COVER STORY

Regional chains are alive and well despite a faltering economy

They sell designer clothing and fresh-cut flowers. They boast the largest selection of Beanie Babies in their market. Their food sections rival free-standing convenience stores. They sell tickets to concerts and sporting events. They even have a dry cleaning service.

Regional drugstore chains are thriving despite fierce competition from Goliath drugstore chains breathing down their backs. What's the secret to their success? Three things: customer service, customer service, and customer service.

In addition to going out on a limb to find exclusive merchandise and offering unique customer shopping experiences, regional chains believe that when it comes to customer service, nobody does it better. Top brass at these chains expect their pharmacists to pamper patients with personal attention. In return, these executives dote on their employees—promoting from within, doling out gifts of company stock, answering phone calls from each and every one of their employees, and extending other special considerations.

Still another major factor contributing to the prosperity of regional chains is that they are on the cutting edge of technology, utilizing innovations that not only heighten their ability to provide top-notch customer service, but also add profits directly to their bottom line.

What better time is there than now, when NACDS' regional chain conference is being held this month in Key Biscayne, Fla., to examine which regional chains are thriving? And what can community pharmacies learn from them?

Innovation, enterprise: Lewis Drugs

• Lewis Drugs, a 21-store chain based in Sioux Falls, S.D., logged sales of more than $100 million in 2001, with about 40% of that from prescription drugs.

The chain's philosophy of selling an unusual mix of items dates back to 1942, when the father of current president/CEO Mark Griffin opened a 7,000-sq. ft. store in downtown Sioux Falls.

"He made it through the war by selling soaps, books, and popcorn," said Griffin. "We used to get in trouble because we sold most of the popcorn in that downtown area. That was our main income flow back then. The theater people across the street were upset because we sold more popcorn than they did. But you did what you could to get through the war years. We sold everything right to the ceiling—a lot of toys and a lot of items that were pretty unusual for a drugstore of that type." The store had sales of over $1 million in 1965, when it moved to larger quarters.

In addition to taking the bold step of selling products that don't exactly fit pharmacy's mold, Lewis Drugs was one of the first drugstores to jump on the self-service bandwagon along with Walgreens and Snyders, Griffin told Drug Topics. "So we were pretty unique," he said.

As Kmart came on the scene in the 1960s, Lewis Drugs found that expanding the size of its stores from 7,000 to 17,000 to 65,000 sq. ft. was a good strategy. The increased space allowed for the development of large toy, furniture, hardware, and sporting goods departments as well as garden centers. "We were selling everything from Nikon cameras to duck boats. We covered the gamut. People perceived us as a drugstore/mass-merchant, which is basically what we are."

Indeed, Lewis Drugs resembles mass-merchandising outlets. It has a soft-goods business, featuring clothing and promotional goods, with popular labels that include Old Navy, Abercrombie, Nike, Calvin Klein, and Polo Ralph Lauren. And it offers a dry-cleaning service.

The chain also took a stab at the flower business and found it so lucrative that it has a flower boutique blooming in every store, complete with delivery service. "We have fresh-cut flowers every day," Griffin noted. "We use that with our flourishing card business and they complement each other." Roses are priced at an economical $9.99 a dozen on Valentine's Day.

"Our buyers are out buying every week. We try to take advantage of any opportunity that comes up. It's a little different, a little more edge, a little not 'business as usual' with us," Griffin continued.

In another effort to outdo the competition, the chain's stores are outfitted with a large service counter selling lottery tickets and events tickets through Ticketmaster. Lewis also offers customers a bill-paying service for utility bills. "We don't make money on bill payments, but it's great for traffic," he said.

Another maneuver aimed at leaving the competition in the dust is Lewis' emphasis on promoting itself. The chain churns out over 30 color circulars a year.

Dubbing Sioux Falls an over-stored community, Griffin noted that Lewis' rivals include ShopKo, Kmart, Target, Wal-Mart, a million sq.-ft. mall, and a couple of half-million sq.-ft. malls. "Everybody in the retail business thinks it's a good place to drop a store or multiple stores, so we have a veritable cornucopia of retail," Griffin said.

With so many outlets competing for pharmacists, it's no wonder this executive bends over backwards to please his employees. In addition to paying competitive wages, the chain hosts bowling parties, delivers food to employees on bitter cold winter days, and Griffin signs a birthday card for every employee.

To survive in a crowded landscape, pharmacies have to do more than pay lip service when it comes to communicating with patients. This chain allocates a roomy 1,500 sq. ft. to the pharmacy, and it has enlarged its counseling rooms. "We pride ourselves on having great communication with our customers at eye level," Griffin emphasized. "We go one-on-one with our customers. We don't isolate our pharmacists behind glass walls."

