YOUNGSTOWN Phar-Mor has rough future, experts think

By DON SHILLING
VINDICATOR BUSINESS EDITOR
YOUNGSTOWN -- The future is bleak for discount drugstore chains such as Phar-Mor, experts say.
"Deep discount drugstores worked well in the '80s, started to fade in the last decade and now are going really fast," said Chris Boring, retail analyst with Boulevard Strategies in Columbus.
Drug Emporium, a Columbus-based chain, faded away last week.
Can it survive? Its bankruptcy filing and sale agreement raise questions about whether Youngstown-based Phar-Mor can survive in a retail environment that is much more competitive than 15 years ago. Like Drug Emporium, Phar-Mor has been losing money and been shunned by investors, who have pushed its stock to less than $1.
Phar-Mor remains committed to its discount niche and insists it will grow, not die.
"We think there's a future for an everyday, low-priced retailer like us," said John Ficarro, Phar-Mor senior vice president.
To survive, a retailer must provide a shopping experience that competitors can't, said David Burns, a business professor at Youngstown State University.
"I just don't see it with Phar-Mor," he said.
Top competitors: Phar-Mor is up against drugstore giants Walgreen and CVS, which are each building about 500 stores this year, mostly on high-traffic, highly visible corners.
New competitors also have risen up. Grocery stores have muscled into the market with their own pharmacies. Discounters Wal-Mart and Target are expanding across the country with new stores that often have pharmacies. Kmart also has added pharmacies to stores.
"I have not heard any positive opinions about discount drugstores' future," Burns said. "Most people question the existence of that format."
Ficarro said, however, that Phar-Mor can survive because it has advantages that Drug Emporium doesn't.
For example: Drug Emporium cited in its bankruptcy filing that it was hurt by the lack of a central warehouse. The chain in essence had distribution centers in the back rooms at all of their stores, Ficarro said. Phar-Mor uses its Tamco distribution center in Austintown to get products to its stores.
Phar-Mor's new automatic inventory tracking system will be in all stores within a couple weeks, helping the company to keep the proper amounts of products on shelves, Ficarro said. Also, Phar-Mor's computer systems are more up-to-date than Drug Emporium's, he said.
"We think we're in a good position to grow," he said.
Streamlining: Ficarro said the chain is striving to be more efficient and reduce costs. In January, the company laid off 22 of its 250 downtown workers and used attrition to eliminate 16 other positions.
Ficarro said the moves will save $2 million a year and Phar-Mor is looking to save between $500,000 and $1 million a year in other administrative costs, such as eliminating duplicate reports, cutting postage and improving store operations.
Investors haven't shown any confidence in Phar-Mor's chances. Its stock has been steadily declining since reaching $12 a share in 1998. The stock fell to under $1 a share earlier this month.
Phar-Mor has lost money in six of the past 10 quarters and lost $5.5 million in its most recently completed fiscal year.
Watching closely: Ficarro said he is watching Phar-Mor's stock price closely but he doesn't think it is in danger of being delisted as Drug Emporium's was March 14. Drug Emporium's stock has since fallen to about two cents a share in over-the-counter trading because its sale agreement with a Minnesota chain calls for little or no compensation for shareholders.
Nasdaq rules say a stock is subject to being removed from its national market if the stock price is under $1 a share for 30 consecutive trading days.
Phar-Mor's stock price rose slightly above $1 Thursday.
Foresees more struggling: Burns said he thinks Phar-Mor will continue to struggle because the discount niche requires large sales volume to allow for price discounts. No players in that discount market are large enough to do that, he said.
Phar-Mor has said for some time that it must get larger so it can spread out its overhead costs over more stores. It now has 139 stores in 24 states.
A large acquisition recently left it with new troubles. Phar-Mor acquired 32 stores from Pharmhouse of New York in 1999 for $7.5 million but has said it took longer than expected to integrate them into its operations.
Ficarro said the former Pharmhouse stores are doing better but wouldn't say if they are making money. He did say they have been regaining business that was lost because the former owners let the stores go before Phar-Mor took over.
Looking for other acquisitions is continual, he said.
In looking to grow, however, Phar-Mor isn't trying to compete with the convenient locations of the larger chains, Ficarro said. It will remain focused on attracting customers through low prices, not convenience.
Although grocery stores have added competition by opening pharmacies, Ficarro said Phar-Mor has been competing with them on their turf. Phar-Mor has been expanding its food offerings, including a frozen and refrigerated food sections in its larger stores.
Burns said he isn't sure that is enough to make Phar-Mor stand out, especially with Wal-Mart opening new superstores that have grocery sections.
"Are you able to compete on price and food?" he asked.
Burns said shoppers are so pressed for time that they are looking to go to fewer stores. Large discounters such as Wal-Mart provide an attractive option, he said.
Major players: Boring said Ohio is unusual in that it has four major players in the discount drugstore market. He said Marc's of Cleveland and Discount Drug Mart of Medina seem to be doing better than Phar-Mor and Drug Emporium, but their future is murky, too.
Discount Drug Mart has staked out a niche by entering rural markets that are underserved, while Marc's seems to be selling a large amount of groceries, he said.
Burns said smaller, independent pharmacies also have found a place. While many have closed, others are succeeding by catering to customers in a way that larger stores can't.
"It seems more like visiting a friend than it does visiting a retail store," he said.
Plan for success: Boring said Phar-Mor must find an underserved market if it's going to succeed. One problem is that it has a large number of lower-rent locations, which would make it hard to attract customers if it changes its format.
"I think it's a really tough challenge," he said.