Longs Drug Stores Corporation History

Address:

141 North Civic Drive
Walnut Creek, California 94596
U.S.A.

Telephone: (510) 937-1170
Fax: (510) 210-6886

Public Company
Incorporated: 1946 as Longs Stores
Employees: 17,300
Sales: $2.95 billion (fiscal 1998)
Stock Exchanges: New York
Ticker Symbol: LDG
SICs: 5912 Drug Stores & Proprietary Stores; 6719 Offices of Holding Companies, Not Elsewhere Classified; 7389 Business Services, Not Elsewhere Classified

Company Perspectives:

Our mission is to be "The Best Drug Store in Town." We will provide quality goods and services to customers in our core categories of Pharmacy/Health Care, Photo, Cosmetics/Beauty Care, and Greeting Cards, while also meeting other selected needs of our customers. We will be the leader for prescription services in retail pharmacy. We will always operate with the highest ethical standards and fairness in all of our dealings with customers, employees, suppliers, and shareholders.

Company History:

Longs Drug Stores Corporation is one of the top ten drugstore chains in the United States, with more than 370 stores in six western states: California (about 300 units), Hawaii (32), Nevada, Colorado, Washington, and Oregon. Each Longs Drug Store offers a wide variety of products and services including pharmaceutical products, photofinishing and photo supplies, cosmetics/personal care items, and greeting cards. Longs is also involved in a joint venture with American Stores Company called RxAmerica, which offers pharmacy benefits management services to healthcare plans and employers.

Founded in 1938

Longs Drug Stores Corporation was incorporated in Maryland on May 24, 1985, as a successor to Longs Stores, incorporated in 1946 in California. The company had specialized in the retail drugstore industry since its founding in 1938 by brothers Joseph and Thomas Long, and changed its name from the general Longs Stores to the more specific Longs Drug Stores in 1961. In 1975, at age 62, Joseph Long credited the company's practice of spreading its wealth among its employees for much of its success. Indeed, a marked decentralization of power not only brought riches to the company's investors but a sense of purpose and handsome financial rewards to its employees. Store managers were paid quarterly bonuses proportional to their unit's profits, and the bonus system extended down through the half dozen assistant department managers that any specific store might employ. By one estimate, a Longs store manager in the late 1980s might have made $80,000 per year.

Longs' expansion began in the late 1960s, when the role of the drugstore began shifting in the U.S. retail market. Its stores, located throughout northern California, with one opened in Hawaii in the 1950s, were typical of the old-fashioned drugstore. Ranging from about 4,000 to 8,000 square feet, they included a pharmacy, soda fountain, and sundry health and beauty products. The drugstores appearing during the late 1960s were often triple that size, dispensed with the soda fountain, and added an array of specialty foods, auto maintenance products, toys, liquor, and stationery, among other products. Many stores set prices below the manufacturer's suggested retail price, pushing them into competition with discount retail department stores. Rather than functioning as the traditional specialty shops, drugstores became discount operations concentrating on health products, and retaining a pharmacist.

In 1967 the industry gained 12.2 percent in revenues, and about 50 percent was estimated to have come from discount chains. In the late 1960s increased prescription drug sales could be traced to an increasing tendency for government subsidy and private insurance to cover the cost of prescription medicines. Longs' 40 stores, located in the center of discount drugstore retailing on the West Coast, saw revenues rise from $78.3 million in 1967 to $95.7 million in 1968.

By the early 1970s chains of 10 or more stores had numbered 180, accounting for more than half of U.S. drugstores. Two- or three-store operations decreased in number, and big supermarkets opened their own drugstore chains. Longs opened its 50th store in 1970, one of eight it opened that year. From 1970 to 1971, sales rose for the first six months from $77.4 million to $90.5 million. Earnings went from $.51 per share to $.72 per share. Its stock split two for one following its annual meeting in May 1971.

Longs increased its sales and earnings every quarter since its founding through 1975, at which time it operated 82 stores. For 1965 through 1975, it showed compounded sales growth of 22 percent, and earnings per share growth of 25 percent. With no leverage, Longs earned from 23 to 25 percent on equity from 1970 to 1975.

Expanded Conservatively in the 1970s

Longs expanded conservatively, not only because it thoroughly investigated potential sites but because it preferred to buy the land beneath its stores and did no business on credit. In the early 1970s Longs opened about six stores a year. Most were located in upper-middle-income areas where retail sales were high. It opened outlets mostly in northern California where competition was less keen. In the tougher retail market of southern California, Longs eschewed highly competitive Los Angeles for its affluent suburbs. Despite the tightening economy, Longs increased expansion to about ten stores annually in the mid-1970s. At that time the company's high earnings allowed it to expand from within rather than by acquisition, like most competitors. Longs carried no debt and took out no loans, so rising interest rates did not affect its growth rate. The Long brothers started the company on $15,000 borrowed from Joseph Long's father-in-law, Safeway founder Marion Skaggs. They had seen their father, a general storekeeper in Mendocino County, California, go under in the credit squeeze right before the Great Depression. Vowing to avoid that fate, they operated strictly on cash after their initial loan.

