Big a Drug Stores Inc.

views updated

Big a Drug Stores Inc.

12030 South Garfield Avenue
South Gate, California 90280
U.S.A.
Telephone: (562) 633-2026
Fax: (562) 633-3613
Web site: http://www.bigadrug.com

Private Company
Incorporated: 1971
Employees: 263
Sales: $114.4 million (2005)
NAIC: 446110 Pharmacies and Drug Stores

Big A Drug Stores Inc. owns a chain of 21 drugstores located in California operating under the names "Big A Drug," "Drug Emporium," "Camelot Drug," "Drug Fair," and "Drug Barn." The stores average 25,000 square feet and derive approximately 40 percent of their revenue from pharmaceuticals. Each store stocks a wide variety of merchandise, including food, office supplies, hardware, entertainment products, health and beauty products, pet food, and home health equipment. All of the company's stores are located in shopping malls or strip malls and offer home-delivery of prescription drugs. The stores also are equipped with service centers that allow customers to pay utility bills, use the U.S. Postal Service, and conduct transactions using Western Union. Big A's 14 Drug Emporium stores operate as deep-discounters. The composition of the rest of the chain comprises three Big A stores, two Drug Barn stores, one Camelot Drugs store, and one Drug Fair store. The company is owned by its founder, Edward Dallal, who serves as its president and chief executive officer.

ORIGINS

By the standards of the 21st century, Edward Dallal was an anomaly in the drugstore industry. His chain of drugstores did not follow the blueprint of success established by the industry's largest competitors, namely retail giants Walgreen Co., CVS Corporation, and Rite Aid Corporation, yet the Big A chain thrived: a diminutive, one-state company that was able to succeed in the shadow of giants. Together, the nation's three largest chains operated nearly 14,000 stores and generated a staggering $100 billion in annual revenue at a time when Dallal's chain comprised fewer than two dozen stores and collected just over $100 million a year in sales. Big A, in its various guises, succeeded because Dallal adhered to business practices his customers liked and had come to expect, creating a loyal customer base that allowed an irregular drugstore chain to remain financially healthy in the modern era of the retail industry.

Dallal, a pharmacist educated at the University of Southern California School of Pharmacy, decided to operate his own pharmacy in the early 1970s. In 1971, he purchased a drugstore in Long Beach, California, the beginning of the Big A chain. A chain of stores was slow to emerge, as Dallal adopted a measured approach to growth. During his first 25 years in business, he added a new drugstore to his operations at an average of one new unit every five years, expanding exclusively in the greater Los Angeles area, in shopping centers or along strip malls. Dallal's 25th year in business marked a turning point, however, ushering in a new era that embraced geographic expansion and a decidedly more rapid pace of expansion.

EXPANSION BEGINNING IN 1996

For a company that opened two stores a decade, adding two stores overnight represented an unprecedented surge in growth. In 1996, Dallal moved beyond the southern half of California for the first time when he purchased two, deep-discount stores operating under the banner Drug Barn. The stores, located in Colma and Sunnyvale, gave Dallal a northern division and added a new, larger format to his operations. Drug Barn's heavy discount pricing strategy, retained by Dallal after he acquired the stores, represented a new wrinkle to his business, a pricing strategy not followed by his other five stores, which operated under three names, Big A, Drug Fair and Camelot Drugs. The addition of a fourth name added to the eclectic quality of the small chain, but aside from the difference in pricing strategy, the entire operation had cohesion, held together by Dallal's retail philosophy.

Dallal preached customer service. Except for warehouse stores that functioned within a self-service format, every retailer claimed to emphasize customer service, but not all retailers put their words into practice. Dallal stressed service as the linchpin of his operating strategy, referring to the importance of his relationship with customers in nearly every discussion of his company. "We have our own clientele," he said in an April 26, 2004 interview with Chain Drug Review. "They've been coming to the stores for 20 or 30 years, and they know they'll get service." In an interview with Drug Store News on April 26, 1999, Dallal said, "Service is the name of the game. You can only compete with service." In a May 2, 2005 interview with Chain Drug Review, Dallal reiterated his refrain, explaining, "We have customers who have been shopping at our stores since they were children, and now they come in with their own children. They're not going to jump ship just because Wal-Mart or Walgreens opens a store down the road." A commitment to service bred customer loyalty, Dallal's only way to compete against much larger rivals whose size produced economies of scale against which the relatively tiny South Gate-based operation could not compete. Dallal knew his strengths and weaknesses; compete against Walgreen and other large competitors on price only, and he would be crushed, but if he could cultivate loyalty among his customers, his small retail chain had a chance to succeed.

The acquisition of Drug Barn seemed to awaken Dallal's desire for expansion, albeit in a conservative manner. He looked for additional stores to acquire in 1997, but he could not find any properties that met his criteria, the most important of which was store size. Dallal's stores typically were larger than 20,000 square feet, unusually large for a drugstore—one of several characteristics of the chain that distinguished it from most of its competitors. Dallal's search in 1997 failed to find any stores that met his size requirements, which would be a perennial problem because of the paucity of available real estate in many metropolitan markets in California. "We're still looking for acquisitions," Dallal said in an April 27, 1998 interview with Drug Store News. "My position is that I'm not in a hurry to expand unless it's the right store and the right location, and unless it comes at a very good price."

COMPANY PERSPECTIVES

The philosophy of the Big A and Drug Emporium drugstores is to provide excellent customer service while remaining competitively priced. For example, the average large chain wait time can be as high as 1 1/2 hours and our average wait time is usually 1/2 hour or less. We have some excellent relationships with local physicians and even offer delivery service in selected locations. This allows us to attract the insured customers as well as those who may be uninsured. Moreover, with increasing restrictions on drug formularies many patients are buying their non-formulary prescriptions from us. This not only provides the opportunity for growing the customer base, but also generates additional front end sales.

