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Kmart Pharmacy

Sears, Roebuck & Co.'s first risky leap into pharmacy retailing this spring could lure a much broader swath of customers to its stores. The opening of the first 25 Sears Essentials stores this spring may also serve as the first crucial test of the company's ability to leverage its pending merger with Kmart Corp. That merger is expected to clear final regulatory and shareholder approval late this month.

The 100,000-square-foot, off-mall prototype will debut in 25 former Kmart locations with pharmacies in 12 states, including densely populated markets like San Diego, Chicago and St. Petersburg, Fla., and smaller cities such as Nashua, N.H., Chattanooga, Tenn., and Warrenton, Va.

Sears Essentials will feature a wide range of both traditional Sears merchandise and the kinds of everyday health- and convenience-oriented merchandise found in drug and mass merchandise stores. The result will be a mix of pharmacy, health and beauty aids, paper and household products and other convenience items, along with traditional Sears department-store categories like appliances, lawn and garden, tools, apparel and home fashions.

The merger of Sears with Kmart--one of the nation's largest pharmacy retailers--will give a boost and much-needed pharmacy marketing and operational expertise to the new venture. Sears chairman and ceo Alan Lacy said as much, noting, "Following the proposed business combination with Kmart, Sears expects that the new off-mall stores will leverage Kmart's strengths including the retailer's experience, knowledge, infrastructure and scale, particularly in such categories as pantry, health and beauty, household goods and pharmacy."

Continuing the commitment to pharmacy retailing could pay off for the new company, which now ranks as the fourth-largest retailer in America. Despite more than a decade of relentless attack from Wal-Mart, Walgreens, Target and mail order pharmacy, Kmart has hung on doggedly to its spot as one of the nation's largest pharmacy and health care retailers. The chain is banking on its 1,150-plus in-store pharmacies to help promote its own return to health as it prepares to shift much of its operations to Sears' Hoffman Estates, Ill., headquarters.

As Kmart and Sears gear up for life as a combined entity, pharmacy will play a key role in revitalization efforts. In the face of withering competition for customers--and for the pharmacists to staff its stores--Kmart shed more than 500 stores with pharmacies over the past several years and saw the departure of two top pharmacy managers, Larry Hruska and Ron Chomiuk. Through that painful process, however, the chain maintained a commitment to the department with an increasing array of patient-care initiatives, a new pharmacy design, workplace upgrades and the rollout of a more powerful and fully networked computer system that allowed its pharmacists to access patient records from any store.

Just how the Sears acquisition will play out on the pharmacy side of Kmart's business remains unclear, but the expertise Kmart's pharmacy managers have developed in disease management, automation, pharmacy workflow and patient service over the past two decades could be a powerful asset as the Sears Essentials format takes root.

Over the past year, Kmart Pharmacy has made big strides with its successful introduction of disease management initiatives--particularly in diabetes care. By the end of 2004, the chain had capped a massive effort to train and certify all 2,400 of its pharmacists in diabetes management and related product categories. Pharmacists also gained additional training last year in how to boost sales and counsel patients in nutritional supplements.

In a telling demonstration of the importance of pharmacy as one of the essential pillars of Kmart's future success, Kmart has also developed a new store format that repositions the pharmacy and drug store department in a prominent, high-profile position at the front of the store near the entrance. The new location is aimed at driving sales in some of the highest-margin categories in the store, like generic drugs, vitamins and other drug store-related categories like greeting cards and cosmetics. But it's also a way to better leverage the role of some of the most highly paid and highly trained professionals in the store: Kmart's 2,400 staff pharmacists.

The new store prototype, which debuted last fall in White Plains, N.Y., among other markets, makes it easier to showcase both the pharmacy anchors and product categories like health and beauty care and vitamins/nutritional supplements. "The new prototype does allow you to show [customers] overall assortment and the different categories that we offer right when [they] walk in, instead of weaving around on a racetrack to find those departments," noted Peter Whitsett, vp and gmm for food, drug, pharmacy and hard lines.

Kmart's drug store team has also pushed sales efforts in high-margin vitamins and nutritional supplements. The chain's recently redesigned Web site now offers a "Wellness Rewards" program in partnership with one of its primary nutritional vendors, Nature Made. Site visitors can amass Wellness Rewards points with every purchase of Nature Made vitamins or Nature's Resource herbal supplements, bank those points in their own account online and redeem them for coupons. They can also scroll through the site's Nature Made Wellness Advisor for a host of information about nutrition, disease prevention and other topics.

THE NEW RETAIL LANDSCAPE

Rank   Company                         Previous       2004 Sales
                                     year ranking     in billions

   1   WAL-MART STORES INC.                1            $285.2
   2   THE HOME DEPOT INC.                 2             $73.1
   3   KROGER CO.                          3             $56.4
   4   SEARS HOLDINGS CORP.             7/11             $55.8
         Sears                             7             $36.1
         Kmart                            11             $19.7
   5   COSTCO WHOLESALE CORP. (1)          6             $47.2
   6   TARGET CORP.                        4             $46.8
   7   AHOLD USA                           5             $46.2
         Retail                                          $27.4
         Foodservice                                     $18.8
   8   ALBERTSON'S                         9             $40.0
   9   WALGREEN CO. (2)                   11             $37.5
  10   LOWE'S COMPANIES                   12             $36.5

Rank   Company                      2004 Net income   Store count
                                      in billions     at year end

   1   WAL-MART STORES INC.              $10.3           4,906
   2   THE HOME DEPOT INC.                $5.0           1,890
   3   KROGER CO.                       ($.128)          2,532
   4   SEARS HOLDINGS CORP.             ($.593)          3,804
         Sears                          ($.507)          2,300
         Kmart                            $1.1           1,504
   5   COSTCO WHOLESALE CORP. (1)        $.882             442
   6   TARGET CORP.                       $3.2           1,308
   7   AHOLD USA                            NA             540
         Retail                             NA             540
         Foodservice                        NA              NA
   8   ALBERTSON'S                       $.474           2,500
   9   WALGREEN CO. (2)                 $1.360           4,582
  10   LOWE'S COMPANIES                  $2.18           1,087

(1) FY ended 8/29/04

(2) FY ended 8/31/04

Source: Company reports

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