Chain reaction

Move over, Eckerd and Walgreen. There soon will be a new drugstore on the block, and CVS Corp. thinks its stores can succeed even though potential neighbors are putting up a fight.

By MARK ALBRIGHT

© St. Petersburg Times, published July 2, 2000

CVS Corp.'s plan to barge into the crowded Tampa Bay drugstore market has not exactly been greeted by a welcome wagon.

In St. Petersburg, more than 150 "Stop CVS" signs popped up in the front yards of prospective neighbors in a heated rezoning battle over a store planned at Fourth Street and Ninth Avenue N.

Near Seminole, dozens of neighbors are choosing sides over a rezoning proposal to replace Bay Pines Evangelical Lutheran Church with a CVS drugstore that would be catty-cornered from Seminole Mall.

CVS is determined to grab a share of the Tampa Bay area's drugstore market, even if it has to fight some expensive and time-consuming neighborhood skirmishes along the way.

The Woonsocket, R.I., chain has about a dozen land deals pending for new stores throughout the area. CVS hopes to fight its way to eventual parity with the two dominant chains, market-leading Walgreen Co. and Largo-based Eckerd Corp. Together, they control 71 percent of the local drugstore market, according to Chain Drug Review.

But prime locations are hard to get when you're the new guy in a fierce competition for choice street corners.

Look around. Walgreen and Eckerd spent most of the '90s in a frenzy of new construction, abandoning stores in strip malls for free-standing buildings. By now, the entrenched chains have snapped up the easiest, cheapest and best sites. Today, 60 of Walgreen's 89 bay area stores are free-standing; 52 of Eckerd's 103 stores are. A decade ago there were virtually none.

"The best sites are gone, so it's really going to be rough for CVS to find the real estate to be a solid No. 3 in this market," said Craig Sher, president of Sembler Co., a St. Petersburg developer that has built more than 100 new Eckerds all over the Southeast in the past five years.

Once Eckerd completes five more free-standing stores in the bay area this year, it plans to develop new stores only in neighborhoods with population growth.

"We think we are pretty well-positioned now," Eckerd spokeswoman Tami Alderman said. "About 85 percent of our new stores in the past five years have been relocations from shopping centers to stand-alone stores."

Drugstores are specific about where they want to build. They want 10,000 to 15,000 people living within a mile. They want to be at the intersection of major thoroughfares with 30,000 to 40,000 vehicles a day on each one. They want the corner that's easiest to get in and out of for homeward-bound commuters. "It's all about convenience," said Mitchell Rice, a principal with FOG Development Inc., a Tampa company that develops sites for Walgreen.

Some prime intersections already have Eckerd and Walgreen stores, and CVS won't rule out making it three.

"We've done it before if the market is right," said Mike DeAngelis, CVS spokesman.

But CVS also might be forced to settle for second- and third-tier spots and maybe mid-block locations.

Even before CVS arrived, bidding wars for choice locations forced land prices as high as $3-million for a single drugstore and rents as high as $40 a square foot. That's more than twice what drugstores were paying for the required 11/2 acres five years ago. It has forced CVS to be creative in assembling land for sites, take on hard-to-develop projects and pay higher prices.

"We knew going in that every new market has its challenges, but we've run into nothing in the Tampa Bay area that was unexpected," DeAngelis said. "We're in this for the long term. We take our time and do it right."

A tough sell

The land where CVS wants to put its first store in St. Petersburg was going to become an Eckerd until that chain gave up trying to win the favor of the Old Northeast neighborhood groups in 1999.

The same objections resurfaced when CVS went at it, even though the new store would replace a worn mini-mart. The chain rounded up hundreds of supporters to sign petitions and made some concessions before the St. Petersburg City Council agreed to rezone the property.

Now, as the store design and parking lot layout advance to another city board, the neighborhood promises to bird-dog the project, even paying a historic preservation consultant $5,000 to oversee its negotiations with CVS.

"We realize the need for a pharmacy here, but we want to be sure it fits the size and scale of what this neighborhood expects," said James Martin, an attorney and Old Northeast neighborhood activist. "CVS made this their handshake store to Pinellas County. We fear they will be demolishing some of the gateway to one of St. Petersburg's historic neighborhoods with another cookie-cutter suburban drugstore."

As for the site near Seminole, the Pinellas County Commission on July 18 will consider a rezoning that would allow the church, which wants to move, to sell its site to CVS.

Neighbors argue that a drugstore would not be as good a buffer from the congested corner as the church has been. Church members and drugstore representatives counter that the site is suitable only for a commercial venture, in this case a 10,880-square-foot building with a drive-through.

As those disputes lurch forward, CVS is starting construction on its first bay area store, which is scheduled to open in October at Bruce B. Downs Boulevard and Fowler Avenue in Tampa.

