Rise and fall of the Eckerd empire

This article "Eckerd: End of an empire" from the St. Petersburg Times details the "Rise and fall of the Eckerd empire: Jack Eckerd's innovation created a colossus and Florida business icon. But then it didn't adapt quickly enough," by MARK ALBRIGHT and CHRIS TISCH (Published April 11, 2004)

As the two major companies that bought Eckerd Corp. pick over the remains of the once-proud Florida chain, it's easy to forget what an amazing American success story Eckerd once was.

Eckerd's sale, after the company's years of declines, also is a stunning business tale -- a story of how a company that revolutionized the pharmacy business slid steadily from its place as smart innovator to a firm that was way too slow to keep up with rapidly changing technology and unable to transform itself beyond a frantically assembled patchwork quilt of disparate smaller chains.

Charismatic Jack Eckerd's creation was a model for the modern American drugstore. The chain became the go-to druggist in retiree-rich Florida in the 1960s after it pioneered senior citizen discounts for prescriptions and over-the-counter drugs. Eckerd's two-prints-for-the-price-of-one deal turned photo processing into a profit center rather than just a traffic generator. The chain's array of store label merchandise - everything from Eckerd Aspirin to Advantage oscillating fans and Wheat-a-Vim vitamins - became such quality names that customers ranked them with nationally advertised brands.

Over the course of a century Jack Eckerd and his family parlayed collections of small local chains into a fortune and a colossus that at its peak was the nation's second largest drugstore operator, before J.C. Penney Co. finally threw in the towel after seven unsettled years of ownership.

Indeed, last week's $4.523-billion breakup and sale of more than 1,200 Eckerd stores to CVS Corp. and 1,500 others to Canadian Jean Coutu Group signaled the end of Eckerd in Florida and other Sun Belt states after a 52-year run. It also ends the last traces of an entrepreneurial family legacy that dates back to 1898. Under Coutu, the corporate headquarters will leave Largo for Warwick, R.I., as the new Canadian owners try to revive the tarnished Eckerd brand in 13 other states clustered from Georgia to upstate New York.

Yet Eckerd's unraveling did not happen overnight. The problems and mistakes started out small, then festered after years of inattention. Ultimately, they snowballed in the past seven years until rivals exploited them.

"Eckerd's leadership over the past two decades was marked by turns of complacency, arrogance, indecisiveness, a disregard of the pharmacy and lack of knowledge of what a promotional drugstore should stand for," summed up David Pinto, editor of Chain Drug Review in one post mortem.

In the end, many of the people who created the modern drugstore weren't that good at running a modern business.

The transformation

Before Jack Eckerd came along, drugstores in Florida were cramped little shops, usually no more than 1,000 square feet. Products were stacked high along the walls or behind the counter, sometimes so out-of-reach that pharmacists needed a long-handled hook to fetch them for a customer.

This is the way drugstores had been for decades. That included drugstores in the northeast and North Carolina owned by Eckerd, his father, J. Milton Eckerd, and his brothers.

In 1947, Eckerd heard the formula was being meddled with in some California drugstores, and with great success. Eckerd flew west and toured a PayLess Drugstore in Oakland and another store in Los Angeles. The first thing Eckerd noticed: They were packed with shoppers, many of them pushing carts full of merchandise.

He saw people buying cosmetics, candy, stationery and housewares. And drugs, too. The stores were huge and spacious and looked a lot like supermarkets. These California stores were spawning a retail revolution in which drugstores served as self-service mega stores, much like discount stores later would in the 1960s. Eckerd went home and tried to apply the same idea to his family's stores, but his father resisted.

In 1952, Eckerd bought three drugstores in the Tampa Bay area for $150,000. He borrowed the money from his half-brother, Ken. Eckerd followed the successful California model by stretching aisles from the entrance to the pharmacy counter in back, then filling shelves and gondolas along the way with an assortment of products, including soaps, beauty supplies, plumbing tools and fishing tackle.

As those stores turned a profit, he opened others in the Tampa Bay area that were 10 times the size of his competitors' stores and offered an assortment of items that other druggists didn't have room to stock.

That wasn't all Eckerd did to grow his business.

