Drug Emporium, Inc. History

Address:

155 Hidden Ravines Dr.
Powell, Ohio 43605
U.S.A.

Telephone: (614) 548-7080
Fax: (614) 888-3689

Public Company
Incorporated: 1977
Employees: 2,200
Sales: $749 million
Stock Exchanges: NASDAQ
SICs: 5912 Drug Stores & Proprietary Stores

Company History:

Drug Emporium, Inc., is a chain of 235 deep-discount drug stores that has been credited with taking the concept nationwide. The foundations of the deep discount segment of the drug store industry have been traced to Depression-era shops offering closeouts and other cut-rate goods. Drug Emporium capitalized on the second period of strong growth experienced by the segment, during and after the recession of the 1970s.

Deep-discount drug stores sought to offer brand-name products at competitive prices to satisfy the demands of recession-weary consumers: these shoppers wanted quality and low prices, and were willing to sacrifice ambiance, convenience, and selection. Deep discounters kept overhead low by renting older and cheaper, but often larger, retail spaces than their traditional drug store counterparts. The stores featured very simple, usually hand-made signs and product displays, which were often just opened and stacked delivery cases. One observer noted that "The 'art' of deep discount seems to make a mockery of space management." In fact, these techniques portrayed efficiency to bargain-hunting customers, thereby adding to the stores' appeal. Deep discounters also kept labor costs low with lower-than-average hourly wages and lean, hands-on management. In 1984 Chain Store Age Executive noted that "Perhaps the most striking feature of the deep discounters is entrepreneurial ownership. It is nearly universal." One deep discounter noted that "The [traditional drug store] chains are just too top-heavy."

From the outset, deep discounters obtained merchandise directly from manufacturers. Their independence freed them to act quickly to obtain the best deals without having to wait for approval from chain headquarters. Buying stock in this way limited selection at deep discount drugstores and meant ever-changing selection heavy on health and beauty aids (HBAs). Such deal-making required considerable experience, personal connections, and talent. Purchasers often settled for limited quantities in exchange for 12 percent to 20 percent discounts, and passed savings of 25 percent to 40 percent off suggested retail prices on to their customers. Deep discounters made up for their lean margins with high volume, however, garnering six to seven times the sales per square foot of their conventional counterparts.

Drug Emporium has been characterized as a pioneer of the discount drug concept. It was founded in 1977 in Ohio--known as "the cradle of deep discount drug retailing"--by Philip I. Wilber. Wilber had by that time advanced to vice-president and merchandising manager of Lane Drug Company in Toledo, Ohio. After a 22-year career with traditional chain drugstores, the executive decided to break out on his own. He observed that such deep discount drug stores as F & M Distributors in Detroit and Bernie Schulman's in Cleveland had found a profitable retail niche, and he hoped to emulate their success.

Using about $80,000 of his own money, $20,000 from his eldest son, Gary, and another $400,000 from 13 private investors, Wilber leased space in a Columbus, Ohio, strip shopping center and opened his first Drug Emporium in October 1977. He later characterized the move from Toledo to Columbus as "a lucky choice." Shortly thereafter the Toledo economy sagged due to the downturn in the automotive and glass industries while the Columbus economy, supported by state government and employment at the Ohio State University, held very steady."

Sales during those first months were depressingly slow, but with the support of his wife Cathy, son Gary, and colleagues in the industry, Wilber concentrated on providing top-notch service to the customers who tried the new concept. In a 1989 address to the Newcomen Society, the entrepreneur recalled January 18, 1978, as a turning point for the business. On that day the state experienced the worst snow storm in its history, and although the Wilbers dug out and made it to work, the patriarch recounted, "our hearts were low. To make things worse, the previous Friday we had used up our $500,000 capital and had borrowed $10,000 on our credit line to meet the payroll. I got on the phone to every radio and TV station and told them we were open. They had all discontinued their regular programming to talk about the storm, so we got a lot of free publicity. A few people started to trickle in in four-wheel drive vehicles ... [to buy] ... the 'Three C's,' cigarettes, condoms and Kotex. After ten days the streets were cleared and our business took off." Drug Emporium achieved profitability that April and broke even in its first year. This was a notable accomplishment: analysts noted that it usually took new stores 18 months to three years to turn a profit.

During the company's second year in business, Gary Wilber fine-tuned the retail concept, altering the store layout and product mix; his changes are credited with making a strong contribution to Drug Emporium's first decade of growth. Much of the chain's early expansion came through franchising, and in 1979 the company established a subsidiary, Drug Emporium Franchise Limited, to train and oversee new affiliates. Gary Wilber later told Stores magazine the reasoning behind franchising: "We didn't want to dilute or break our management continuity, and at the same time our goal was to get into as many cities as quickly as possible. Franchising enabled us to do that without the capital outlays. It would have taken many more years to hit the markets we did without the franchising program."

Drug Emporium's first licensee opened in 1979 in Cincinnati and Wilber opened his second store in Columbus 1980. During the next few years franchises opened in Arizona, Dallas, Kansas City, Seattle, Tampa, Atlanta, San Diego, and Indianapolis. Wilber later noted, "We were on a roll."

