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Big chains a headache for small drugstores

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Local shops that haven't been taken over are finding it tough to compete.

October 08, 2008|Andrea Chang | Times Staff Writer

The pharmacy business in Southern California is cutthroat. Just ask John Tilley, the owner of four small drugstores in Downey.

Over the years, the Los Angeles-born pharmacist has seen drugstore chains such as Sav-on, Thrifty and Drug Emporium fade away. In their place are ever-larger nationwide giants such as Walgreen Co., CVS Caremark Corp. and Rite Aid Corp.

This summer, for instance, CVS agreed to buy Longs Drug Stores Corp., one of the last major regional drugstore chains. Now Walgreen has jumped in with a rival bid.

"It never, ever stops being a shark tank," said Andrew Wolf, an analyst who follows drugstores for BB&T Capital Markets. "The smaller players have gotten squeezed, their profits have gotten squeezed and at some time they decide to throw in the towel."

To keep up with the fast-changing industry, Tilley has stocked hundreds of new drugs and added a wider selection of products to the shelves at his stores, Pacific Pharmacy, Downey Plaza Pharmacy and two Zweber Apothecary shops. More recently, he's had to compete with mail-order prescription services, which have gained a strong foothold.

In the meantime, rivals try to woo away his pharmacists. The large chains court him and seek to buy him out. One even threatened to plunk one of its superstores across the street from his busiest location.

"We get offers, I would say probably not every week, but at least once or twice a month," said Tilley, 54. "Usually it's just a little feeler-type letter: 'Why don't you sell to us now while you still can make some money?' "

Many customers said they felt frustrated by the swift pace of consolidation.

Maria Sykes-Free, a Los Angeles retiree, said she longed for the days when she would get her prescriptions filled at a "small, quaint" neighborhood pharmacy.

"Pretty soon, there will just be one drugstore, one department store, one bank. People can't have their own individual businesses, is what it seems to me," said Sykes-Free, who was buying cosmetics at a Walgreens in the Miracle Mile district recently. "Everything is being gobbled up."

Longs, based in Walnut Creek, Calif., became the latest prize. With 526 stores, mostly in California but also in Hawaii, Nevada and Arizona, Longs developed a significant presence in key markets that its bigger rivals envied.

The chain announced in August that it had agreed to sell itself to CVS for about $2.7 billion. But a month later, Walgreen jumped in with an eleventh-hour, $2.8-billion offer.

A takeover of Longs would bolster either company: Walgreen, the largest drugstore chain in the country, operates about 6,500 stores. CVS, the second-largest, has about 6,300 stores.

Longs quickly said it planned to stick with its previous agreement with CVS. Then, in a move that highlighted the industry's fierce competitiveness, Walgreen Chief Executive Jeffrey A. Rein wrote a public letter to Longs' board of directors saying the company was "disappointed with your unwillingness to discuss our proposal" and would continue its pursuit.

"Although we would unquestionably prefer to work directly with you to complete a negotiated transaction," Rein wrote, "we are prepared to take our transaction directly to your stockholders."

Consolidation in the drugstore industry is driven in part by the cost savings that can be found when different functions, such as distribution, purchasing and management, are combined.

The chains that have succeeded have built expansive networks of well-placed stores, said John U. Bacon, author of "America's Corner Store: Walgreens' Prescription for Success."

"What Walgreens figured out, and what others figured out, is that they weren't selling just a product or a price," Bacon said. "They were selling convenience."

The competitive pressures on retail pharmacies are tough on both the chains and the independent stores, said Laura Miller, senior economist at the National Assn. of Chain Drug Stores.

"You can buy all the things that you can get in a drugstore in another kind of store," she said. "And increasingly you can buy all the things you can get at a supermarket or a mass merchant at a drugstore."

Last year the big three -- Walgreen, CVS and Rite Aid -- represented nearly 80% of traditional chain drugstores, according to the drugstore group.

But many industry experts said customers still have plenty of options.

In addition to traditional chain and independent drugstores, today supermarkets and mass merchants such as Target Corp. and Wal-Mart Stores Inc. provide pharmacy services. In total, there were nearly 56,000 community retail pharmacies last year. That was up from about 51,000 in 1997, according to the drugstore group.

But the number of independent drugstores has steadily declined. In 1990 there were 32,000 in the country. Today there are about half as many, Miller said.

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