In wake of F&M’s demise, off-pricers look to sharpen focus – bankruptcy of F and M Distributors elucidates perils of deep discount drug stores – Industry Overview
Down, but not out. That’s the message from the industry’s deep-discount drug chain survivors after years of attack from Wal-Mart and other well-managed, deep-pocket rivals.
Last year was bittersweet for the off-price drug store business. It was the year in which F&M Distributors, the nation’s pioneering deep-discounter and one of the industry’s Big Three, succumbed to liquidation by creditors after a two-year struggle to survive. But the year also yielded some good news, as Phar-Mor emerged intact from bankruptcy and Drug Emporium began to see the fruits of its lengthy turn-around effort.
Nevertheless, the failure of F&M was a hard blow. Other, smaller deep discounters like Rochester, N.Y.-based Freddy’s and the A.L. Price chain founded by Perry Drug Stores had already disappeared from the retail arena, but F&M’s liquidation after 40 years in the business was a more chilling scenario. To some, it signaled the end of an era.
“The rest of the world has sort of caught up with deep discounting,” said Chicago-based retail consultant Sid Doolittle. “Supermarkets are doing it. Wal-Mart is doing it. The reasons for deep discounting to exist are going away.”
Consulting firm Management Horizons concurs. “Deep discount stores rose meteorically during the 1980s,” said one official. “But in the mid-1990s, many of their consumer appeals have been bypassed by high-efficiency competitors with large, consistent selections and under-pricing capabilities.”
All that may be true, but it doesn’t paint the whole picture. The leaders of the industry’s two biggest surviving chains, Phar-Mor and Drug Emporium, are quick to acknowledge the difficulties posed by super-efficient, low-cost operators such as Wal-Mart. But they also see plenty of potential for a retail format that offers a wide selection of HBAS, high-demand household goods and in-and-out deal merchandise at steep discounts.
“I’m not going to abandon the belief that there’s a place for the deep discounter – a place where customers still enjoy shopping,” asserted Bob Lyons, senior vice president for Drug Emporium. “Deep discounters don’t get a fair shake because we’ve all made mistakes in running our businesses. We’re correcting our mistakes.”
Among the biggest mistakes, Lyons said, was “taking real estate that didn’t work.”
Lyons’ assessment points up both the challenge and the potential of deep discounting. On a store-by-store level, it’s clear that consumers are still attracted in droves to the deep-discount format, provided the store is conveniently located, fun to shop and stocked with a good selection of everyday brand-name items and closeout merchandise at low prices.
And those stores can be profitable, as well as high in sales volume; Phar-mor president and chief operating officer Dave Schwartz, for instance, insists, “Every one of our 102 stores is profitable,” and Drug Emporium has some units which are doing fabulously, according to a company source.
Strengthening their cases is the fact that some single-market deep discounters remain perfectly viable retail ventures – in part because they’re unhampered by the demands of multi-market distribution and other high execution costs associated with larger chains. Among them: Price-less Drug Stores in the Sacramento, Calif., market, Drug Barn in San Francisco and – most notably – 38-store Marc’s in northeast Ohio. They continue to thrive, or at least survive, by staying in close touch with local consumer demand and by keeping their stores fun and exciting to shop.
As long as their volumes make up for tight margins and operating costs can be kept under control, there is no compelling case for the demise of the format. What the big chain operators must still prove, however, is that the success of the deep-discount format on the local store level can be married through better information and cost controls to the disciplines and centralized operating strategies of chain retailing, and replicated in dozens of markets.
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