Longs was not affected by 1974's retailing slump. Sales for 1974 were up 22 percent with earnings up 19 percent for the fiscal nine months ended October 1975. Of that rise, 21 percent in sales growth in actual volume, not price increases, accounted for 15 percent. In 1975 each Longs store averaged $4 million in annual sales, versus $500,000 for the industry. Its $250-per-square-foot sales led the industry, where the average was $100. Its gross margin was less than 25 percent in an industry where it was typically 33 percent at that time. Longs stores did about as much business as competing stores twice the size. Decentralized pricing gave Longs an advantage in the inflationary economy of the 1970s, allowing managers to raise prices according to their local costs, instead of waiting for the word from the central office. Its decentralized acquisition of store stock also aided their ability to negotiate in the tough economy. Warehousing costs were nil because it did not maintain a central warehousing system. Most stock was purchased at store level from direct manufacturers or local wholesalers and jobbers. Merchandise was stored in the retail unit, but just briefly, as Longs turned over its inventory eight times a year, about twice the industry standard. The stores in general shied away from costly items such as console TVs. A store might sell such an item, but only stock a few until it proved to be a big seller. This way a unit avoided becoming saddled with unsalable merchandise in an economic downturn.

Doubled in Size in the 1980s

Longs entered Anchorage, Alaska, in 1977, Arizona and Oregon in 1978, and Nevada in 1979. By 1980 it operated 113 outlets in California, 12 in Hawaii, four in Arizona and one each in Alaska, Nevada, and Oregon. The company's rate of expansion increased to 14 to 17 units annually, and over the next decade it would double its total number of stores. Sales per square foot rose to $381 in 1979 from $351 the previous year. Revenue passed the $1 billion mark in 1982. In June 1987 the company acquired 11 Osco drugstores in California and one in Colorado, and sold to the Osco chain 15 of its own Arizona stores. Longs typically closed very few stores.

In addition to its lucrative incentive program, Longs had had profit-sharing since 1956. The company sold $25 million of its stock to the profit-sharing plan in March 1989. The sale provided liquidity and tax benefits, and significantly increased the plan's holding of company stock. In the late 1980s, Longs bought back 2.5 million shares that had been held by outside investors. Of the outstanding 20 million shares, employees owned 12 percent, and the Long family owned about 26 percent. It was speculated that the company was going private, although it announced no such plans, and remained a publicly held company. The family influence remained great. After chairman Joseph Long died in 1990, his son Robert M. Long became chairman and CEO; Thomas Long remained a director until his death in 1993.

Long's outlook was bright as it entered the 1990s, carrying no long-term debt and owning the property housing more than half of its stores. The chain's net income had grown 10 percent a year from 1978 to 1988, and a 28 percent increase in fiscal 1988 put it at $49 million, on sales of $1.8 billion. For 1988 it was still outperforming all large drugstore chains in sales per employee, $147,000; sales per store, $7.8 million; and sales per square foot, $455. In the early 1990s Longs focused on increasing its pharmacy business. In 1989 and 1990 it remodeled 24 pharmacies and promoted its mail-order prescription business. Fiscal 1990 was the fifth consecutive year that pharmacy sales grew more than 20 percent. Company-wide sales surpassed $2 billion for the first time in 1990. Net income grew ten percent from the previous year, to $61.3 million. Per-store sales averaged $8.8 million in 1990.

Centralized Operations Marked 1990s

Longs suffered from declining profits during the early 1990s, even while revenues continued to increase. The early 1990s recession hit Longs particularly hard because so many of its stores were located in California, which suffered a more severe recession. Increasing competition from huge discounters such as Wal-Mart and Costco also cut into profits. While the company's decentralized approach had worked well for many years, the more highly competitive 1990s led Longs to begin moving in the direction of centralization. In 1992 the chain began installing a point-of-sale scanning system in its stores in order to more efficiently control inventory and cut purchasing costs. The following year Longs began to centralize its over-the-counter drug business. The company also began to establish chainwide pricing, breaking with the tradition of store managers setting prices.

In 1993 and 1994 Longs paid $3.1 million to settle charges that it had overbilled the government for Medicaid claims in Nevada and Hawaii. In 1998 the company settled a dispute with the U.S. Department of Labor regarding overtime pay for about 2,000 pharmacists, agreeing to pay millions in back wages. The pharmacists had been paid straight time for hours in excess of 40 in a week. Meanwhile, in 1995 Longs established a subsidiary called Integrated Health Concepts (IHC), a pharmacy benefits management (PBM) company serving employers and healthcare plans. In November 1997 Longs merged ICH with the PBM unit of American Stores Company, creating a joint venture between the two companies known as RxAmerica.

Growth in the 1990s came through both acquisitions and the opening of new stores. In 1993 Longs paid $12 million for the 21-unit Bill's Drugs chain. Two years later six Thrifty PayLess stores in Hawaii were acquired. In 1997 Longs entered the Denver market with one new store and the Las Vegas market with four new stores. Longs announced in July 1998 that it had agreed to acquire Western Drug Distributors, Inc., which ran the 20-unit Drug Emporium chain in Washington and Oregon--with 18 of the stores in western Washington and two in the Portland, Oregon, area.

This last purchase was likely to increase Longs sales past the $3 billion mark. The chain was also closing in on the 400-unit level. Profit levels had improved nicely over those of the early 1990s, with the $58 million of fiscal 1998 a small but significant improvement over the $49 million of fiscal 1995. Per-store sales averaged $8.46 million for fiscal 1998. With its health improving, Longs appeared to be positioned to thrive in the early 21st century.

Principal Subsidiaries: Longs Drug Stores California, Inc.; RxAmerica (50%).

Longs Drug Stores Corporation History

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