Another strategy that has paid off handsomely for Lewis is its partnership with hospital systems. The chain leases clinics it has built on its own real estate. "At our locations with hospital systems," Griffin explained, "we integrate the traffic flow into our store." Exiting the clinic brings the client into the pharmacy.

And Lewis Drugs is no wallflower in the technology area, either. "We've been scanning for 15 years," claimed Griffin. "We were one of the first scanning drug chain companies." The chain is currently studying proposals to implement central fill.

Outstanding service: May's

• May's Drug Stores is a 39-store chain headquartered in Tulsa, Okla. It serves southwest Missouri and northwest Oklahoma. According to outside sources, the chain chalked up sales of $165 million in 2001—two-thirds of that from Rx drugs.

Like many other regional chains, May's has made outstanding service a priority. Among its most loyal customers, the chain even conducts focus groups to make sure it is achieving its goals. "Our most loyal customers tell us that they wouldn't shop anywhere else because the pharmacists know them and their families and they feel comfortable shopping in the store."

Gerald Heller, May's president/ CEO, echoed Griffin's thoughts on the importance of having a great selection of merchandise. He believes May's has a leg up in this area because the chain does its own importing.

Even when it comes to selling convenience foods, May's goes overboard to outpace others. It launched a "groceries to go" concept in about half of its stores and enlisted Pillsbury's help in refining its mix of items. "We try to focus on quick meal preparation for breakfast, lunch, and dinner and to offer customers something they can pick up quickly when they are in our store," Griffin said. Among the offerings are bacon, eggs, milk, lunch meats, cheeses, bread, mustard, soups, and high-quality frozen entrées.

Another reason for this regional chain's success is the relationship its pharmacists have built with their community. The chain encourages its pharmacists to speak in nursing homes and at senior citizen events on topics relevant to senior patients.

May's also has an arrangement with the University of Oklahoma whereby faculty helps provide disease state management—cholesterol, blood pressure, and asthma screenings as well as liver-function tests—within its stores.

When it comes to technology, Heller couldn't agree more with Griffin about the importance of going full steam ahead. "One of the things we're most proud of is that we've been totally computerized in our pharmacy since 1975. We analyzed our business and saw what was happening with third parties. The only way to handle them realistically was on a computer system. When we started, the payback was much faster at every store we set up than we anticipated. Computerizing all our stores has given us a tremendous advantage."

Having a proprietary customized computer system instead of an off-the-shelf system has been a boon to this chain. "We can change it on a day's notice if necessary," Heller said. "If we had to stand in line and get a change made by [an outside] company, we'd have to wait six months to a year. We can mine our own data, since we don't have to ask anybody else for the data, and of course we also don't have to pay fees to anybody on a monthly basis. It wasn't nearly as expensive as going outside and buying a system in today's marketplace," said Heller.

Alluding to May's advanced technology, Heller thinks it's second to none for the size of his company. "We've always believed in having great technology, and fortunately we have people who have been able to keep us current and ahead of most people on the technology front. We've been on total scanning in our stores for 10 years. We've had automatic replenishment out of our warehouse for the past eight years, giving us tremendous information at our disposal. We developed an IVR [Interactive Voice Recognition] system with its own workflow built in. We have our own Internet site from which customers can order Rxs," said Heller. The chain has also had Baker cells for automated counting and dispensing for some time. "We have one of Baker's new installations, and we have two ScriptPro robotic units in our stores," said Heller.

While May's is eyeing expansion, Heller is taking a cautious approach. "We have gone through tough periods, and that's one of the reasons we didn't open as many stores this year as planned. We canceled two brand new stores strictly because I wasn't comfortable we'd get the right type of pharmacist to fill them," he said.

To attract pharmacists, the chain worked with the University of Oklahoma school of pharmacy to open a branch in Tulsa next fall that will admit 60 students. "Having them right in our city should be a big help to everyone who operates in this area," Heller said.

Finding niche markets: Fagen

• Fagen Pharmacy is a 23-store chain based in DeMotte, Ind. The chain, with $35 million in sales, has carved out another path to riches: niche markets. In addition to freestanding stores, the chain, which serves northwest Indiana and parts of Illinois, has placed pharmacies in grocery stores and clinics.

Jerry Fagen Sr., R.Ph., founder and president, knows that catering to different niche markets can be fruitful. "In one store we do a large business with mastectomy fittings and wound care. We supply pharmaceuticals to group homes, nursing homes, and prisons. Where pharmaceutical service is needed and nobody has filled the gap, we've set up a system to do that," he said.

Being attuned to changing needs in the marketplace is another accomplishment of this chain. Fagen sold his nursing home business seven years ago and finds business picking up in this arena. "I didn't think I'd end up back in the nursing home business. Now we get calls from nursing homes that are dissatisfied with the few major players out there. We became the supplier for three nursing homes in the past year and a half," he said. He is contemplating whether to create a new division to handle the increased business.

