Duane Reade Holding Corp. History

Address:

440 Ninth Avenue
New York, New York 10001
U.S.A.

Telephone: (212) 273-5700
Fax: (212) 244-6527

Private Company
Incorporated: 1961
Employees: 1,400
Sales: $383 million (1996)
SICs: 5912 Drug Stores and Proprietary Stores; 6719 Offices of Holding Companies, Not Elsewhere Classified

Company History:

Privately owned Duane Reade Holding Corp. is the holding company for Duane Reade Drug Store Co., the largest drugstore chain in New York City's borough of Manhattan. Selling brand-name goods at low prices from its small but heavily trafficked outlets, Duane Reade had, by 1990, achieved probably the highest sales ratio per square foot of any drugstore chain in the U.S. Its profit margins were said to be the envy of the industry. During the early and mid-1990s Duane Reade increased the number of its outlets and began emphasizing higher-end products such as cosmetics. Of its 60 stores in early 1997, 54 were in Manhattan.

Duane Reade Before 1992

Named for its location at the intersection of two streets in lower Manhattan, the first Duane Reade drugstore was opened in 1960 by three brothers: Abraham, Eli, and Jack Cohen. By the autumn of 1973 there were nine stores, still all in Manhattan. The company warehouse was in Carteret, New Jersey. Duane Reade's customers were the office workers who staffed the island's skyscrapers and, accordingly, the chain kept office hours, staying open only on working weekdays, from 8 a.m. to 6 p.m. Candy and hosiery accounted for an unusually high percentage of sales. Little space was given to housewares, since patrons generally commuted to work by mass transit and could not maneuver bulky cartons through rush-hour crowds.

Geared to the thrifty shopper, Duane Reade had to keep its overhead low. By closing nights and weekends, it held payroll costs down, and it chose store locations shrewdly, with an eye to maximum traffic for leased space. When Abe Cohen found rents too high on busy 23rd Street between Park Avenue South and Madison Avenue, he leased a store on the corner of Park Avenue South and 22nd Street for about 70 percent less. The store did more than $1 million in sales in its first year. To promote business Duane Reade relied on circulars distributed on the streets or in nearby office buildings and advertising in neighborhood weeklies rather than more expensive marketing through television or daily newspapers.

Conservatively managed by the Cohens, no-frills Duane Reade never opened more than three outlets a year, but it had 17 stores in 1980 and 25 in 1984. Sales volume was estimated at $32 million in 1977. When the company filed for an initial public offering--never completed--in 1984, it reported sales of $102 million in fiscal 1983 and a net profit of $7.8 million, indicating a profit margin more than twice the industry average.

In 1989, when Duane Reade had 33 stores and annual sales of $236 million, almost double the 1984 level of $120 million, it was the nation's 25th-largest drugstore chain. All except one Brooklyn store were in Manhattan. The company warehouse, as well as its offices, were across the East River from Manhattan, in Long Island City. The chain's success remained due to the ability of the Cohen brothers to negotiate reasonably priced long-term leases in Manhattan's heaviest concentrations of shoppers and to focus on selling the fastest-moving, service-free items. Customers were encouraged to drop off their prescriptions before work and pick them up during lunch hour, when they had more time to shop. Abe Cohen, the company chairman, generally fixed his attention on real estate, with Eli, the president, overseeing merchandising, and Jack, senior vice president, in charge of store operations.

According to a 1990 estimate, the average Duane Reade store, less than 5,000 square feet, was doing triple the amount of business per square foot of bigger chains like Walgreen's and Genovese. It was selling only health-and-beauty aids, over-the-counter remedies, cosmetics, and pharmaceuticals, avoiding categories such as office products, toys, bulky outdoor items, and those goods that required a lot of customer service. Most outlets still were only open on weekdays during customary working hours, closing at 6 p.m. One real-estate broker explained, "With couples both working, they need to buy health-and-beauty aids near where they work. Duane Reade practically has a captive audience."

Under Bain Capital, 1992--95

The Cohen brothers sold Duane Reade in 1992 for a reported $239 million to Bain Capital Inc., a Boston-based investment firm with a record of developing successful retail businesses, including Staples and Sports Authority. By this time there were 37 Duane Reades, still all in Manhattan except the Brooklyn store, one in the Bronx, and one in Newark, New Jersey. At least nine Cohen family members left the company's payroll, with Bruce Weitz becoming its new chief executive officer, (Two of Eli's sons soon founded a competing store, Price Depot.) A few months later Duane Reade suffered a blow when one of its highest-volume units was severely damaged in the bombing of the World Trade Center.

By mid-1994 Duane Reade had 46 stores--still all but three in Manhattan&mdash…eraging 6,300 square feet of selling space. The chain ranked second among the top 50 in its field in productivity, averaging $6 million in sales per store. Cosmetics had received a major push from management, accounting for 8 percent of sales, compared to the industry average of 4.6 percent. In that year small boutiques run by Nature's Element, a chain of bath and body shops, began leasing space in several Duane Reade stores. It was considered the industry's first case of a drugstore chain allotting space in its stores for another beauty-aids retailer. Pharmacies, in all Duane Reade stores, accounted for 27 percent of the chain's sales.