He was the first to offer senior discounts, which made him a hero to Florida's swelling elderly population. He offered 2-for-1 photos, great for tourists and snowbirds who could send a photo back home and keep one for themselves.

Eckerd, whose father was one of the first discount druggists up north, also clipped his own prices so much that he violated the state's fair trade rules. When judges threw out the law after manufacturers dragged Eckerd into court, Eckerd was seen as a champion for consumers. People wanted to shop at his stores.

Then in 1959, Eckerd brokered a deal to open units next to Publix stores, at the time the fastest-growing grocery chain in Florida. Squatting next to groceries was key to drugstores then because it increased traffic.

Eckerd's stores doubled to a dozen in Tampa Bay, but he wanted to build more. In 1961, he went public and raised $2-million by selling stock.

Little did investors know it, but Jack Eckerd's company would reach record sales and profits for 21 years in a row. A $1,000 investment in Eckerd in 1961 would be worth $158,000 three decades later.

For the next 16 years, Eckerd would double in size every two years. That would include expansion into several southern states, including Texas, which would eventually become Eckerd's No. 2 state.

Eckerd dabbled in diversity, buying a chain of department stores, a candy company, a food-products manufacturer and a security firm. None did as well as the drugstores, but they weren't a major drag on growth, either.

By 1971, Eckerd Drug had filled its 50-millionth prescription. A year later, Eckerd acquired his family's drugstores in Delaware. The company's sales that year were $334-million and Eckerd predicted $1-billion by 1980.

By this time, Jack Eckerd was becoming more than just a Tampa Bay business icon and his interests were straying beyond his company. In 1971, he pledged more than $10-million to bail out debt-ridden Florida Presbyterian College, which trustees months later agreed to rename Eckerd College. He also launched programs for troubled youth and gave to the arts community. His support built Ruth Eckerd Hall in Clearwater, named after his wife.

He ran for public office three times, losing each election. In 1975, President Gerald Ford asked him to lead the Government Services Agency in Washington, D.C., which he did for two years.

"When I returned from Washington, I hardly even considered going back to the corporation on an active basis," Eckerd later wrote in his book, Eckerd, which was published in 1987 by Fleming H. Revell Co. "It was clear to me that the part of my life devoted to leading the Eckerd drugstore business was over, and I began looking for other mountains to climb."

Eckerd remained on the board of directors, but the company was so big that he no longer felt in touch with the operations. Eckerd was a man who enjoyed being close to the stores and the employees.

In later interviews, Eckerd talked about the joy of moving a slow-selling display of bouncing-balls from the top shelf to the bottom, where kids could grab them and pester their mothers to buy them. The balls, of course, sold out.

But with a business chugging toward 1,000 stores, executives spent their time pleasing analysts and stockholders. Where to put the bouncing balls was the least of anyone's worries.

As Jack Eckerd gradually exited in the early 1970s, the reins of the company were handed to his trusted second-in-command, Harry F. Roberts, then in 1974 to Stewart Turley.

Described by underlings as "firm but fair," Turley was recruited personally by Eckerd because of his background in manufacturing and personnel at a time when the Teamsters were launching an organizing drive. Turley would lead Eckerd for 22 years.

In 1977, Eckerd had become the drugstore colossus of the South when Turley orchestrated a merger with Eckerd Drug of North Carolina, which had been founded by Jack Eckerd's brother-in-law, Ed O'Herron Sr. Eckerd was now the second-largest drugstore chain in the nation. A year later, sales topped $1-billion.

But that year also showed the first sign of overzealous expansion, albeit slight.
In June 1978, Eckerd closed nine of its stores in Denver because they weren't competing. Five months later, Turley told analysts sales were "somehow softer" than in previous months.

Like many prosperous retailers of the time, Eckerd turned itself into a retail conglomerate, which later was deemed a mistake. Eckerd branched into department and clothing stores, bought a candy company and opened a chain of surgical supply stores, then made its most costly error in 1981 with the purchase of American Home Video Corp., an early entry in the VCR-inspired consumer electronics craze.

"Back then Wall Street wanted diversified conglomerates," Turley said. "But we probably did get spread too thin and diverted resources that should have been allocated to the drugstores."

The Denver company sold video and computer items, promising ventures in the early 1980s. It had exploded from two stores to 106 in two years, and some experts predicted the industry's growth would rival the television boom three decades earlier.

