PHAR-MOR Is cutting stores the right strategy?

THE VINDICATOR, YOUNGSTOWN
Observers question how long the chain can survive after it reduces its store count by nearly 50 percent.
By DON SHILLING
VINDICATOR BUSINESS EDITOR
YOUNGSTOWN -- Phar-Mor is creating far bigger problems by the way it's trying to emerge from bankruptcy court protection, experts say.
Already losing millions of dollars a year, the Youngstown-based discount drugstore chain will find it even harder to be profitable as it closes nearly half of its stores, some analysts said.
Phar-Mor positions itself as a low-cost shopping alternative, but it needs more stores, not fewer, to deliver those prices, said David Burns, a business professor at Youngstown State University. More stores would allow it to make larger volume buys, which result in lower prices, he said.
Larger chains also can offer lower prices because they spread their overhead costs over more stores, said Howard Rosencrans, an analyst with HD Brous & amp; Co. in Great Neck, N.Y.
Phar-Mor filed for bankruptcy protection from creditors Monday in U.S. Bankruptcy Court in Youngstown. The Youngstown-based discount drugstore chain said it intends to reorganize as a smaller company, operating 74 of its 139 stores.
Quotable: "It's going to be a tough size to be at for the long term," Burns said.
Rosencrans said this size doesn't make sense unless it's only staying in markets where there isn't much competition, but he considers that unlikely.
He questioned whether Phar-Mor can survive as a stand-alone company and said selling the company seems like the best option.
Focus on profits: Phar-Mor officials themselves have been saying for years that the chain had to get bigger. John Ficarro, Phar-Mor senior vice president, said Monday, however, that the focus now is on becoming profitable.
"We'd rather be a little smaller and much stronger than larger and teetering," he said.
Phar-Mor lost $4.3 million in the first three quarters of its most recent fiscal year and a total of $18.2 million in the four years before that. It has annual sales of about $1.3 billion.
David Schwartz, company president, said Phar-Mor will survive by cutting overhead and streamlining operations. He said the company will emerge from bankruptcy court in six to nine months.
Chris Boring, retail analyst with Boulevard Strategies in Columbus, said, however, that the only place discount drugstores are doing well is in rural markets that don't have much competition. Phar-Mor and Drug Emporium, another Ohio chain, instead have fought the larger chains in urban markets.
"They just don't stand a chance," Boring said.
Columbus-based Drug Emporium recently filed for bankruptcy and was acquired by Snyder Drug Stores of Minnesota.
Competition: Phar-Mor has had trouble competing on price because Wal-Mart and Target can offer lower prices and are opening more stores with pharmacies, Boring said.
Meanwhile, Walgreens and CVS are succeeding by opening stores at convenient, high-traffic locations.
"The problem with Phar-Mor is that they are neither fish nor fowl. The don't have the most convenience, and they don't have the lowest prices either," he said.
Leadership: Rosencrans said Phar-Mor also has struggled because of a lack of corporate leadership. The primary change needed at Phar-Mor is new top executives, he said.
Abbey Butler and Melvyn Estrin, who are co-chairmen and co-chief executives of Phar-Mor, acquired control of the company in 1997 from Robert Haft, who brought the company out of bankruptcy court in 1995. Butler and Estrin also are the top executives of Avatex Corp., a Dallas-based holding company.
Ficarro has said that criticism of the management style of Butler and Estrin isn't valid because they have turned over the daily operations of Phar-Mor to David Schwartz, company president and chief operating officer.
Groceries: Phar-Mor recently has tried to draw in more customers by adding grocery items. That has been popular locally because much of the local grocery market is dominated by Giant Eagle and Phar-Mor has been able to offer better prices, Burns said. In other areas, however, there are more low-cost grocery options so Phar-Mor has a harder time attracting customers, he said.
Ficarro said Phar-Mor is trying to bring back its original theme of "Power Buying." It has been offering large lots of varying items at its 27 stores in the Youngstown and Pittsburgh regions for the past month. Customer response has been strong so the program is being expanded, he said.
He said part of Phar-Mor's problems has been the changing buying habits of consumers. Middle-class consumers now are valuing time more than money so they are limiting the number of stores they will shop, he said.
Grocery stores are taking advantage of this trend by offering more services, he said. Consumers are willing to do more shopping there even if they have to pay extra for products such as shampoo, he said.
Phar-Mor also is blaming increased competition, the geographic diversity of its stores, changed credit terms by vendors and its high-cost debt for its financial problems.
shilling@vindy.com