Transcripts

Drug Stores Find A New Prescription for Survival

PAUL KANGAS: The nation`s third largest drug store chain is getting larger. Rite Aid is buying part of Canada`s Jean Coutu group for $2.6 billion in cash and stock. Specifically, Rite Aid is acquiring more than 1,500 Eckerd drug stores, more than 330 Brooks Pharmacies and six distribution centers. All of the properties are located on the east coast or in the Mid-Atlantic States. Rite Aid is expected to remodel and rebrand the stores to carry the Rite Aid name. That`s a process that could cost the company almost a billion dollars over the next four years.

GHARIB: That Rite Aid deal is just one example of how many American drugstore chains are rapidly expanding these days. As Erika Miller explains, many are bulking up just to survive in an industry where being super-sized can be the key to survival.

ERIKA MILLER, NIGHTLY BUSINESS REPORT CORRESPONDENT: Drug stores have come to look a lot like supermarkets and convenience stores, offering food and household items. But prescription drugs are still what bring most customers through the door, accounting for an estimated 70 percent of sales at chains like Walgreens, CVS and Rite Aid. It`s a desire to improve profitability in this area that`s driving many chains to merge.

JOHN RANSOM, HEALTHCARE & DRUG STORE ANALYST, RAYMOND JAMES: I think the leading factor is everybody in the pharma channel has to get big so they can beat up on the vendor. In this case, those are the pharmaceutical manufacturers mostly.

MILLER: Rite Aid`s bid for Eckerd and Brooks is just one of several drugstore mergers this year. CVS purchased Albertson`s drugstore business and Walgreen`s bought Mid-Atlantic regional chain Happy Harry`s. But experts say consolidation isn`t the only positive for the sector. An aging population is also a big boon.

MARK HUSSON, CONSUMER BRANDS ANALYST, HSBC: Pharmaceuticals are driven by demographics, not economics. So as we all age in the United States, clearly this is an area where people are getting older and fatter and uglier and more in need of pharmaceuticals, so, it`s a good place to be.

MILLER: In addition, many drug retailers have made their stores more appealing through renovations and expansion of store hours. Those changes are helping them boost sales of non-pharmaceutical items, which typically carry higher margins. Finally, experts say drugstores are less sensitive to changes in the economy, so they predict that if the economy continues to slow, the sector will likely outperform.

HUSSON: The outlook for the sector, in general I think is quite a positive one because, just as we`re seeing some deceleration in consumer spending in other sectors, in pharmaceuticals, we`re seeing actually expenditure increases quite markedly year over year. So the demand drivers in this sector are better than almost any other sector I can think of in retailing.

MILLER: It`s clear that the consolidation wave still has a ways to go. Analysts say the big three drugstore chains have a combined market share of about 40 percent, and there are still 22,000 independent pharmacies in the U.S. Erika Miller, NIGHTLY BUSINESS REPORT, New York.