Consumers put the revolution on hold when a recession hit. American Home Video lost millions and sapped Eckerd of capital that could have gone to upgrade the drugstore chain's computer systems. This would haunt Eckerd for two decades.

"The thought back then was diversification so all your business wasn't in one interest," said Ken Banks, Eckerd's former marketing director. "What it did was it not only took your eye off the ball, but it also took a significant amount of capital to get into these other businesses."

In May 1982, Turley told analysts profits would fall 10 percent, Eckerd's first year without a gain.

Rival Walgreens eclipsed $2-billion in sales that year and invaded Florida. Another chain, Revco, also moved in. Albertsons began putting pharmacies in its stores, making grocery stores competitors rather than partners.

Eckerd's drug sales slumped in 1983. An aggressive advertising campaign chewed profits. Analysts said customers came to Eckerd's to buy items on sale, but didn't buy much else.

Analysts noted Eckerd's was beginning to fall behind the times. While Walgreens stores had computers linked to share prescription information in 1984, Eckerd wouldn't even have scanners at the check-out until 1995.

As big retailers flocked to use computerized tracking to make ordering and inventory distribution more efficient, Eckerd merchants could rely only on projections based on sales in a few hundred stores to know what was selling and where.

The technological gap that Eckerd began to lose to competitors in the 1990s grew into a chasm within a decade.

Its competitors knew in real time what was selling in every store and at what price. Eckerd merchants had to keep making educated guesses in both buying and deploying merchandise. While Eckerd had to funnel goods through its own distribution center network, competitors were equipping their suppliers to ship directly to stores, skipping an entire step in the logistics of keeping stores stocked.

Eckerd's inability to keep track of its merchandise was blamed for the company's loss rate - goods that disappear somewhere within the system - remaining stuck at almost 3 percent of sales. That's about a third higher than the industry average, or about $80-million in lost profits.

Customers, too, noticed the technology edge. Eckerd's difficulty in knowing what was selling and when was blamed for stores being out of stock on high-demand items. Customer service also suffered because store employees had to spend extra time sorting out errors.

Walgreens had a complete inventory tracking system chainwide by 1995. Eckerd's version is up and running in 650 of 2,800 stores, with a plan to finish the job in 2005. That's also when Eckerd planned to be able to access a patient's medical history at any store. Walgreens installed such a system 20 years ago.
In fact, some small chains that were purchased and became Eckerd stores had to replace newer computer technology with Eckerd's older versions.

Eckerd was not spending money or keeping current on innovations in technology because the company was focused on other issues for two decades, like paying down debt, adapting to dramatic change in pharmacy and trying to get back into the real estate arena.

After profits plunged 49 percent in the third quarter of 1985, Eckerd was targeted for hostile takeover that summer by the Dart Group Inc., a Washington, D.C., bookstore and drugstore operator, which bought 5 percent of the company stock for $46.5-million. Like many corporate raiders of the 1980s, Dart's chairman, Herbert Haft, saw easy money staging a takeover of a company with weakened defenses. Eckerd was bloated with marginal operations in too many industries. Its stock price was low. So he bought a small stake, became a nuisance by threatening to assemble a bigger share and waited for Eckerd to borrow deeply to pay him a premium to go away.

A month later, Eckerd unloaded American Home Video to Tandy, sold its department stores and bought out the Dart Group.

Soon after, Eckerd announced it was for sale with Turley in charge. Unable to find a white knight, a group of investors - including about 25 Eckerd managers - took the company private. That left Eckerd saddled with $1.2-billion in high-interest debt owed to the new owner, Merrill Lynch Capital Partners. Gone was Jack Eckerd, who sided with the stockholders and walked away with $36.4-million.

"For the first time in almost 50 years, I owned no part of an Eckerd drugstore," he wrote in his book. "The fact that unsatisfactory performance by management and the board of directors (on which I played a prominent role) was responsible didn't make it any easier."

Still, he planned to keep close to the company.

"As long as that name is up on top of those drugstores, you're going to have a hard time shaking me," he said.

In fact, even after Eckerd's ties to the company were severed, he still stopped in the stores and shook employees' hands, said Les Smout, the Eckerd family's longtime financial adviser.