With no way to grow his business through external means, Dallal turned to internal improvements, looking for ways to increase business at his collection of seven stores. In 1997, he launched a marketing program with the help of Promotions Unlimited, distributing coupon books and placing advertisements for his stores. "It brings in business and I can compete in the market," he said in his April 27, 1998 interview with Drug Store News. Dallal also began experimenting with stocking variety and craft items, such as artificial flowers, adding a picture-framing self-service area, and a staffed, custom-framing service. The new features, which complemented the chain's service centers that allowed customers to pay their utility bills and send or receive money via Western Union, were intrinsic to increasing traffic at the stores, of particular importance to the Big A chain. Typically, drugstore chains relied on pharmacy business, referred to as "back-end" because of the location of the pharmacy, to generate nearly 70 percent of a store's business. Big A, in another departure from the norm, relied on backend business for roughly half the business of a typical drugstore, generating the bulk of its sales from the "frontend," the groceries, health and beauty products, and sundry other merchandise stocked on the shelves leading to a store's pharmacy. Aside from offering a wide variety of merchandise, one of the advantages gained by operating large stores, Dallal added new, convenient services to lure customers into his stores, thereby bolstering the front-end of his business.

Without the aid of growth achieved by acquiring stores, Dallal made progress nevertheless. In 1998, the addition of new services and merchandise helped fuel a 10 percent increase in chainwide revenues to $55 million. Big A closed out the 1990s exuding strength, able to thrive as the industry's largest competitors expanded vigorously, establishing their stores, in some cases, only yards away from Dallal's stores. The company headed toward its 30th anniversary as something more akin to a mom-and-pop retailer than a chain, a drugstore operator without drive-through, prescription-drug service and without any stores opened 24 hours a day. Big A's diversion from the industry standard would continue, but the company's 30th anniversary marked an unprecedented increase in physical growth. Dallal's search for new stores found a large target in 2001, elevating the stature of his chain to a new level.

DRUG EMPORIUM ACQUISITION IN 2001

To the east, in Powell, Ohio, the fortunes of another drugstore chain drew Dallal's interest. Drug Emporium, a retail chain founded in 1977 in the Graceland Shopping Center in Powell, was in the headlines for all the wrong reasons. The company had spent the 1990s becoming one of the country's leading discount drugstore chains, assembling a roster of 137 company-owned stores and 42 franchised stores by the end of the decade. Aggressive expansion lifted sales to $1.2 billion, but rapid growth was achieved at the expense of profitability. The launch of DrugEmporium.com, the company's online pharmacy, in 1999 proved to be a particular disaster, recording an $8.1 million loss during the first quarter of 2000 and accumulating $22 million in losses during its first 15 months in operation. Drug Emporium soon headed toward financial collapse, as the chain, with stores concentrated in Pennsylvania, Ohio, Georgia, Michigan, and California, racked up crippling losses. The company prepared to file for bankruptcy in early 2001, but before it did so, Dallal moved in and acquired 15 of the company's California stores. The stores, which Dallal claimed were profitable, averaged 25,000 square feet, making a perfect fit to his enterprise. In early March 2001, Drug Emporium was delisted by the NASDAQ and filed for bankruptcy before the end of the month. Before the end of the year, 34 Drug Emporium stores were liquidated, two units were sold to Long's Drug, and 77 stores were sold to Snyder's Drug Stores Inc.

The acquisition of the Drug Emporium stores represented a massive addition to Big A, tripling the size of the chain. Almost immediately, Dallal began outfitting the 15 units with service centers, adding departments that increased store patronage considerably. The addition of bill-paying service centers, for instance, accounted for an average of 300 visits per store per day, while the presence of U.S. Postal Service stations attracted 150 customers per day and 600 per day during holidays. "An average drug chain might spend $26 to acquire a new customer or generate foot traffic," Dallal said in a June 25, 2001 interview with Drug Store News. "With these services, we're able to do it for free." Beginning in January 2002, he also began experimenting with 99-cents departments in several stores, scoring sufficient success to prompt a rollout of the department throughout the chain before the end of the year. By all measures the acquisition of the Drug Emporium stores proved to be a boon, but the same could not be said of Snyder's Drug Stores' experience with former Drug Emporium units. In 2003, the company, primarily because of its acquisition of 77 Drug Emporium units, filed for bankruptcy.

KEY DATES

1971:: Edward Dallal purchases his first store in Long Beach, California.
1996:: Big A acquires two stores in northern California operating under the name Drug Barn.
2001:: Big A acquires 15 Drug Emporium stores, tripling its store count.
2006:: Big A launches its web site.

As Dallal looked ahead, his focus was on maintaining his stores' commitment to customer service and on adding new features and departments to keep new customers coming through the doors. Expansion in any substantial manner seemed unlikely given the lack of suitable real estate properties in California. Dallal's attitude toward further acquisitions in 2004 was much the same as it had been in 1998. "Unless it's a steal," he said in an April 26, 2004 interview with Chain Drug Review, "I'm not going to buy it." He was content to push ahead with his existing operation, an anachronism in the modern retailing world that was profitable nonetheless. In 2006, however, he bowed to the times in one respect by launching a corporate web site. He had purchased a domain name nearly six years earlier, and for nearly six years an "Under Construction" sign greeted online visitors. The launch of the web site, which was an information-only site, coincided with the company's 35th anniversary, an occasion that celebrated a successful past and pointed to a promising future.