Kinray Inc.

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Kinray Inc.

152-35 10th Avenue
Whitestone, New York 11357
U.S.A.
Telephone: (718) 767-124
Toll Free: (800) 854-6729
Fax: (718) 767-4388
Web site: http://www.kinray.com

Private Company
Founded: 1940
Employees: 800
Sales: $4 billion (2005 est.)
NAIC: 424210 Drugs and Druggists' Sundries Merchant Wholesalers

Kinray Inc. is the world's largest privately owned wholesale drug distributor, and overall the fourth largest wholesaler in the United States. Operating out of a single, 400,000-square-foot, state-of-the-art, facility, which is only open for one eight-hour shift per day, the Whitestone, New York-based company serves independent pharmacies in eight northeastern states: New York, Maine, Massachusetts, Rhode Island, Connecticut, New Jersey, Pennsylvania, and Delaware. Kinray elects not to serve large drugstore chains, hospitals, or mail-order facilities. To its more than 3,000 customers, Kinray offers branded and generic pharmaceuticals as well as health and beauty products, vitamins, and herbals, including 600 private label products under the Preferred Plus Pharmacy brand. The company also provides medical equipment and diabetes-care products. In addition, Kinray offers a variety of services to its customers, including the production of imprinted pharmacy bags; imprinted promotional items (such as card holders, pens, pill boxes, and magnets); a variety of promotional calendars; monthly sales flyers, and corresponding shelf cards and window signs; counter and floor displays; and seasonal catalogs. Kinray also offers merchandising services, such as helping pharmacies with product mix and pricing strategies, and store design and the installation of fixtures. Kinray is owned by its chief executive, Stewart Rahr.

STEWART RAHR JOINS FAMILY BUSINESS: 1969

According to company material, Kinray was founded by Stewart Rahr's father, Joseph Rahr, in 1944, though other sources cite 1936 as the start of the company. What is certain, however, is that Kinray began as a small retail pharmacy in Brooklyn that also supplied some other drugstores. Stewart Rahr was born in 1948 and raised in Brooklyn. He earned an undergraduate degree from New York University (NYU) in 1968 and then enrolled in NYU's law school but dropped out in 1969 to help his father, whom he convinced not to sell the struggling business. Kinray at the time employed just five people and did less than $1 million in business each year. The young man was energetic and competitive and determined to build up Kinray's wholesale business. According to Crain's New York Business, "Rahr was the captain of the baseball and basketball teams at Brooklyn Poly Prep. At summer camp, he won a team straight-line competition with his wits—and by breaking the rules. Using a rope young Mr. Rahr had everyone toe the line, then removed it before any of the judges saw it. The straight line formed by the team aced the competition."

Rahr experienced tough times as he tried to add wholesale customers. He called pharmacies to drum up business and more often than not was met with a curt "Nothing for you today" and the click of the phone. Undeterred, he continued to call until the pharmacies began to place small orders with him. If anything, the constant rejection made him more determined to one day become that pharmacy's primary supplier.

In 1975 Rahr became Kinray's owner and continued to gradually build the business, chiefly by making extra efforts to please his customers and by making sure he was at his desk each morning at 6 a.m. He was a hands-on executive and even the owner or manager of the smallest pharmacy could get him on the phone. In 1984 he relocated to a larger and more modern distribution center, a 25,000-square-foot facility in the Elmhurst section of Queens. Another decade of effort and persistence followed, setting the stage for a period of explosive growth. The turning point came in 1993 when Rahr was seated on an airplane next to an Austrian inventor, who by chance had developed a sophisticated automated order-picking system that quickly assembled orders and sent them onto conveyor belts for packing and shipping. In 1994 Kinray moved into a new 140,000-square-foot facility in the Whitestone section of Queens with the new order-picking system installed, coupled with a sophisticated purchasing and inventory management system. Retailers could use personal computers to place orders and even change prices on the packaging.

