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In retailing, it's not necessarily how big you are, but how big you are in the markets you serve. And for Lewis Drug, with its headquarters in Sioux Falls, S.D., that makes for a very large fish in a relatively small pond whose population is 186,000.

However small, it is a market that was named the No. 1 best place to do business by Forbes this year, thanks in large part to a rocketing growth in personal income, the low cost of doing business and a low crime rate. That makes for a very attractive market for big retailers like Walgreens and Wal-Mart, national chains that have penetrated just about every major metropolitan area there is worth penetrating and that are now looking for smaller, profitable markets to enter.

Both chains already have footholds in Sioux Falls--Walgreens operates four stores here, and Wal-Mart has two supercenters here--and both chains are continuing to expand into the market. And while that concerns Mark Griffin, president and chief executive officer of Lewis Drug, which controls more than 36 percent of total pharmacy sales in the market, according to Chain Store Guides data, the chain is focused on challenges much bigger than any retail competitor could ever pose. Chains like Lewis have something big retailers will never have, Griffin told Drug Store News in an exclusive interview.

"The thing that differentiates the regionals [from national chains] is innovation: We can turn on a dime," Griffin remarked. "Our biggest challenge, like most retailers right now, is adapting to the marketplace, evolving the marketplace. And if you're in the drug store business, adapting to what's coming down the road [means dealing with changes in] the Medicare/Medicaid area, which is going to be a key element for success going forward. Fortunately, in the markets we're in, we have favorable market share. We don't want to lose that; we want to grow it."

To hold its share, the chain has introduced several key programs and initiatives aimed at keeping Lewis atop the local leaderboard in terms of pharmacy sales--and many of those programs revolve around the changes in Medicare.

For one thing, the new Medicare Part D drug benefit may represent an expansion opportunity of sorts for Lewis. "Once Medicare Part D becomes a reality, a lot of people who are running independent pharmacies are going to have a tough time because of the cut in reimbursement rates," commented John Devlin, regional manager for Lewis Family Drug, a division that includes 15 smaller-format stores. Much smaller than the original Lewis Drug store format, which runs about 40,000 square feet, at 8,000 square feet, Lewis Family Drug stores are still about twice the size of the typical independent pharmacy.

As expected, the introduction of Medicare Part D will impact significantly the number of cash customers, which will take a huge bite out of independents' gross profit margins. "So those 35 percent margin customers all of a sudden are going to be 15 percent to 20 percent," Devlin explained.

By contrast, chains like Lewis, which have enough space in the store to offset weaker pharmacy margins with more higher-margin front-end merchandise, have managed eroding pharmacy margins somewhat successfully for several years now. And of course, Lewis is better able to leverage its size when buying medicines than most independents can.

That's why Lewis executives are expecting an exodus of independent operators in the area looking to sell the business--even among the independents with vibrant pharmacy businesses. "We've been contacted by a few [independent operators] already," Devlin said. And that would add up not only to some potential file buys, but also the addition of more Lewis Family Drug stores.

And while chain drug stores across the country announce partnerships with in-store health clinic operators, such as MinuteClinic and Take Care, as part of the latest differentiating craze, Lewis Drug has been working for almost 15 years on this front. Although it's not the clinic-within-a-drug-store model that so many other chains are working on, it might as well be--the Sioux Valley Clinics oftentimes have their own entrance straight into the Lewis Drug pharmacy. A few of the chain's big 40,000-square-foot-plus Lewis Drug stores are located in small strip centers, where the only tenants are Lewis and Sioux Valley Clinic.

Another notable difference between the various in-store clinic operators that have emerged in recent months: Rather than nurse practitioners, Sioux Valley Clinics are staffed with teams of up to eight to 10 doctors or more who specialize in pediatrics and gynecology, among other specialties. That adds up to a lot more prescriptions than the in-store clinics can generate on average. MinuteClinic, Take Care and the others work off a set menu of basic services, such as diagnosing upper respiratory infections and other less-than-severe conditions.