"It will be tough for CVS, but they are well-versed in how to land real estate in markets that are much harder to work in than Florida," said Erik Gordon, director of the University of Florida Center for Retailing Education and Research. "Developing in New England and making bad locations work for you can be really hairy, but they've done very well. Still, it will take them years to make a dent here."

Breaking into Florida

CVS chose Florida as its next growth market largely because it is one of the few states with only two big drugstore chains competing for business. In October, the company, which already has 24 stores in the Jacksonville area, said it would try to crack the Tampa Bay area market, the nation's 13th largest with annual prescription sales of $1.3-billion. In May, CVS broadened its march into Florida, adding the Orlando and Fort Lauderdale markets as targets for 2001.

The logistics of establishing a beachhead in a major new market is an expensive bet even for chain giants such as CVS, which is running neck-and-neck with Walgreen to be the nation's biggest drugstore operator. CVS will be paying as much for advertising as the millions Walgreen and Eckerd spend. But at first it will be able to spread the cost over only a tiny fraction of the store count commanded by its far bigger rivals. That's one reason the chain's Florida venture could operate at a loss for years.

But moving into new markets has become a principal growth strategy for the nation's five biggest drugstore chains in a race to cover more new territory. Walgreen faces the same challenge in Atlanta, where it recently decided to elbow its way into a market dominated by Eckerd and CVS.

The rush to build free-standing stores is one of many changes roiling the drugstore business.

Drugstores learned they can draw 20 percent to 30 percent more business from a highly visible store at a major intersection than from a store tucked in a shopping center.

Drugstores with stand-alone locations have added drive-through pharmacies and boosted their stock of health and beauty items and foods found in convenience stores. Besides, the drugstores don't want to share a shopping center with chains such as Wal-Mart, Target and Publix, which have pharmacy counters of their own.

Why have so many retailers tried to get into the prescription business? Simple. Spending on prescription drugs is growing four times faster than overall health care spending. This year, pharmaceutical sales are forecast to increase 20 percent, and average growth of 11 percent to 15 percent a year is expected over the next three to five years, according to Raymond James & Associates.

Meanwhile, the big drugstore chains have grown bigger through a series of acquisitions. The trend has been fueled by the health care plans that control 80 percent of the prescription business. Insurance companies steer business to chains that offer the most locations. The notion that big chains can negotiate better prices helped Wall Street bankroll many of the drugstore megamergers of the past five years.

All the big chains have opened online pharmacies on the Internet where customers can send in prescriptions to be filled through the mail, but so far they are using their online drugstores mostly to circulate health information and drive traffic to their stores.

To bond with its customers, for instance, Walgreen added online features that allow customers to view their prescription history and tabulate their annual medication bill with the tap of a few keys each year for tax purposes.

But most customers still prefer to pick up their prescriptions at a store.

"We don't see online prescriptions becoming more than 1 percent of our pharmacy in the next few years," said George Riedl, general manager for e-commerce at Walgreen.

So, for now at least, the main front in the drugstore wars remains the fight for the street corners.

CVS Corp.

HEADQUARTERS: Woonsocket, R.I.

CHAIRMAN AND CHIEF EXECUTIVE: Thomas M. Ryan.

1999 NET INCOME: $635-million.

1999 REVENUES: $18.1-billion.

ORIGIN: Once the drugstore unit of Meville Corp., one of America's oldest retail companies, CVS Corp. grew into one of the nation's two biggest drugstore chains in the past five years. Melville unloaded its array of other retail ventures, including Marshall's, an off-price apparel chain, to concentrate on becoming the nation' dominant drugstore operator. Through acquisitions, it built a collection of 4,088 stores and is adding 400 a year. It moved its headquarters to Rhode Island and changed its name to CVS (which originally stood for Consumer Value Store.)

SIZE: Neck-and-neck in revenues with industry-leading Walgreens, CVS leads in prescription sales with 12 percent of the U.S. market. It's No. 1 in market share in six of the 10 biggest metro areas. Rival Rite-Aid has as many stores as CVS, but all of the CVS stores are east of the Mississippi River. By comparison, Walgreens has 3,000 stores in 40 states and had 1999 revenues of $17.9-billion

NEW VENTURES: Set up an online drugstore in 1999 that is linked to a site run by Merck Medco, one of the nation's largest pharmacy benefit managers. Handles mail-order prescription service for United Healthcare, Merck Medco and PharmaCare. Recently opened an experimental ProCare store in Boston that specializes in the huge prescription needs of people with HIV, organ transplants, cancer, multiple sclerosis and growth hormone deficiency. Moving aggressively to loosen Walgreen's and Eckerd's grip on Florida, one of the few states with only two big drugstore chains.

QUOTE: "We aim to become the No. 1 or No. 2 drugstore in each market we enter," spokesman Mike DeAngelis said.

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