Duane Reade raised the number of its stores to 51 in 1994, one of which became an around-the-clock operation. Several opened in residential rather than commercial Manhattan neighborhoods. By late 1994 about a dozen of Duane Reade's outlets were operating on more than one space level. Although Weitz acknowledged that such stores were expensive to build and staff, required extra security, and discouraged impulse buyers, the company was finding it difficult to obtain enough affordable street-level space to meet its needs. Duane Reade also was facing competition from national chains attracted to Manhattan for high sales volumes and less intimidated by Bain Capital than by the Cohen brothers. "People are not as afraid of an investment company as they are of an entrepreneurial family," a realtor told the New York Times.

By mid-1995 the number of Duane Reade stores had grown to 58, but Rite Aid, with bigger stores offering more varied merchandise, was closing in on its lead in Manhattan. Woolworth's had converted five money-losing five-and-dime stores to RX Place Drug Marts, and CVS and Genovese had entered the Manhattan market. The competition for selling space was said to be taking its toll on the profits of Duane Reade, which was reported to be trying to conserve capital by stretching out the period between acquiring a new store and actually signing a lease. Its openings in residential neighborhoods were said to have dramatically increased its costs because, unlike those in commercial areas, these outlets needed more than one shift of employees. Duane Reade was keeping stores in residential areas open seven days and in some cases offering free delivery. It was clustering stores in prime areas--such as Grand Central Terminal--in order to keep out competition, even at the cost of diminishing sales per square foot.

Duane Reade also needed to direct funds to modernizing its antiquated computer system, which was still without point-of-scale scanners. When Bain Capital bought Duane Reade in 1992, many store functions were still done largely by hand, and the company had no means of providing any information to store managers for promotions or targeted orders. By 1995 a system linked store personal computers with the computers at headquarters. With the completion of the $10-million automation project, point-of-sale scanners would register sales, pharmacy departments gain online connections to third-party payers, and computer links to vendors streamline purchasing and inventory. Hand-held scanners were scheduled to be able by 1997 to take stock levels and automatically communicate this information to the warehouse, and a new labor forecasting system would allow managers to schedule employees according to sales, historic traffic patterns, and even the weather, reducing overtime costs.

Resurgence, 1996--97

By mid-1996 Duane Reade appeared to be a business in trouble. Following a drop in operating profits from $31.2 million in 1994 to $27.5 million in 1995, it lost $5 million in the first quarter of 1996 and had its credit rating downgraded by Standard & Poor's. S&P reported that the company, with only $4 million remaining of available credit on its revolving line, had obtained a waiver on a $7.8-million loan repayment and was obligated to repay $11 million in debt by the end of the year and another $23 million in 1997. Security analysts suggested that Duane Reade would have to close some of the 24 stores it had opened since 1992.

Weitz resigned in September 1995 as chief executive officer of Duane Reade and was succeeded in April 1996 by Anthony Cuci, who left the presidency of Pathmark Stores Inc. to take the post. Interviewed by Chain Drug Review, Cuti said the company had a "shoebox administration." In a backhanded compliment to the chain's strong fundamentals, he noted that annual sales had risen to well over $300 million and commented, "If we can do that without in-time inventory, without electronic data interchange, or market research, or any advertising, or a sampling program, or cosmeticians spraying fragrances on people as they walk in and out of stores, or any of that hype, it's a tremendous plus."

Cuti vowed to increase the company's pharmacy volume considerably by making its pharmacy departments more customer friendly and encouraging pharmacists to suggest tie-ins with over-the-counter products. Within a year he had replaced one-quarter of its store management team, including 11 store managers and 15 pharmacists and pharmacy supervisors. During 1996 same-store sales of prescription drugs rose by more than 25 percent, the biggest such gain in the chain drugstore industry. Duane Reade ended the year with 60 stores. Sales came to $383 million--up 7 percent--with operating earnings of about $35 million.

In a follow-up interview for Chain Drug Review in 1997, Cuti also expressed a goal to turn Duane Reade into a destination shop for cosmetics by stocking more extensive assortments of the major lines and also offering a significant variety of secondary and ethnic lines. Citing the need to serve high-end customers, Cuti noted, "The market value of prime retail property in Manhattan has soared during the past two years ... and has divided the city's upscale market into two distinct consumer groups--demanding well-to-do commuters and equally demanding well-to-do tourists.... We estimate that it now takes $125,000 a week in sales for a drug store to survive in Manhattan. We regularly do that kind of volume, while many of our chain and independent competitors do not.... And that has put us in a very advantageous competitive position."

With Duane Reade leading all drugstore chains in sales per square foot and with its per-store annual sales of $6.5 million among the highest in the industry, Duane Reade appeared poised for renewed expansion. In a February 1997 statement the company said it was considering making an initial public offering of stock. DLJ Merchant Banking Partners II, a unit of Donaldson, Lufkin & Jenrette Inc., took a $350 million stake in Duane Reade in May 1997. Corporate headquarters were moved from Long Island City to Manhattan in that month.

Principal Subsidiaries: Duane Reade Drug Store Co.

Duane Reade Holding Corp. History

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