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Signs of trouble

As Eckerd enters its fourth year of a five-year turn-around plan, sales per store keep dropping and the chain continues to lose market share to others.

By MARK ALBRIGHT
Published September 21, 2003

Paul Wurmser put up with slow-moving lines at an Eckerd pharmacy for two years.

Then came the fiasco in February, when Wurmser couldn't get his prescriptions filled at his neighborhood Eckerd in Tallahassee. The first time he stopped to pick up his medicine the pharmacist had lost the paperwork. The second time, Wurmser waited in a line 10 deep, only to be told the pharmacist couldn't read the doctor's handwriting.

"That did it," the computer systems analyst said. "I went to a new Walgreens a few blocks farther away. They filled my prescriptions in 10 minutes, tops. Eckerd cannot get me back."

Such stories rankle Wayne Harris, the former supermarket executive who next month begins his fourth year of a five-year turnaround plan at the Largo drugstore chain.

"I would be naive to think we aren't still making mistakes," said Harris, Eckerd chairman and chief executive. "But we now have the systems in place and the commitment by a vast majority of our pharmacists to be as good as or better than anybody else. This should not be happening."

The poor customer service that haunted many Eckerd stores for much of the past decade made it easier for competitors, ranging from Walgreens to supermarkets and discount stores, to whisk off customers from what once was the dominant drugstore chain in Florida.

Since 1998, Eckerd's share of the market dropped from 36 to 29 percent in Miami and from 33 to 29 percent in the Tampa Bay area. In the hometown market where Eckerd once was the leader, Walgreens today claims 43 percent.

It's the same story in Dallas, Orlando, Atlanta and Charlotte, all Eckerd strongholds that major competitors flooded with new stores.

Yet until recently, Harris was able to claim some success in his turnaround effort because cost-cutting, store closings and promotional sales produced improved quarterly results.

Now the string of short-term successes has been broken. Eckerd recently warned its operating income will be down 30 percent in the current quarter over last year and flat the quarter after that. That's bad news for Eckerd and for shareholders in its parent, J.C. Penney Co., the department store operator with headquarters in Plano, Texas.

"We screwed it up," Penney's chief executive Allen Questrom recently said of Eckerd's performance. "We fogged out and thought we were doing better than we were."

The problems have brought renewed grumbling by some investors and analysts that Penney's should get out of the drugstore business. Penney's will evaluate this winter whether to keep pouring money into the chain it bought in 1996 or unload it.

Doubts also have been raised about Harris' future.

"Penney's stock is poised for a lift if there is any goods news about Eckerd," said Bernard Sosnick, a securities analyst with Fahnestock & Co. "I have seen no evidence Questrom is wavering about his support for Wayne Harris, but he has a Rolodex full of top retail executive talent to call if he decides he needs it."

But Harris, interviewed in his office at the Eckerd headquarters on Bryan Dairy Road, seems unruffled. He said the nation's fourth largest drugstore chain can, and will, grow its way out of its problems through a long-delayed building boom that's now under way.

Eckerd will have opened 250 new stores by the end of this year and is geared up to continue that pace for the next five years.

A new Eckerd store generates 40 percent more business than an old one, and the pharmacy counter business increases at 20 percent a year for its first five years.

"We lost market share in places where we did not build new stores and competitors like Walgreens did," Harris said. "We are not going to gain market share until we do what the best players in this industry are doing: putting new stores on the right corners and replacing our remaining old stores in shopping centers."

A less convenient choice

Customers voted with their feet after Walgreens flooded Eckerd's former strongholds with hundreds of slick new stores at the same time Harris was struggling to rebuild Eckerd's tarnished franchise.

Although Eckerd replaced some old stores with new ones, the chain has shrunk from 2,900 stores in 1999 to 2,690 today.

Yet every time a competitor put a new store between an Eckerd and one of its customers, the Eckerd became a less convenient choice. Three years ago, 94 percent of Florida residents and 89 percent of Texans said an Eckerd was their closest drugstore. In 2002, that had declined to 82 percent of Floridians and 75 percent of Texans.

Harris has been scrambling to overhaul the company and perceptions of it in hopes of regaining lost customers. He oversaw remodeling of two-thirds of the stores. He has tried to instill a sense of mission and friendly customer service in clerks. He overhauled the chain's delivery and backroom functions to be more efficient and keep the shelves fully stocked.

So far there are only preliminary signs the effort is paying off. Eckerd's internal research of 10,000 drugstore customers found they rated the chain better in customer service, pricing competitiveness, merchandise selection and trust than they did three years ago. But such improvements have not trickled down to the bottom line.

In measures of stores open more than a year, a sign of a chain's hold on its customer base, Eckerd continued to lose ground for the second year in a row, according to a recent Goldman Sachs Research report.

Annual nonpharmacy sales in stores open more than a year were down 5.6 percent. Even more significant, the number of prescriptions, or scripts, written shrunk 4.5 percent in 2002 in those stores. The company reported no improvement in either measure through the first two quarters of 2003.

Drugstores get about two-thirds of their revenues filling prescriptions. It's known as a "sticky" business because pharmacy customers are typically loyal and can be counted on to buy something else when they are in the store.

"Despite operating in the senior-citizen-heavy Sun Belt, Eckerd script counts are declining," Goldman Sachs analyst George Strachan wrote. "This is almost unheard of in a traditionally sticky business. Customers do not readily go through the trouble of physically transferring a prescription file from one store to another unless something is seriously wrong."

There's more. Eckerd lagged Walgreens when Consumer Reports rated drugstore chains. Readers rated Walgreens as average in speed and service. Eckerd, CVS and Rite-Aid were rated below average.

