real price breaks from wholesalers, lack of relevant marketing support, and poor third-party contract negotiations.

Slow expansion by major players, not to mention the withdrawal of several smaller franchise brands from the market over the past few years, is one indication of cracks in the system. After experiencing strong growth in the mid-1980s, MSI today counts 1,100 stores in the United States and another 250 in its international operations. Medicap has 184 stores open today with another 15 in development. Minnetonka, Minn.-based Snyders/Drug Emporium has a franchise network of 65 stores under its banner and another 16 licensed outlets that resulted from the buyout of Drug Emporium last October. Arlington, Va.-based Care Pharmacies was recently restructured from a buying group into a 44-store franchise company.

For some franchisees these numbers aren't heartening. Mike Martin admits that a desire to be, in his words, "part of something big" was the motivation behind striking a deal with Medicine Shoppe to open a store in Dallas, Ga., in 1991. When he joined, said Martin, the company had introduced a program called "2000 by 2000," implying it would have 2,000 stores by the end of the century. "At that time, the largest national chain was only about 1,000 stores, so my thinking was that this company was going places and I needed to get on board," he explained.

Bill Tatum, an MSI owner in Suffolk, Va., since 1987, was also swept up in the franchising tide during a period of rapid growth. "They were expanding at a rate of about 150 stores a year, and they were talking big about launching national advertising and other programs," said Tatum, who was then working for the People's drugstore chain.

If Martin, Tatum, and others once thought they were riding the wave of the future, they're not so sure today. The company has failed to come close to targeted expansion, they said. And there's also some evidence that the number of individual franchises is actually decreasing, with the only growth recently coming from an increase in the number of corporately owned stores. Martin also questions MSI's record of convincing franchisees to renew their contracts for another 20 years.

MSI's president and CEO, Marc Parrish, who moved over from parent company Cardinal Health last June, concedes there's been only a "mild increase" in the number of stores recently. While he declined to disclose figures on annual unit growth over the past few years, he projected the addition of 25 new stores this year, a number of which will be owned by existing franchisees bent on expanding their holdings. He stressed, too, that MSI is on track in terms of contract renewals. "We're not 100%, but we're meeting our objectives," he said, noting that the company doesn't release these numbers.

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