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Medic Drug: Adapting to a new retail climate - 2003 Annual Report

Michael Johnsen

Service is one of the key value propositions left that small-town drug stores can use to differentiate their stores from their bigger-boxed, national-reach cousins. The kind of service where the person behind the counter not only greets the a patient with a smile, but by his or her first name.

This is the premise Medic Drug was based on when Nat Lipsyc and Jerry Zlotnik opened their first store in 1961. And it's the premise the chain operates under today.

"When we came here years ago," remarked Zlotnik, executive vice president for the chain, "we saw that independent pharmacists worked hard to maintain their customer base through superior service. In those days, the people knew the pharmacist and liked the pharmacist; [those stores] had a friendly atmosphere."

But what the independents didn't have was the ability to compete on price. Lipsyc, Medic Drug's president, and Zlotnik thought that if they could provide that same level of personal service and offer a wide selection of products at lower prices, that would be their better mousetrap.

Today's retail climate, however, makes it somewhat tougher for the smaller chains to compete. Pharmacy margins are getting slimmer and slimmer under increased pressure from Ohio's Medicaid program, in addition to pressure from third party payers. "It's a different business than it used to be," Zlotnik said. "It used to be I'd be happy to do 100 percent [in] pharmacy [sales]. Now, I'd like to do 1 percent pharmacy and 99 [percent] out front."

And it doesn't help when local Rep. Sherrod Brown, D-Ohio, schedules regular trips to Canada so that senior groups can import Canadian pharmaceuticals illegally. "Its like anything else," Zlotnik commented. "The pie's only so big. Every time somebody takes a little slice out of it, no matter ii they're making a living doing it or not, it doesn't help [the pharmacist]."

These trips, combined with the storefronts sprouting up across the country promising to facilitate online transactions with Canadian pharmacies, make for an uneven playing field in the business of pharmacy, Zlotnik said.

And these days, even the front-end business is suffering from the current economic malaise, especially when you factor in competing mass discounters like Wal-Mart, which are more capable of attracting customers on price alone.

But that hasn't stopped Medic from making its d rug store format a destination center for value-hungry consumers. The chain first introduced a 99-cent concept some 12 years ago, Zlotnik said, and it's been a boon to the chain's front-end business since.

The chain features a 36-foot wall of 99-cent items and fills the gondolas facing that wall wit hi her-price d closeout items. The business does so well that Medic has one buyer dedicated to scouting nothing but closeout products.

Though the dollar wall only constitutes 4 percent to 5 percent of the chain's front-end sales, the concept pays dividends in other ways. "It's high margin," Zlotnik said. "And it brings the value concept alive in our stores." When consumers walk in and see something they p aid $4.99 for elsewhere and see it on sale for 99 cents at Medic, they come back, Zlotnik said.

And the pressures on both the back-bench and the front registers take a toll on small businesses as a whole. It gets more and more difficult to deliver that homegrown, neighborly service as the smaller chains look to reduce their overhead in such areas as payroll to make up for the tougher business climate.

"[Business] is much more difficult today than it was before because of the pressures of keeping payroll down," Zlotnik said.

In addition to keeping a close eye on the labor dollars, Medic makes biannual trips to Asia and actively seeks niche health care business opportunities, such as home health care an medicine supply contracts with nearby assisted living centers.

Recently, the Cleveland chain expanded its home health care business, a business model that has earned its own division within Medic corporate. "We have home health care specialists in most of our stores," Zlotnik said. Many of them are former nurses, and they are trained not only on how to operate home health care equipment, but also process the insurance claims for Medic patients.

Medic recently opened a closed-door facility to service assisted living accounts with blister-packed medicines and such. Medic also has a long-standing position in diabetes care with its Diabetes Care Plus program. As part of the program, a Medic pharmacist reviews a patient's medication regimen, both over-the-counter and prescription, for possible adverse reactions, treatment redundancies and proper dosage. The specialists can also recommend a number of diabetes care items.

Looking forward, Zlotnik believes the business model driving chain drug might need to make a metamorphosis. "I've said it many times. This industry has to look at itself and figure out how it's going to reinvent itself," Zlotnik said," because being a convenience store with a pharmacy doesn't make a lot of sense to me." Especially when many classes of the retail trade are positioning against that convenience concept--from gas stations doubling as convenience stores with sandwich shops to a burgeoning dollar store class of trade. "[Other retailers] are going to out-convenience us," Zlotnik said.

Anyone can be convenient, and many retailers are chasing that carrot, but Zlotnik is confident that service and price are much better ways to strike a point of difference. Today's baby-boomer seniors, unlike their aged parents, are not loyal to any particular class-of-trade, let alone loyal to a particular chain. "They don't feel any loyalty," Zlotnik observed. "Wherever it's convenient, they go in and get it."