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Kinney Drugs may appear small when compared with the big four national chains--it has 74 stores primarily in New York and Vermont.

But Kinney acts big, a fact reflected as much by the programs and initiatives the chain currently is working on as by its dominance in the smaller markets throughout northern and central New York.

The key components of its successful strategy are a loyalty card with 275,000 members--which makes for 60 percent household penetration in the markets its serves--and a pharmacy benefit management division it has operated for more than a decade, with more than 145,000 lives covered. And the company continues to grow its store base roughly 8 percent a year.

Meanwhile, Kinney's sales continue to grow at a much faster clip, up some 17 percent in 2004 to $457 million. In the smaller markets up North in the heart of Kinney Country, as they call it, it is by far the No. 1 pharmacy retailer, accounting for almost 40 percent of pharmacy sales in the college town of Plattsburgh, N.Y., and more than 50 percent of the market in Ogdensburg-Massena. And as it expands into the larger markets further south, such as Syracuse, N.Y., where it has made a concerted push in recent years, Kinney is coming on strong, making up ground on the big chains. Currently, Kinney and Rite Aid rank at No. 3 in Syracuse, with roughly 12 percent of total pharmacy sales.

Driving the growth has been a slate of big-chain programs and initiatives that have kept the chain relevant, particularly as it targeted expansion in bigger, more urban markets like Syracuse, which is about six times bigger than Kinney's next-biggest market, with a full-time population of more than 650,000 people that gets even larger in semester.

It may be a bit unusual for a regional player to operate its own PBM. But for Kinney Drugs, it helps keep the chain a viable player in pharmacy. Kinney's PBM, called ProAct, was established to help small employers in the area. "We've had some sort of pharmacy benefit management in place for about 11 years," noted Dan Villa, ProAct president since February. ProAct was formally incorporated some six years ago.

While the chain also operates a mail order operation through its PBM division, having an in-house mail order operation doesn't necessarily rule out mail order as a threat. "There was some skepticism [some] years ago on how well a patient would adapt to mail order," Craig Painter, Kinney Drugs president and chief executive officer, told Drug Store News during an exclusive interview. "Well some of them are adapting just fine."

There are times when it makes sense, Painter acknowledged--especially considering the cost-sensitive nature of pharmaceuticals today and the money that can be saved directing chronic medications through a lower-overhead business like mail order. "Mail order is here to stay," he said. "The retail setting needs to come up with strategies that will allow them to survive in that market.... We have to find ways to make it economically feasible to provide 90 days at retail."

While the threat of mandatory mail programs exists for all pharmacy retailers, it is mitigated at least somewhat by the dynamics of Kinney's core markets: largely rural without many large employers. But that could soon change, Kinney executives fear--particularly as the chain continues its downstate expansion into larger markets like the Albany, N.Y., capital area, which is targeted for expansion. "We don't have a lot of those large employers, but [mandatory mail] is now filtering down to the mid-sized and smaller employers," observed Bridget-ann Hart, Kinney's chief operating officer.

The Kinney ValueCard loyalty program is another example of how Kinney uses its small-chain sensibilities and connectedness to its core consumers to act like a big chain. The program is primarily used to deliver in-store discounts, as well as create special "savings groups," such as young seniors ages 55 and older and "Kinney Cares for Kids" members, families with children younger than 6. Loyalty-card holders receive a 10 percent discount on all Kinney private label merchandise and are eligible for the chain's "Dollar Days" savings, a program that changes monthly.

The next step for the card program is mining the data, and Kinney currently is developing the systems it will need to make sense out of that transactional data, explained Mark Martinchek, Kinney's director of retail marketing. The goal is that within the next year, Kinney executives will have a better understanding of individual consumer needs.

Another contributing factor to its dominance in its core markets is its efforts to stay connected to the communities it serves. Major Kinney branding efforts include local "Kinney Nights" at minor league baseball stadiums, including programs with the Toronto Blue Jays' AAA-affiliate Syracuse SkyChiefs and the Washington National's A-affiliate Vermont Expos. Kinney also sponsors activities with minor league teams like the Syracuse Crunch, a farm team for the National Hockey League's Columbus Blue Jackets.

The Kinney sports connection doesn't stop there. The company also sponsors NASCAR drivers Bob McCreadie in New York and Brent Dragon in Vermont. In his 60s, McCreadie is somewhat of a local celebrity on the racing circuit and frequently appears at new Kinney store openings to sign autographs.

For its merchandising strategy, Kinney is all about convenience. A customer walking in through the corner entrance is some five steps away from a quart of milk, a six-pack or a bag of chips. While many chains continue to expand the consumables categories, for Kinney, it's even more strategic, as the drive to the nearest supermarket could make Kinney a preferred fill-in grocery choice for customers.

"We've achieved a nice balance, certainly, as a health service provider being our primary reason for existence," Martinchek said. "And we couple that with [items] that people need to use every day." The convenience position drives frequency, Martinchek said, increasing visits from two to three times per month to one or two times per week.

