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Sunday, Sep. 6, 1998
Local drug stores fight ending era
Shops survive by old soda fountain charm
By JEFFREY TOMICH
Staff WriterWhen Bill Powell opened Bel-Aire Drugs 42 years ago, the drug counter was the nucleus of the small, neighborhood pharmacy.
Times have changed. Squeezed by a third-party insurance system, drug manufacturers and the rapid growth of large drugstore chains, neighborhood pharmacies have had to alter the way they do business.
No longer are prescription drug sales a main source of profits for independents. Today, they have to look elsewhere.
``Now, we make more on cosmetics, greeting cards, jewelry and fragrances. Anything in the store is a better profit margin than prescriptions,'' Powell said.
It's the same story down the street at Hamlin Pharmacy, where owner Karl Arnold and his daughter Karen Nicholson recently added 1,200 square feet to the shop to make room for more gifts, greeting cards and other merchandise.
Nicholson, who runs the front end of her father's store, said the recent onslaught of chain drugstores and changes in the health care industry had her and her father worried and made them rethink how their store is operated.
``I'm real optimistic personally, because I feel like we've found our niche and we're trying to improve on it all the time,'' she said.
Growing up in Corpus Christi, Arnold and Powell were classmates in grade school and junior high, roommates at the University of Texas and fraternity brothers in Alpha Tau Omega. They both served in the Air Force at Biloxi, Miss., and later worked for a while for Parr Drugs before opening separate pharmacies just miles apart on South Staples Street.
Now, Arnold and Powell find themselves linked again -- this time as owners and operators of two of Corpus Christi's last independent pharmacies. Things have reached the point that Arnold kiddingly refers to Powell and himself as ``buddies in gloom.''
Powell launched Bel-Aire Drugs in 1956. Arnold floated a loan from his father and started Hamlin Pharmacy four years later.
At the time, there were many independent pharmacies in Corpus Christi. But most have now either closed or been sold. Among the most recent examples: Eckerd Corp. purchased 40-year-old Town & Country Pharmacies in 1995 and the Santa Fe Pharmacy last year.
Those that have survived find themselves increasingly hemmed in by drug manufacturers, managed-care contracts and mail-order houses.
Todd Dankmyer, senior vice president of communications for Alexandria, Va.-based National Community Pharmacy Association, said about 1,000 independent drugstores have closed each of the last five years. Nationally, about 25,000 independent pharmacies remain.
The problem for independent pharmacies is complex.
Many blame drug manufacturers for pricing policies that they say are discriminatory and allow health maintenance organizations and mail-order outfits to buy the same quantities of the same products at 40 to 60 percent discounts.
Thousands of community pharmacies nationwide joined a landmark class-action drug price-fixing lawsuit brought against 20 major drug makers. As of July, 15 pharmaceutical manufacturers had offered settlements with damages totaling $723 million, according to the association.
Independents also complain that managed-care practices have cut deeply into fees that they receive on prescription drugs.
``The vast array of insurance company practices done in the name of so-called managed care have essentially ratcheted down fiercely on the reimbursement to pharmacies,'' Dankmyer said.
Chain reaction
Powell said no matter how expensive a drug, he gets a small fee per prescription, normally $1 to $2. A small, independent pharmacy like Bel-Aire may fill 100 prescriptions on a good day, producing a $100 to $200 gross profit -- not nearly enough to pay to bottle and label medication, pay the electric bill, insurance and meet his payroll, he said.
Independents also face the growth of limited-provider networks that only do business with large chains, Dankmyer said. And other insurers leverage consumers to mail-order houses by structuring the co-pay system so that they pay less by ordering prescription drugs by mail.
``Those kinds of insurance practices have all combined over the last 10 years to disadvantage independents in the marketplace,'' he said. ``Some (operators) are just to the point where their margins are sufficiently narrow and they're tired of the fight.''
Independent pharmacies also face competition from large chains.
In certain areas of the country, major chains have been fairly aggressive in buying out independent pharmacies' prescription files or the stores themselves.
Chains at war
In Corpus Christi, large chains like Eckerd Drugstores and Walgreen's are struggling for control of the local market, building new stores sometimes within blocks of one another.
There are other players in the drugstore business here, including grocery store chains Albertson's and H-E-B, mass merchants such as Wal-Mart and Kmart and hospitals such as Spohn, which owns Elizabeth Street pharmacies. There are also several other independent pharmacies in town.
The fastest growing, however, are Eckerd and Walgreen's. Eckerd has done it largely through acquisitions while Walgreen's has done it by building hundreds of new free-standing locations, many with drive-through windows -- a concept the company pioneered in the early 1990s.
Eckerd operates 11 drugstores in the Corpus Christi area and Walgreen's has five.