"The love was still there even though the ownership wasn't," Smout said.

The buyout nearly quadrupled Eckerd's $400-million debt, which slowed expansion to about 50 stores per year. The hangover of the debt burden lingered for years and planted a few seeds that later would fester and haunt the company to the end. Eight years would pass before Eckerd could again open new drugstores as quickly as bigger competitors. Expensive technology investments were postponed that continued to force Eckerd to play catch up.

Turley methodically steered Eckerd back to health, but the chain limped for years while paying down debt. The advertising budget was cut in half. The pace of new store growth dropped from 100 a year to 25. Eckerd eked out its first annual profit since it had gone private - a tiny $3-million on revenues of $2.9-billion in 1989.

"When you go through a period of difficulty in business, it strengthens you," Turley said. "When things get better, you appreciate it."

Changing times

Eckerd faced a different landscape in the 1990s. Soaring prescription prices shifted the bulk of the pharmacy business from moms and cost-conscious seniors to huge managed care providers. In 1983 Eckerd got 5 percent of its pharmacy business from health insurance providers. Ten years later it was 80 percent.

The health insurers proved a tough bunch to please. They wanted lower prices and more stores closer to their policyholders' homes and workplaces. They also wanted pharmacists at the front line enforcing their cost containment rules on doctors and patients.

Against this backdrop, Eckerd was saddled with a collection of old stores in strip shopping centers shared with supermarkets and discount stores that were scrambling to open pharmacies of their own.

Turley's answer: cut costs and sign up more insurance carriers to provide Eckerd with a captive audience. Eckerd's reinvention as a health care store was reinforced in a new logo: the company name framed in a blue pill. "EckerdNomics" ad campaigns tried to counter perceptions Eckerd was too pricy.

Wall Street didn't buy in quickly. Turley's plan to sell stock to acquire the troubled Revco chain in the Midwest and Mid-Atlantic states fizzled. Then in 1993, after closing a distribution center and a management house cleaning that wiped out 600 jobs, Eckerd refinanced its mammoth bank debt and went public on its own.

Diversification remained a bad word. Visionworks and Insta-Care, a prescription drug delivery service for nursing homes, were sold. The big Eckerd photo processing lab was shifted to a contractor as was the computer department.

Many customers, however, were angered by congested pharmacy counters while Eckerd's played catch-up in technology.

Lines became common as swamped pharmacists coped with sorting out insurance paperwork and health plan rules that insurers wanted Eckerd to enforce. Some pharmacists, who took pride in being trusted community health professionals, griped that the patient was no longer the customer Eckerd aimed to please. The insurance companies, they said, were the customer.

Within a few years Eckerd would improve its technology to ease the pharmacists' job. Refill orders could be keyed into a touch tone phone, they automated pill counters and in 1996 Eckerd opened its own mail order pharmacy.

Lines may have eased at the pharmacy counter, but employees realized the company culture had changed and there would be no going back.

In 1994 Turley hand-picked his heir apparent, an articulate, English-born retail veteran named Frank Newman. He had headed Drug Emporium, a defunct Michigan chain of 113 stores. At Eckerd, Newman created a new store prototype that catered to time-stressed shoppers' desire for convenience. It featured drive-through windows, was laid out so shoppers could get in and out fast, and was built for major corners rather than strip shopping centers. About 400 grocery store food items were stocked so Eckerd could lock horns with convenience stores.

Eckerd was clicking again for the first time in a decade. It was the market share leader in the Tampa Bay area, Atlanta, Dallas/Fort Worth, Miami, Orlando and Charlotte, N.C., and a strong second in Houston, San Antonio and Birmingham, Ala. New store growth rivaled competitors, soaring to 150 stores a year. In 1995, Eckerd stock rose an impressive 32 percent. Two years after going public, Eckerd shares had quintupled in value.

There was little time for celebrating.

A new wave of consolidation swept over the drugstore industry. Insurance companies wanted bigger chains that served more states with more stores. Industry-leading Walgreens was about to surpass 4,000 stores. Despite the rush to build stand-alone stores and close obsolete ones in shopping centers, Eckerd had 1,700, virtually the same number it did after the hostile takeover a decade earlier.