Given Sioux Valley Clinics' patient base, many of whom will be getting prescription drug coverage for the first time because of the changes in Medicare, Lewis Drug executives expect the introduction of the Part D benefit in January will mean a significant increase in pharmacy business for the chain. "What's going on with Medicare and Medicaid is only going to enhance that [clinic partnership]," noted Griffin.

To help drive awareness of Lewis' presence in the local health care community, the chain conducts a number of free health screenings and educational programs, including ostomy screenings, cholesterol testing and diabetes screenings, as well as skin care seminars and nutrition counseling.

Lewis Drug also operates two long-term care pharmacies: one out of its home office in Sioux Falls and another out of Rock Rapids, Iowa, which serves 27 nursing homes in about a 60-mile radius. In addition to blister packing up to 200 prescriptions per day, Lewis' long-term care pharmacists in Rock Rapids also conduct nursing home consultations by reviewing medicine regimens for some 850 beds.

"What makes us successful is that we're involved with everything," commented William Ladwig, Lewis' vice president of professional services, except mail order--for now, that is. Lewis has been one of the strongest advocates in the group for developing a mail order option through the Chain Drug Consortium. "We have a very loyal clientele, but when that clientele is forced without their ability to change direction, that takes them out of the game plan."

And the chain also is test-marketing e-prescribing capabilities in one of its smaller markets. "As [e-prescribing] evolves, we're in the position now where we have the software in our system," noted David Nielsen, Lewis Drug director of corporate services.

Driving home its message of its strong connection to its hometown markets, the chain recently embarked on a new marketing campaign, "The Store Next Door." Springboarding off the familiar, all-American girl-next-door theme, the new tag line is printed on the 90,000 circulars it distributes each week, which recently received a high-gloss makeover. The chain has bought billboard space throughout downtown Sioux Falls, as well.

While the chain is working on several important initiatives aimed at growing its pharmacy business, Lewis' lifeblood--certainly the greatest source of its profitability--is its front-end business. Lewis derives a high percentage of its sales at the front-end of its stores, roughly 45 percent, driven by a merchandising strategy that takes a little bit of business acumen from a variety of specialty retailers. They're categories generally not found in the typical chain drug store environment: extensive home and garden sets that extend to the parking lots of stores, a vibrant DVD rental and sell-through business, an expansive electronics department, name brand clothing (jeans are a big seller) and a home furnishings business. Lewis is able to generate solid business in these categories because, in the markets it serves, it's a pretty long drive to the local Blockbuster Video or Pier 1 Imports or any number of the other specialty retailers that don't have stores in these areas because the population is too thin.

Lewis Drug customers also can buy a lottery ticket, pay their utility bills or pick up their dry cleaning (actually cleaned off-site, but Lewis does provide same-day service). The chain even operates Ticketmaster outlets and post offices on-site.

The odd combination of products and services makes Lewis unlike most other drug chains. For instance, a Lewis customer actually can buy a gift and a card and then have it gift-wrapped and delivered all under the same roof. (During the peak of Christmas shopping season, Lewis Drug postal centers each day can fill a semi-trailer with packages to be delivered.)

It also helped drive sales growth of 7.5 percent last year for Lewis, reaching $115 million for its fiscal year ended Feb. 1. It certainly makes for a different kind of drug store. For example, among its back-to-school offerings this year, the front page of Lewis' Aug. 27 circular featured an ad for a Nike hooded sweatshirt for $16.99; inside was a full page dedicated to furniture from its Pier 1-esque collection, ranging in price from $29.99 to $79.99.

Another key to Lewis' success has been a pricing strategy that comes in somewhere between Wal-Mart and the specialty retailers it emulates. Even if there were more Blockbuster and Pier 1 stores in its markets, Lewis would still undercut them. For instance, Lewis advertises video rentals, including games, at $1.43 per night compared with $3.49 or more at Blockbuster.