What else can other pharmacies learn from Fagen? A year ago the chain installed McKesson's Pharmaserv for Windows computer system. "This system has allowed us to have a useful chain host at the office to monitor all of the prescription activities at the stores. Margins have slipped so dramatically that it's important to study the financial reports every day. You have to watch every penny. Many independents don't realize how much money slips away because of a missed price update or submitting of the wrong AWP or NDC number. Insurance companies pay based on what you submit," he emphasized.

Fagen is quick to put on the brakes when a plan doesn't pan out. For instance, he began to build disease state management programs and counseling rooms but stopped because the business wasn't profitable. He is, however, installing drive-through windows now. "I feel I have to do it to compete," he said.

Fagen has lately found another prescription for success. "By Jan. 1, we're taking on several large companies who are converting their retirees to Medicare primary while their companies will take a secondary position on insurance. The companies will send people to Fagen because we are one of the few chains that will take assignment on Medicare diabetic supplies and inhalation solutions. It looks, for example, like we'll have a lot of patients directed to us by the steel industry by Jan. 1," said Fagen.

Employees first: Happy Harry's

• Happy Harry's is a 58-store chain headquartered in Newark, Del. In addition to stores in that state, it has stores in Maryland, New Jersey, and Pennsylvania. It anticipates sales of $350 million for its current fiscal year. The chain opened 14 stores in 2001; 12 stores are slated to open their doors in 2002.

What's the chain's blueprint for competing with its long list of neighbors: Rite Aid, Eckerds, CVS, Giant Food, Wal-Mart, Target, Safeway, Pathmark, and Acme? According to Alan Levin, chairman/president/ CEO, "There's a correlation between the way we treat our employees and the way they treat our customers. And that's key. It's a benefit the regional and smaller chains have that the nationals can't get. They can talk the talk, I'm not sure they can walk it. We believe we have the best people. They bring a caring attitude—something the national chains just aren't able to do," he said.

Making himself accessible to all employees and encouraging them to raise issues is a lesson national chains and independents can learn from Levin's management style. "We, unlike our national friends, have not really experienced a pharmacist shortage. We attribute that to communication. We have the ability to listen to their concerns about how we can best serve their needs and their patients' needs. We provide pharmacists with adequate technician support, and we were the first chain to have an IVR system chain-wide, allowing pharmacists to spend more time with patients. That's what they went to school for, and they feel good about being able to do that."

That Levin doles out company stock beginning with the employee's five-year anniversary doesn't hurt morale either. Still, he claims, " I don't believe it's a money issue. The reason we have good pharmacists—you can always find someone to pay you more—is that we treat them with the same respect we hope they'd give us."

Taking the plunge into technology has also helped Happy Harry's stay ahead of the crowd. The chain is a beta site for McKesson Automation Systems' (formerly known as Baker APS) will-call system. Levin explained that the system being tested in one store has four carousels that hold prescriptions. As a patient gives his/her name, the carousel automatically spins to and identifies the correct Rx. The bar code on the bag is scanned and automatically released. "We're installing our second one in January. It helps to prevent medication errors and gives us the ability to make sure our inventory is as current as possible," said Levin. Happy Harry's is also examining central fill.

While Levin doesn't think it's necessary to take pains to find unique items, he admitted that he went to great lengths to convince Ty, the manufacturer of Beanie Babies, to take his chain on as an account. "We are the largest seller of Beanie Babies, and for the past four years the largest of Ty's accounts. When we started, we had only 30 stores and it was like pulling teeth. They didn't like selling to multiple outlets. We were able to convince them that, because of our tight geographic territory, it made sense. We have Beanie Babies in all but two of our stores, and it has worked out fairly well," he said.

Levin also keeps a keen eye on costs. He opened drive-through windows at 27 stores in strip locations instead of freestanding locations on corners. "Our national competitors, who feel very strongly they have to be freestanding on the corner, incur a huge amount of expense in getting that corner. Our rent factors are half theirs. I still believe it's nice to have the other shops in the center; each of us draws on the other's strengths."

While Levin is interested in expanding the chain, he is keenly aware of the pitfalls of becoming too large. "Our formula is like making soup. You can continue to add water and eventually it loses its flavor."

His solution to maintaining quality is to promote only from within the company. "Even if you were a manager for Eckerd, you'd still start as a manager trainee at Happy Harry's. We have never violated that, and we never will. You may lose a very qualified person, but if you expect to get loyalty, you have to give it," he said.

Will the future find regional chains thriving? Griffin thinks the potential is great. His advice: "Think outside the box. Be creative. One of the advantages we and other small regionals have is flexibility and the ability to turn on a dime—and you'd better take advantage of that, because it's a large edge. And promote, promote. If they have the right mindset and if they go about their business the right way, there is no reason they shouldn't flourish."

Sandra Levy

Sandra Levy. What's Their Secret?.

Drug Topics

2002;1:34.