Largo, Florida-based Eckerd was acquired last year by the J.C. Penney Co. Inc. The company operates more than 2,800 stores nationwide and had $6.1 billion in sales in 1997.
Walgreen's is the No. 1 drugstore retailer in the United States in sales, though it has fewer stores than Eckerd.
Michael Polzin, a Walgreen's spokesman, said there are two factors driving the growth in the drugstore industry.
Serving a growing need
One is the growth of managed care. Today, according to an industry estimate, about 80 percent of people who come into pharmacies with prescriptions have them paid for through third-party insurers. Insurance companies contract with drugstores to fill prescriptions at a certain rate for their plan members.
``In order to be attractive to those plans, it's important for pharmacies to have a good market share,'' Polzin said. ``Therefore, you need more stores to cover more area.''
Also driving the growth of the drugstore industry is America's aging population.
According to projections by the National Association of Chain Drug Stores, retail sales of prescription drugs will exceed $100 billion for the first time in history in 1998, a 15 percent increase from the $89 billion in sales last year.
Sixty-one percent of those sales will belong to chain drugstores, mass merchants and supermarket pharmacies, the association estimates.
Baby Boomers are hitting 50 years old, about the time in life people start to use more prescriptions, Polzin said. ``It's starting already, and in the coming years there's going to be more and more demand for pharmacies and pharmacy services.''
Return of Walgreen's
Walgreen's opened its first store in Corpus Christi on Chaparral Street in 1941. After opening three stores, the company left Corpus Christi in 1988.
Three years ago, Walgreen's came back, opening two stores. It then added two more. The Deerfield, Ill., company opened a fifth store in Corpus Christi on Monday on Airline Road.
Nationally, Walgreen's opened nearly a store a day during the past 12 months, giving it a total of 2,549 stores in 35 states and Puerto Rico. The company ended fiscal 1998 with sales over $15.3 billion.
While there are no more stores currently on the drawing board for Corpus Christi, Walgreen's isn't exactly slowing down. The chain plans to have 3,000 stores open by the year 2000 and 6,000 stores by 2010.
As Polzin puts it: ``We still see a lot of opportunity nationwide.''
In 1996, Walgreen's built a 13,500-square-foot store at the same intersection as Hamlin Pharmacy. It concerned Arnold and his daughter, Nicholson, who helps her father run the store.
``We were worried,'' admits Nicholson. ``For a while, we thought about closing the pharmacy and just keeping the front-end of the store open.''
Instead, the family took a lesson from another, well-known retailer and decided to emphasize niche services that they provided and the chains didn't.
Finding a new niche
Dankmyer said most independents don't see competition from chains as their biggest problem.
``We've always been able to beat the chains when it comes to face-to-face contact,'' he said. ``A good independent can basically out-compete a good chain in my view, and I've heard most of my members say that.''
Arnold and Powell agree.
``You can't compete with them head-on,'' Arnold said. ``That's suicide. Sam Walton said `If you want to compete with me, find out what we're not doing and start doing it. And we did.''
Changes in the drugstore and health care industries have forced independents such as Hamlin Pharmacy and Bel-Aire Drugs to find new ways to compete. Many, rely on services such as free delivery, charge accounts, gift-wrapping and knowing their customers' names when they walk through the door.
``There's customers I've never met, but I'd recognize their voices in a dark room,'' said Nicholson, who as a 4-year-old used to stand on a box and work the cash register at her father's store.
Hamlin Pharmacy and Bel-Aire Drugs also kept their old-style soda fountains where customers can still sit down for a cup of coffee or a cheeseburger and milkshake.
Soda fountain life
Most independents gave up on fountains in the 1960s and 1970s, Powell said. Then, with the explosion of fast-food restaurants, fountains were money-losers.
``What we thought might be a losing proposition turned out to be an asset and a unique asset,'' he said. ``The fountain has been a key for both of us as far as keeping traffic and keeping the store open. I feel like it keeps life in the store.''
Today, many independent pharmacies are doing well. Most of the marginal operators or less profitable stores have been sold or closed. And while profits on prescription drugs have been cut, sales at some stores are going up as are proprietors' incomes, Dankmyer said.
``Of the independents in the market, it appears that a sizable percentage of them are doing better,'' he said. ``The question is, is the attrition mostly behind us or are we going to continue to see these closings and (buyouts) over the next few years?
``We're cautiously optimistic that the worst is behind us -- that the independents that are out there are good operators and good competitors and will be able to survive and prosper in the era of managed care.''Post your comments about local news eventsFront Page || Main Index || News || Business || Texas || South Texas Outdoors || Birdwatching || Sports || Entertainment || Selena || Education || South Texas Attractions || World Wide Web