At the end of the day, Lewis understands the customers in its home markets better than its competitors likely ever will. For instance, the chain will introduce a new seasonal gift program modeled after famous Sioux Falls landmarks, such as a replica of St. Joseph's Cathedral. Part of the proceeds will be shared with the church, said Bob Meyer, Lewis Drug general merchandise manager.

Another strong example of how well tuned in Lewis is to the communities it serves was a key fold in Lewis' back-to-school program. This year the chain featured special corrugated cardboard displays in its stores with one-page shopping lists for parents provided from each local school, telling parents exactly what supplies their children would need, by grade. All of the items, of course, could be bought conveniently in the store.

Real estate expertise key to staying ahead

With the big chains coming, Lewis Drug president and chief executive officer Mark Griffin isn't spending a lot of time looking in the rearview mirror. Walgreens has four stores in Sioux Falls, S.D., with more to come. Wal-Mart has two supercenters in the market and is looking to open a third, Griffin told Drug Store News. Other pharmacy operations in the market include Hy-Vee and Kmart, which operate five pharmacy departments between them.

They all must contend with Lewis. With 63 years serving southeastern South Dakota, along with Iowa and Minnesota, Lewis Drug executives know a thing or two about the local real estate game. Lewis still controls more than one-third of pharmacy sales in the Sioux Falls market. "Because of the lack of population [density], you've got to be right on your bet," commented Griffin, who buys properties sometimes in anticipation of development to come.

The chain has a knack for securing prime corners years before the surrounding area has enough critical mass to justify a new store. The chain holds promising--albeit undeveloped--parcels of land down the street from a future group of hospitals slated to open in 2006, including a heart center.

Lewis Drug's home state of South Dakota--where it operates 18 of its 26 total stores--isn't too bad a place to call home. Sioux Falls recently was voted by Forbes magazine as the No. 1 best place for business and careers, as well as Money magazine's top 100 best places to live--and it is growing.

The influx of new residents presents an opportunity, as well as a challenge, however. Most of those new residents are familiar with national chains like Walgreens or Wal-Mart. They haven't necessarily heard of Lewis--yet. "Everything's about branding nowadays," acknowledged Griffin. "If we don't do our best job branding Lewis with the transient population that every community has ... we're not doing our job. When people move to this area, they've already heard of the national chains. We have to educate them on the Lewis brand, and that's one of our missions."

Family partnership lays chain's foundation

Lewis Drug has been serving Sioux Falls, S.D., and the surrounding communities since the height of World War II, breaking ground downtown with one of the region's first self-serve drug stores in 1942. Lewis Drug started out as a partnership between George Frederickson and Jesse Lewis. Four years into the operation, Lewis sold his interest to John Griffin, who was then manager of the downtown Sioux Falls drug store. A year later, a second Lewis Drug opened in Mankato, Minn.

A little more than 20 years later, Lewis Drug closed its first store and converted it to its headquarters, which since has been moved to Minnesota Avenue, just down the street from the current site of its Southgate location.

Most of the Lewis Drug executive team has served almost half as long as the company has been in existence, averaging 25 years of experience with the chain. These days, that kind of longevity is almost unheard of.

Executives point to the culture at Lewis--a culture that encourages a little autonomy among executives even as it grounds them in accountability. It's a culture that rewards strong work ethics even as it encourages life outside of the company. "We're a very open organization," said Mark Griffin, Lewis president and chief executive officer. "And people benefit from that because they feel better about the job they do."

Griffin, who took a leadership role with the company in the 1980s, helping his dad manage the pharmacy operation, credits his management style to his father, John, who was hired to manage the first Lewis Drug store and later partnered with Frederickson to expand the concept. Lewis Drug executives are given the opportunity to perform. It's a throwback management style that provides Lewis' leadership a little latitude without stripping them of support.

"We built in this company a source of excellence where people really respect Lewis Drug," said Gene Elrod, vice president of human resources and loss prevention for Lewis and a 36-year veteran of the company.

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