As a result of this upgrade to its infrastructure, Kinray was well-positioned to take advantage of changes in the marketplace. Family-owned wholesalers established in the years following World War II dropped out as their founders died, and Kinray was able to pick up many of their customers. Not only was there consolidation taking place among pharmaceutical wholesalers, drugstore chains were saturating Kinray's core New York City market, threatening many of the independent pharmacies that Kinray served. Kinray actually thrived under conditions that should have imperiled the company.

SALES REACH $500 MILLION: 1995

In the mid-1990s Rahr told Chain Drug Review, "We're swimming against the tide—and loving it." Sales surged 35 percent in 1994 to $355 million and totaled some $500 million in 1995. The reasons for Kinray's success were many. Because the company carried no debt and its operation was efficient, it held a crucial pricing advantage in an industry with slim margins. Its customers were also strong players despite the proliferation of drugstore chains. While Kinray served pharmacies in New York, New Jersey, Connecticut, and Pennsylvania, the bulk of its business was conducted in the densely populated boroughs of New York City, where the kind of independent pharmacies Kinray catered to continued to prosper because of their longstanding ties to their communities. "These aren't sleepy little mom-and-pop stores," Rahr told Chain Drug Review. "The mom-andpop stores are gone. Our customers are smart, successful retailers who have thrived despite the growth of the big chains. We've helped them stay competitive by providing a high level of service and giving them a number of advantages that independent stores need in this environment."

In 1996 Kinray was serving 1,500 pharmacies as sales reached $600 million for the year. Unfortunately, the Whitestone facility, despite its size, could process no more orders and the company was unable to take on more business. Seven hours each day were devoted to picking, checking, and shipping morning orders. The bottleneck at the root of the problem was the checking of orders, but double-checking was a crucial component of the system. A mistake in a drug order could result in devastating consequences, and at the very least lead to the loss of business with the affected pharmacy.

COMPANY PERSPECTIVES

Committed to the "independent" pharmacy, Kinray knows that not all pharmacies are the same. Each pharmacy has its own specific needs and business ideas. By giving each pharmacy our own personalized care and services, Kinray will make the "independent" pharmacy a success. Our loyalty and the loyalty of our Kinray pharmacies are unmatched. Kinray will try harder than anyone else in the industry so that the "independent" pharmacy can enjoy the same success that we have for 60 years.

In 1996 Kinray earmarked some $6 million to upgrade the Whitestone distribution center. A new A-frame automated picking system was installed, and Kinray was able to reduce the amount of time it required to pick, check, and ship morning orders to just two to three hours. Moreover the new system allowed Kinray to double-check those orders before they left the building, essentially eliminating all errors, a key factor in maintaining satisfied customers. Another benefit of the new system was that instead of filling a pharmacy's orders as soon as they arrived, Kinray could wait to see if any further orders came in from that customer. The orders could then be consolidated, saving time and improving efficiency.

Aside from making sure that orders were filled in a timely and accurate fashion, Kinray sought to serve its customers in other ways. It steadily grew a private label program under the Preferred Plus brand. In the final years of the 1990s, the company added a line of diabetes-care products as well as new health and beauty items, vitamins and herbs, and humidifiers. In addition to making products available that cost less than national brands, Kinray also took pains to make sure the quality was high. Another step taken to help retailers compete was Kinray's work on forming the Wholesale Alliance Cooperative, a network of independent pharmaceutical wholesalers in the United States. By banding together they hoped to give independent pharmacies and small chains enough collective heft to gain access to third-party prescription drug plans, an important trend in the pharmacy industry, as well as other advantages. They included manufacturer-sponsored new product launch programs, product rebate programs, and education programs.

A slump for independent pharmacies in the late 1990s winnowed down the competition, yet Kinray continued to grow at an accelerated rate. To solidify its ties to the stronger independents that remained, the company was also willing to lend money to those interested in investing to grow their businesses by opening new stores. Not only did it supply funds, Kinray helped independents in selecting sites and with other aspects of opening the new units. Other support programs were also added, including the production of circulars, ads, and window signage.

