The CEO of Eckerd Corp.'s parent, J.C. Penney, says the biggest goof was not building more new stores.
By MARK ALBRIGHT
Published September 30, 2003
Eckerd Corp. has problems that will take more than a year to fix, but the chief executive of the Largo drugstore chain's corporate parent says its biggest shortcoming has been its failure to build more than a few new stores for the past five years.
"It doesn't take a degree from MIT to figure out that if your competitor builds a new store across the street, you're going to lose 10 to 20 percent of your business," Allen Questrom, chairman and chief executive of J.C. Penney Co. Inc., Eckerd's parent, said Monday.
"We stopped building new stores. Our competitors did not wait around for us to get our act together," he added. "But longer term, we need to deliver the merchandise and service at Eckerd as well as the guy across the street."
Questrom, who will decide by year's end whether Penney will keep or sell Eckerd, spread the blame around for the drugstore chain's flagging performance in this third year of what was supposed to be a five-year turnaround.
The candid remarks came in an all-day session with securities analysts at J.C. Penney headquarters in Plano, Texas. Questrom also shed new light on how he is approaching the decision, and he took some of the heat off Wayne Harris, whom Questrom named Eckerd chairman and chief executive three years ago.
The options for Eckerd, Questrom indicated: Selling to another retailer, finding a financial buyer or concluding J.C. Penney can make more money by continuing to invest in the nation's fourth-largest drugstore chain.
Questrom conspicuously did not list as an option spinning off the struggling Eckerd as a stand-alone stock.
Eckerd recently disclosed it will fall short of its goal of a 4.5 percent return this fiscal year. Questrom said meeting that goal in the future is the minimum performance J.C. Penney should accept.
Questrom took personal responsibility for keeping a lid on Eckerd's once-ambitious new store program. That allowed rivals to attack such Eckerd strongholds as Florida and Texas. Eckerd has been losing market share to discount stores, supermarkets, a flood of new Walgreens and, more recently, to CVS, which in three years went from zero to 66 stores in Florida.
With 2,700 stores, Eckerd today has about 100 fewer stores than it did in 1998.
"Not opening stores was my fault," Questrom said. "We were having financial difficulties of our own. We misread that closing 300 stores was what really improved our profitability. We didn't fully understand how embedded some of the problems had become over the past 10 years at Eckerd."
Eckerd is opening 250 new stores this year. Many of them are in Texas and Florida. The chain is geared up to open that many annually for the next five years.
Critics also have rapped Eckerd for slow and impersonal service, cluttered stores and pricing that wasn't competitive. Harris has taken steps this fall to deal with each of those shortcomings.
"Opening new stores will help level the playing field with competitors, but the ultimate salvation of Eckerd is our doing a better job within the four walls of the stores we have," he said.
Some stalled investments make it difficult for store workers to do their jobs more efficiently. Because of installation delays, for instance, Eckerd will not get the full benefit of a new inventory control system until the end of next year. A new computer system for the pharmacy is supposed to help Eckerd catch up with one that Walgreens developed on its own. Walgreens customers can fill an insurance-paid prescription at any of its 4,227 stores. Eckerd's version also would enable doctors to use the Internet to deliver prescriptions. But Eckerd is waiting for an off-the-shelf system that is not expected to be running for two more years.
"Those are the sorts of investments we need to truly put Eckerd on a level playing field," said Questrom.
Fresh evidence of the challenges facing Eckerd appeared Monday. J.C. Penney said that September sales in Eckerd stores open more than a year were running a "little behind" the forecast, which was that they would be "little changed" from September 2002. Eckerd's operating income is forecast to be about 30 percent below last year for the third quarter and flat for the fourth quarter.
J.C. Penney stock closed Monday at $21.38, down 58 cents.
Meanwhile, Walgreens on Monday reported that its net income rose 12 percent to $277-million, or 27 cents a share, in the quarter ended Aug. 31, up from $248-million, or 24 cents a share, a year ago. Revenues increased 14 percent to $8.2-billion. Same-store sales were up 9.9 percent.