The chain currently is test-marketing four freezer-door facings showcasing a deeper selection of popular frozen food items..

Kinney has a deeper selection among several other categories in its average 9,700 square feet of retail space, such as seasonal products, noted David McClure, vice president of retail operations. The 110 linear feet of toys would be another example, or the three racks of discounted clothing in the form of T-shirts and sweatshirts. Kinney offers 1,200 square feet of clothing in two of its stores, McClure said.

Technology, such as digital photography, typically takes its time in expanding into more rural centers, yet Kinney already has set up digital printing throughout its stores with its partner Konica Minolta. Kinney also offers an online photo service, where customers can order prints to be picked up later in the store and has one-hour photo labs in more than 40 of its stores.

In addition to its photofinishing services, Kinney also offers an extensive line of 16 digital cameras--most average for around $70, with one as high as $219.99.

And Kinney currently is transitioning its private label program--with some 750 SKUs--from the Kinney brand name to the Premiere Value brand, a private label brand distributed across the members of the Chain Drug Consortium.

Community focus stems from chain's longtime family history

With wooden signage punctuating Kinney Drugs' offerings throughout the store, the chain has managed to slip in a drug store with all the modern-day conveniences dressed with a country store look and feel. It's homey. The pharmacy counter stands a little higher than waist level, and with no glass separating the pharmacists from the patients, it makes the pharmacists that much more accessible.

While the chain wants the look of its stores to convey the image of the hometown drug store chain, it also speaks to its long, venerable history. Kinney Drugs celebrated its 100th anniversary two years ago.

Burt Orrin Kinney, an Albany College of Pharmacy graduate, opened the doors of the first Kinney Drugs in 1903--a location that is still part of Gouverneur, N.Y.'s downtown business district. The second store of the Kinney chain wasn't added until 1928 when the founder's son, Harold Kinney, expanded to Massena, N.Y.

Some 40 years after the first store opening, Kinney Drugs began expanding into shopping centers that featured plenty of parking, a retailing trend that took hold after World War II. It was during this period that Kinney Drugs moved into Vermont.

The Kinney Drugs distribution center, which now stands at about 135,000 square feet, was first built in 1962.

The Kinney family sold its interest in Kinney Drugs to its employees in the mid-1980s, in lieu of becoming acquisition fodder for the national chains. That means Kinney currently has more than 2,200 owners.

And those Kinney people take that ownership commitment seriously. "We remain a very close-knit organization even as we grow," Hart said. Indeed, the average length of service for Kinney's executive team is 17 years. At the store management level, it's 12 years--and that's after you take into consideration the company's recent growth spurt in the past four years.

In the 1990s, Kinney Drugs began pulling away from those shopping centers it populated so liberally in the 1940s and 1950s and relocated its stores on prominent corners with free-standing locations. Today, 70 percent of the chain's store base is free-standing.

And still today, Kinney expresses how much it cares about its community. The chain, along with a few other groups, has donated $500,000 through the Kinney Foundation, its charity arm, to help construct a children's hospital in Syracuse, N.Y. "The foundation is a fairly new organization that's growing," said Owen Halloran, vice president of pharmacy marketing and professional services at Kinney.

Expansion shapes competition plan

Key competitors in the upstate New York and Vermont markets that Kinney serves include both Rite Aid and Brooks-Eckerd, with Walgreens on its way.

"We have several new Wal-Mart supercenters slated to come in different areas, and the dollar stores just continue to fill in any open [retail] holes," noted Mark Martinchek, Kinney director of retail marketing.

But no matter. Kinney has placed its own expansion plans into motion--growing its pharmacy influence out east, west and south to what will be more than 100 stores in the next five years.

"That five to six store addition [per year] works well right now into our economic model ... but also coming online three or four years down the road to add profit," commented Kinney president and chief executive officer Craig Painter. "There's not a [significant] influx of people that are coming into our market areas. Our challenge is to win that customer and continue to earn their loyalty."

Perhaps for that reason Kinney is exploring adding gas sales to its convenience quotient, despite escalating gas prices along a slim-margin business.

Kinney is developing a 14,000-square-foot prototype in Seneca Falls, N.Y., scheduled to open next month. The chain plans to open its first Rochester-area store in Canandaigua, N.Y., next month.

While Walgreens and others are looking to begin expansion into smaller metropolitan areas, so, too, is Kinney, growing from its rural base into suburbia. In the coming five years, Kinney is hoping to develop its Vermont store base and to expand with about five to six new stores per year.

The chain contracted with an agency more than a year ago in an effort to freshen its image among its current markets, as well as "to develop an aggressive plan in support of our new stores in new markets," said Martinchek.

Most recently, Kinney acquired three Hill Drug Stores, marking its entry into Ithaca, N.Y., a market of 30,000 consumers 45 miles south of Syracuse, N.Y.

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