Kinray forged industry alliances to maintain sales growth. In 1999 it reached an agreement to distribute Advanced Plant Pharmaceuticals products to more than 700 New York City–area independent pharmacies. The relationship later expanded to include another 1,300 independent pharmacies operating in Massachusetts, Rhode Island, Connecticut, New Jersey, and Pennsylvania. A year later, Kinray allied with CornerDrugstore.com to provide an e-commerce solution to some 2,000 independent pharmacy customers.

ADDITION OF COMPETITOR'S CUSTOMERS: 2002

As Kinray closed the 1990s, sales reached the $1 billion mark. The company serviced 1,700 retailers in six eastern states and had outgrown the Whitestone facility it had opened only a few years earlier. The company added another 200,000 square feet to the distribution center, which became operational at the start of the new century. Some of that extra capacity was used to service the customers of a former rival, Brooklyn-based Remo Drug, a 70-year-old family-owned concern that began liquidating its inventory in March 2002 in order to shut down. Remo did about $700 million in business each year from 500 drugstore accounts. Kinray was able to buy Remo's inventory from cash on hand and picked up between 250 and 300 of Remo's customers. The additional business helped to boost Kinray's sales to the $2 billion level by the end of the year. Just two years later that amount would reach $3 billion.

The success of Kinray made Rahr a very wealthy man. In 2004 he made headlines when he paid $45 million in cash for an 18,000-square-foot waterfront estate (Burnt Point) in the Hamptons of Long Island. At the time it was the most expensive home ever sold in New York State. The 25-acre estate came completely furnished and included a half-mile of waterfront, a private dock, and a sailboat. Rahr already owned a $13 million apartment in Manhattan and a home in Sagaponack.

KEY DATES

1940:: Company is founded in Brooklyn.
1969:: Stewart Rahr joins family business.
1975:: Rahr becomes Kinray's owner.
1984:: Kinray moves to Elmhurst, Queens.
1994:: New distribution center opens in Whitestone, Queens.
1997:: Automated picking system is added.
2002:: Remo Drug inventory is acquired.

A great deal of Rahr's wealth, and the growth of the drug distribution industry in general, was the result of speculative drug buying, essentially arbitrage in which middlemen took advantage of anticipated drug price increases. Distributors stocked up on drugs and when the price increases hit, they pocketed the difference after selling the products to retailers at the new price. According to the New York Times, the practice peaked in 2001, when it was estimated that the three largest publicly owned distributors made 60 percent of their profits, nearly $1 billion, from speculative buying. According to the Times, "Rahr, who honed the practice with the help of a computer program, said that his profit from the practice never reached 40 percent. Mr. Rahr also said that his and other distributors' fees accounted for a tiny portion of the cost of drugs to consumers, with manufacturers taking the major share of profits." In essence, manufacturers used the practice as a way to provide incentive to distributors to push their drugs with pharmacies. Speculative drug buying, in turn, also encouraged manufacturers to continually raise prices, leading to drug cost inflation. Moreover, when distributors stockpiled drugs, shortages developed around the country, and drug companies were able to artificially inflate their sales, misleading investors. Thus, the practice became a concern for the Securities and Exchange Commission, which sued Bristol-Myers Squibb, contending that the company had inflated its sales by $1.5 billion in 2000 and 2001. To settle the matter the pharmaceutical firm agreed to pay $150 million and cease the conduct.

Kinray had to make up for the shortfall in profits that came with the end of speculative drug buying. Instead of raising prices, Rahr elected to control costs and expand into new territories in order to increase sales volumes. In this regard, Kinray established a telemarketing office to drum up more business with pharmacies. Kinray also sought to sell more generic drugs, which boasted higher profit margins than branded drugs, as well as more Preferred Plus products. Another concern facing Kinray was the question of succession. Rahr's son, Robert, had joined the company but left in 2004 to become involved in private equity. The only other child, a daughter, had never worked for the company and was completing graduate work in preparation for a career in the medical field. In the short term, Rahr expressed no interest in retirement, but the company he built, doing about $4 billion in sales in 2005, was an attractive acquisition target and offers from the large publicly owned distributors were likely to come his way.

Ed Dinger