The survey was compiled this summer from 32,000 of the nonprofit magazine's readers. Readers gave the best pharmacy ratings to independent drugstores, discount chains and supermarkets such as Publix, Albertsons, Winn-Dixie and the Medicine Shoppe, which operates franchised drugstores at Kash n' Karry.

Wal-Mart Stores Inc., the discount giant that ranks fifth nationally in retail pharmacy sales, was rated equal to Walgreens in service and speed, but better than Eckerd.

None of this surprises Doris Coles. The retired New Port Richey nurse thinks Eckerd staffing is too thin.

"One time I waited in the parking lot while my mother went in to get something," she recalled. "After 10 minutes I started to worry something happened to my mother. I met her coming out the door. In all that time, she couldn't get any sales help. So she gave up."

A jumble of specials

The drugstore industry changed dramatically in the 1990s. Discount stores and supermarkets rushed into the lucrative pharmacy business. Drug prices were soaring. Newcomers wanted to capture some of the profits generated by baby boomers aging into their prime prescription-buying years.

The rush of new competition prodded drugstores to move out of shopping centers they shared with supermarket and discount store pharmacies. Tens of thousands of new stand-alone drugstores were built, sometimes two or three at the same prominent corner, complete with drive-through pharmacy window. Because 70 percent of drugstore shoppers are women, expanded selections of convenience foods and beauty, cosmetics and skin care products became a larger part of the formula.

Drugstores today see themselves as the convenience store of the 21st century, using their pharmacy counter as the main drawing card. They're priced somewhere between discount stores and the more expensive drop-in convenience of a 7-Eleven.

"It's become more of a location and look-of-the-stores business," said Erik Gordon, a University of Florida marketing professor. "While CVS and Walgreens are operating almost entirely from new stores in Florida, Eckerd remains a mixed bag of new ones and some really bad old ones."

New or old, Eckerd stores have become a jumble of specials, sales signs and bargain bins. Much of the clutter was Harris' doing. Because Eckerd was not known as competitive on prices three years ago, he decided he needed bold, visible changes to get attention.

The sedate royal blue and white of the old Eckerd store was gone.

Harris dense-packed stores with merchandise stacked up to 8 feet high, then plastered the store with hundreds of shelf tags in bright red and yellow that shout "Sale" and "Low Price." Placards dangling from the ceiling trumpet the chain's slogan, "Get More Value."

Advertising turned into a myriad of clip-and-save coupon deals laden with rules (limit two per customer, good only with $5 minimum purchase, offer expires on...) to keep opportunists from cleaning out the supply.

"We needed to put out a value message," Harris said, "to persuade people who had not shopped us recently that we were price-competitive again."

Eckerd uses almost every exposed surface to promote merchandise. The top and sides of wine racks are covered with corkscrews, copies of the Complete Bartender and gift wrap for bottles of wine. The doors to soda coolers are covered with easy-to-grab packages of Cracker Jack, Reese's Peanut Butter Bites and Soy Crisps.

Eckerd in 2003 unveiled a prototype store. At 14,000 square feet, it is about 3,000 square feet larger than its predecessor. To build and stock one costs a relatively modest $3-million, only $75,000 more than the smaller store Eckerd built in large numbers beginning in 1993.

But in smaller, older stores the chain's enlarged selection is often stacked almost to the ceiling because shelves double as the storeroom. So customers see such items as suntan lotion and breakfast cereal stacked on shelves 8 feet above the floor with the lawn chairs, plush toys and backpacks.

"The stores just look dismal and overloaded," said Skip McRae, a hospital financial consultant who lives in north Pinellas County. "They're getting worse than Walgreens, not better."

Last month, it got too excessive for Harris, who declared war on clutter creep. Unsold summer goods backed up in the stores when fall and Halloween merchandise arrived. He asked store managers to make a weekly round to remove promotional clutter that sticks into the aisle.

But there was another problem: All the coupons and heavily promoted sales prices prompted customers to comparison shop. Many did not like what they found.

"Eckerd promoted stuff as sale-priced that really really wasn't even a bargain," said Pat Bernstein, a retired retail manager from Seminole who quit reading the Eckerd coupon books. "If something is two for $5, they still want $2.99 for it if you only buy one (with a coupon). It should be $2.50. I've seen sale items at Eckerd priced higher than regular prices at Kmart. How stupid do they think we are?"

Harris thought he had fixed the competitive pricing problem until June. Then a Goldman Sachs retail analyst comparison-shopped 47 items at an Eckerd and two of rivals in Orlando. The analyst concluded Eckerd was overpriced and should be cutting prices and improving customer service to rebuild customer confidence before accelerating a new store program.

Harris took a survey and adjusted several prices he considered too high. In addition to the monthly and quarterly price checks of direct competitors, he added a weekly check of 50 top-selling items in each store to the district manager's job. He also increased inventory options for store managers to avoid criticism of being out of stock on key items.

"This is to assure that we stay in stock and competitively priced," Harris said. "I don't want to be confronted by either issue again."

Many analysts think Eckerd's internal problems are fixable, but even so the chain's turnaround has yet to gain traction.

"Some of the Eckerd stores look absolutely awful," said Walter Loeb, president of a Loeb Associates, a New York retailing investment consulting company. "They really need a cleanup in store management, and that usually starts at the top. There is going to be a lot of scrutiny (of Harris), but I think it would be very difficult for Penney to sell Eckerd in its current state."

Harris insists he's heading in the right direction, but he'll need time to prove it.

"We're going through a relatively difficult period, but at the end of the day, this is going to be a good company because we are investing in the long term," Harris said. "When we finally get on a level playing field by opening as many new stores as our big rivals have been, we'll start seeing encouraging signs in our performance. But it is going to be a year or two before we are where we should be."

- Mark Albright can be reached at albright@sptimes.com or 727 893-8252.

[Last modified September 21, 2003, 02:03:13]

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