Enter J.C. Penney

Through the 102-year history of J.C. Penney, every chief executive left one lasting contribution as his legacy to the future of the enterprise.

The last in a line of nine CEOs who spent their entire working career at Penneys, the folksy James Oesterreicher was no different when he took over as chief executive in 1996.

Eckerd was to be his legacy.

The drugstore industry was consolidating quickly, as big chains swallowed up other big chains. Penney's regional Thrift Drug, with 800 stores, was about to be marginalized as a new echelon of giant chains emerged with 2,800 or more stores. Oesterreicher hoped to capitalize on the easy sales growth by catering to the baby boom as it aged into its big prescription-buying years.

JCPenney department stores were coming off a good few years. So Oesterreicher's answer was to buy Eckerd Corp., a dominant name in the Sun Belt which meshed well with Thrift's presence across the Midwest. Oesterreicher bought up four other chains in New York and the Carolinas to further broaden the market.

The idea was to stabilize the ups and downs of Penney's department store business. Drugstores shifted from being a JCPenney side business to 40 percent.
Oesterreicher's buzz word was synergy. Eckerd stores would be a new point of distribution for the JCPenney brand. Copies of the JCPenney big book catalog would be sold there. Customers would have a new place to run up charges on their JCPenney credit card. Catalog desks appeared in Eckerd stores so shoppers could pick up mail order purchases.

"The problem was there never was any synergy," said Bill Hare, a former Penney speech writer who wrote a new company history called Celebration of Fools: An Inside Look at the Rise and Fall of JCPenney. "Nobody bothered to challenge the purchase because it was clear Oesterreicher didn't want to hear it."

By paying $4.4-billion in cash and $1.1-billion in assumed debt, Penney created the nation's second biggest drugstore chain with 2,800 stores in 23 states. Within months, however, Eckerd dropped to fourth as CVS and Rite Aid made deals to be even bigger than Eckerd.

At Eckerd headquarters 1997 was a transition year of chaotic disruption as J.C. Penney merged four chains and its Thrift Drug unit into one unit in Largo. About 500 managers lost their jobs. In addition to opening 250 new stores, teams fanned out to convert 1,100 stores in 10 states to the Eckerd look, rules and merchandise mix.

Most of it went off without a hitch, but the job was done so quickly mistakes were plentiful and long lasting. The worst was Eckerd's disastrous debut in Tidewater, Va. Eckerd bought 113 CVS stores that antitrust regulators had decided another rapidly consolidating rival could not keep. In its frantic zeal to keep the stores from closing even for one night, Eckerd killed customer trust and goodwill. Eckerd computers could not read the patient files. So each patient's medical history had to be rebuilt from scratch - even a customer who showed up for a refill on a prescription he had been taking for years. For days customers fumed up to an hour in lines. Eckerd airlifted in 150 pharmacists to help sort out the mess. The state Board of Pharmacy fined CVS $1.6-million for its role, but Eckerd got the black eye from customers. The embarrassed chain also paid a $100,000 fine for practicing pharmacy in Virginia without a license.

"I'm looking forward to a more normal year," a weary Frank Newman said at the end of 1998.

Nonetheless, Eckerd performed so well in 1999, and the Penney department stores so poorly, that analysts suggested Eckerd be spun off as a separate tracking stock to boost the shares of the parent company. Penney executives promised to consider it when Eckerd next reported back-to-back quarters of strong and improved performance.

That never happened.

In 2000 J.C. Penney auditors revealed Eckerd's good performance had been a bit of an illusion because the company had been underreporting its inventory losses to shoplifters and employee theft. That whacked $74-million a year from the company's profits. To prop up its profitability Eckerd closed 277 of its 2,900 stores as chronic money-losers only three years after they were acquired.

None of the highly touted synergies paid off. A test of JCPenney catalog desks inside 250 Eckerd stores was quietly shelved. The extra drugstore business mattered little once J.C. Penney sold its credit card business.

Oesterreicher's vision of the marriage showed its dark side. Eckerd executives complained shares of their once high-flying stock had nosedived because of Penney's department stores. Many lost huge amounts of their family savings. Penney managers groused the string of Eckerd surprises undermined their own division's turnaround. Then Newman abruptly resigned in late 1999 to take over a startup e-commerce venture.

