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Shoppers Drug Mart (Deborah Baic/Deborah Baic)
Shoppers Drug Mart (Deborah Baic/Deborah Baic)

Shoppers Drug Mart's quest for an elixir Add to ...

As an executive at a top New York drugstore chain, Joe Jackman made a point of checking out Shoppers Drug Mart outlets in Canada as a model for his U.S. business.

Mr. Jackman, former chief marketing officer at Duane Reade and today a consultant for its parent, U.S. pharmacy giant Walgreen Co., still takes cues from Shoppers. He keeps an eye on its spacious stores, its lucrative private-label and beauty offerings and revenue-boosting rewards program - key parts of a formula that has fuelled one of the hottest Canadian retail growth stories of the last decade.

Yet he's also aware that the very model that steered Shoppers to a profit of $585-million in 2009 from $118-million a decade earlier needs to undergo radical surgery, as new drug reforms begin to derail its prescription for growth.

"Shoppers is one of the chains retailers around the world, not only drugstores, look to for inspiration," said Mr. Jackman, who currently runs a Toronto-based retail consultancy. "The bad news is there isn't as obvious a path to future growth."

The Canadian retail star that could do no wrong is now at a critical crossroads. Shoppers is grappling with profit-crushing generic drug changes across Canada - particularly in the key Ontario and Quebec markets - that are forcing it to rewrite the business strategy. At the same time, a growing array of rivals ranging from discounters to grocers are dashing to steal away sales by bolstering their own pharmacies.

But just when strong leadership is crucial to steer Shoppers on the bumpy road, it is struggling with the sudden resignation of its chief executive officer, Jurgen Schreiber, effective Feb. 15. He had honed the chain's strategy and was just starting to prepare for a new era of lower pharmacy profits by scaling back store expansions and other costs, while counting more than ever on selling lipsticks and milk to rev up revenues.

On Thursday.

Among potential candidates for the CEO position are John Lederer, former CEO of Duane Reade (and previously president of Loblaw Cos. Ltd.), as well as Joe Magnacca, currently president at Duane Reade and a veteran of Shoppers and Loblaw, analysts suggested.

For Shoppers, the drug reforms underscore a productivity challenge. Its more spacious, snazzier stores make them an attractive destination for customers. But up until now, the bigger stores took up to three years to generate positive cash flows, Mr. Caicco said. Today, with reduced profits from generic drugs, Shoppers will find it difficult to make those gains. The vast stores also saddle the company with 25 per cent lower non-pharmacy sales per square foot than rival Jean Coutu, he said. On the flip side, an even bigger wrinkle may be Shoppers' smaller stores. They have little room for non-pharmacy merchandise, such as high-margin cosmetics and private labels, which Shoppers is betting will help offset generic-drug losses. Shoppers' return on investment in the smaller outlets could be slashed to about 5 per cent from more than 20 per cent, Mr. Caicco warned.

Mr. Schreiber had started to address some of the issues. He spearheaded a makeover of Shoppers' small stores that seems to entail cramming in more cosmetics, private labels and food. He moved to fill all stores with more offerings for babies, pets and health food aficionados, and expand displays of high-tech gadgets such as mobile phones. He even had a plan to introduce financial services.

While food is a low-margin category, it draws consumers to stores more often than other kinds of products. Shoppers should consider spotlighting more fresh sandwiches and takeout fare to keep customers coming back, the Toronto-based consultant Mr. Jackman said. "There's a big prize to getting food right."

Customers who buy food spend three times more than those who don't, Mr. Schreiber has said. Designing stores in ways to force shoppers to pass through the food - and other unintended - aisles could also entice them to step up their spending, Mr. Jackman said.

Mr. Schreiber hadn't abandoned finding savings at the pharmacy counter. Last year he launched private-label generic drugs in most provinces as a way to shave costs, partly by shipping the products in pre-packaged containers to save pharmacists from the time-consuming task of bundling medications. On Friday, he won a victory on this front: an Ontario court backed a challenge by Shoppers and Katz to the Ontario government's ban on these private labels.

Mr. Schreiber had other expansion tactics in mind, including snapping up small rivals that may not survive the reforms. Not all his initiatives panned out. His high-end Murale beauty chain that he launched in late 2008 performed weakly; it's a distraction and should be ditched, Mr. Jackman said.

Still, Mr. Schreiber had positioned Shoppers as a savvy player, just the type of retailer that a big U.S. chain - particularly Walgreen - may want to scoop up, said Mr. Ford, the Guelph-based consultant. A takeover would add to the recent wave of foreign players swooping in on Canadian retailers. "At some point in time I think it's inevitable," Mr. Ford said.

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