A $6 million private stock offering in 1983 brought in funds to further this rapid growth. A reorganization merged the two family-owned stores with those of Atlanta franchisee Frank Shanower as well as the lead franchising operation to form Drug Emporium, Inc. The infusion of cash paid for new, company-owned stores in Atlanta and Columbus as well as investments in joint ventures. By 1983, the burgeoning chain had 27 franchised stores.

By 1984, the deep discount segment of drug retailing boasted about 150 stores and claimed two percent of the chain drug market. The deep discount drug store movement was concurrent with the expansion of super warehouse grocery stores, membership warehouse clubs, and other "off-price" concepts that featured brand name products at very competitive prices. The discounters' successes attracted the attention of conventional drug store chains as well as groceries and supermarkets. From 1985 to 1990, the number of deep discount drug stores nationwide more than doubled, from 313 to 700, to penetrate most large- and medium-sized markets.

When Drug Emporium raised $17.7 million in a 1988 initial public offering, it boasted 59 company-owned outlets and 78 franchised locations. The fresh cash flow was used primarily to pare down a $24.3 million debt to $3.3 million. During its first year as a public company, Drug Emporium's stock more than doubled and was split 2-for-1. Equally dramatic sales and earnings growth throughout the latter years of the decade disguised a plethora of underlying problems, both within Drug Emporium and in discount retailing in general. Sales increased 69 percent from $241 million in fiscal 1987 to $406.7 million in fiscal 1989, and earnings more than quintupled, from $1.5 million to $8 million, during that same period.

Drug Emporium was the single largest player in deep discount drugs during the late 1980s, but its dominance was both fleeting and deceptive. Competition had intensified dramatically during the mid-1980s, as an unprecedented multi-market price war among and between several classes of retailers emerged, especially in health and beauty aids. In the past, for example, supermarkets had concentrated on groceries while discounters emphasized HBAs. In the 1980s, however, each began to encroach on the other's traditional merchandise strengths: supermarkets began to aggressively promote HBAs, add pharmacies, and offer bulk packaging, while discounters strove to offer more grocery items and carry a more reliable selection of goods. Purchasing for discount chains continued at the individual store level, but corporate-level purchasing increased steadily. Although many discounters shifted their purchasing strategy, they maintained their low-price policies, thereby squeezing already-slim margins. Oversaturation in the market exacerbated these competitive pressures.

Chairman Philip Wilber set his sights on $1 billion in sales and 200 stores for fiscal 1991. Drug Emporium's financial growth came to an abrupt halt that year, however. Although sales increased by more than 25 percent from $487.9 million to $620 million, profits declined by almost 20 percent from $8.2 million to $6.6 million. Harlan S. Byrne, writing in Barron's, blamed the slowdown on a "stepped up pace of spending for new stores." The company was striving to take advantage of a national real estate slump by buying up bargain properties, while simultaneously buying out many franchisees. During fiscal 1991 alone (ended February 27), company stores increased from 83 to 115, while franchised locations dropped from 112 to 102. Additions during that period included the acquisition of six stores from a struggling Washington, D.C., chain, increasing Drug Emporium's presence there to 14 locations. The chain stopped offering new franchises at this time as well, citing affiliates' general inability to raise capital for growth and expansion.

By the end of fiscal year 1992, Drug Emporium had lost $4.7 million. According to a June 1992 Plain Dealer article, "inventory counting mistakes, overestimations of gross margins, restructuring charges and store closings" were to blame. After fiscal 1993's net loss of $2.6 million, a "frustrated" board of directors ousted chairman Philip Wilber, reassigned Gary Wilber from CEO to vice-chairman and treasurer (he retired in April 1994), and demoted Robert E. Lyons III from president to senior vice-president of marketing and merchandising. Board member David Kriegel advanced to chairman and CEO, and took immediate steps to cut expenses, improve operations, and expand management responsibilities and lines of authority. Management accepted a five percent across-the-board pay cut to show fiscal leadership. In a December 1993 "roundtable" interview for Discount Merchandiser, Kriegel acknowledged the saturation of the market in discount drugs, and predicted "dog-eat-dog" competition. He closed 12 underperforming stores; centralized purchasing, accounting and marketing; implemented automated inventory control (including bar-coding and scanning); increased grocery offerings (including a private-label product line) and advertising support; and even offered home delivery in limited areas.

Drug Emporium launched a new store concept in Heath, Ohio, near the chain's headquarters in 1993. The location featured four primary departments: Health Care, Beauty Care, Cosmetics, and House & Home. The store had extra-wide aisles and "Best Buys" and "Snack" zones. A new, more upscale decor featured a purple, teal, and fuschia color scheme and neon signs.

Although some competing retailers saw the problems at Drug Emporium and other major discounters as signs that the deep discount drugstores were waning in popularity, the segment did maintain strong showings in certain markets. Drug Emporium, for example, continued to dominate the drugstore market in Atlanta. The chain had 235 stores at the end of fiscal 1994 (down from a 1993 peak of 252) and turned a profit of $1.3 million on sales of $749 million that year. After shoring up its franchise network, Drug Emporium indicated that it was once again ready to cautiously explore this avenue of growth.

Principal Subsidiaries: Cincinnati Drug Distributors, Inc.; Roemon Drug Distributors, Inc.; Centerline, Inc.; Barclay Farms, Inc.; Winter Fern Drug Distributors, Inc.

Drug Emporium, Inc. History

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