To keep critics calling for Oesterreicher's ouster at bay, Penney's annual meeting a few months later was moved to a warehouse in a Kansas City suburb. About 100 critics made the pilgrimage anyway. "Somebody sure needs to be jacked up," said Gary Mayfield, a retired Penney store manager.

A one-time Neiman Marcus CEO credited with guiding Federated Department Stores Inc. out of bankruptcy, Allen Questrom months later replaced Oesterreicher at the helm of J.C. Penney. He began a sweeping, five-year overhaul of Penney's department store business. By the fall of 2000 he installed Wayne Harris, a supermarket industry veteran who was fresh from overseeing the liquidation of the 200-store Grand Union chain in New Jersey, as chairman and chief executive at Eckerd. Questrom confessed he didn't really see how Eckerd fit in Penney's long-range future. But he decided to give the chain one last chance before he would pull the plug.

Harris came up with a five-year plan based on strategies lifted from supermarkets to return profit goals to the drugstore industry average. CVS, the same group that ended up buying half of Eckerd last week, floated informal offers to purchase all of Eckerd for much less than the $4.523-billion the chain fetched four years later.

Eckerd's third CEO in three years, Harris attacked one of Eckerd's bigger weaknesses: the front end that sells nonpharmacy products. He closed the backstage storeroom and jammed the sales floor with merchandise stacked all the way to the ceiling. That forced shoppers to wander the cavernous aisles to get to the pharmacy counter. Eckerd's new slogan, trumpeted in bright color ads, became "Get More" to woo bargain hunters. In 2002 the changes paid off in increased sales and earnings, but critics mocked the circus atmosphere.

Customers complained about Eckerd's inability to keep all the below-cost specials in stock.

Meanwhile new store growth was sacrificed for the cash to convert older stores to the new look and beef up investments in long-delayed technology.

"In the end Eckerd failed to integrate all those chains into a single, consistent brand," said Walter Loeb, a New York financial consultant.

While Eckerd stopped building new stores, Walgreens and CVS flooded Eckerd strongholds in Florida and Texas with new stores. Insurance companies also began giving patients a choice of chains to fill their prescriptions, not just one. Many customers voted with their feet.

"It's not rocket science that customers will cross the street to shop a new store over an old one," Questrom said.

A decade ago Eckerd's 481 stores in Florida outnumbered Walgreens two-to-one. By 2003 each chain had about 600. But Walgreens' share of the Florida market in 2003 rose to 42 percent compared with Eckerd's 27 percent, according to Merrill Lynch.

By last year many customers and analysts said the advertised low prices promised in Eckerd ads were often cheaper at competitors' stores. Eckerd's sales performance slumped to the worst among the big four drugstore chains in the first three quarters of 2003. Harris hoped for improvement when Eckerd's first large batch of new stores opened. The chain's performance continued to weaken instead.

"The Eckerd brand equity always revolved around the pharmacist," said Ken Banks, vice president of marketing from 1974 to 1990. "You knew him for years. He went the extra mile for you. That's why you kept going back to the same store. That's been lost. They've been trying to get the customer into the store to get a deal on Coke or Pepsi."

Questrom said Penney executives mistakenly thought the worst of Eckerd's ills were solved when 277 stores were closed in 2000.

"We didn't fully understand how embedded some of the problems at Eckerd had become over the past 10 years," he said. "In the end Eckerd remained a patchwork of drugstore chains."What Went Wrong?

* Saddled with the big debt payments from a 1986 leveraged-buyout, Eckerd became an industry follower, not an innovator.
* Patched together as a series of acquisitions, it never functioned as single chain.
* It was unable to use technology to improve customer service.
* The chain did not build attractive new stores as fast as its competitors.
* It switched to supermarket tactics as a final desperation move.
* One former employee noted that now "everything is cluttered and they sell beer and wine and so forth, and (Jack Eckerd) would never have that in his stores."

Source: From the St. Petersburg Times. "Rise and fall of the Eckerd empire: Jack Eckerd's innovation created a colossus and Florida business icon. But then it didn't adapt quickly enough," by MARK ALBRIGHT and CHRIS TISCH (Published April 11, 2004)