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'Trench warfare' on horizon for pharmacies

Target Corp. is taking over Zellers stores in Canada and will open its own discount outlets by early 2013.


The pharmacy business is thriving in the face of a rocky economy and costly new drug rules.

Two separate announcements on Monday tied to drugstore businesses underline the growing interest in the field, even though it has been hit by new government generic drug regulations that pinch pharmacies' profits.

McKesson Corp., a major drug distribution firm, signed a $920-million agreement to buy the companies that supply marketing and other services to Katz Group's independent and franchised stores, including IDA Guardian and Medicine Shoppe Canada Inc. Katz also runs the Rexall and Pharma Plus drugstore chains.

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Meanwhile, a bidding war is expected to erupt among Shoppers Drug Mart Corp., and other drugstore retailers for the coveted customer prescription files of discounter Zellers, after U.S. discounter Target Corp. said it will not acquire the pharmacies within the Zellers outlets it is buying.

The latest developments show that pharmacy retailing is still attractive: it has a virtually guaranteed customer base as aging consumers snap up medicines and other necessities carried in drugstores.

With government and private plans covering much of customers' drug purchases, pharmacies are able to weather recessionary storms better than other retailers. But they also feel growing pressures of drug reforms, and competition in their other aisles, including from the arrival next year of Target.

Pharmacies "have a wonderful, golden, highly stable source of revenue as long as they recognize it should be the basis of a broader-based business," said Jim Danahy of consultancy CustomerLAB. "It is in such a state of flux now that the industry is nervous and active."

Analysts say there will be even further consolidation in the industry. Nick Loporcaro, president of McKesson Canada, said his company decided to focus for now on the independents and franchisees, which face "turbulent" times. "We're constantly looking for opportunities that fit in our overall plan," he said. "Our focus today is on the independent business."

With the decision by Target, which last year bought up to 135 Zellers leases to launch its own namesake stores by early 2013, rival pharmacies will race to snatch away Zellers' customer files for their own businesses, industry watchers predict. Mr. Danahy characterized the coming action as "trench warfare."

He estimated that the Zellers pharmacies are valued at between $2-million and $5-million each, with a pharmacy counter at most of the 273 stores. Zellers' owner, Hudson's Bay Co., has said it's looking at its options with its remaining Zellers, although observers think that they eventually all will close.

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Dominic Pilla, the new chief executive officer of Shoppers Drug Mart, suggested late last year his company is interested in picking up Zellers' files. "We are going to analyze that extremely carefully, and be very vigilant."

Meanwhile, Katz Group announced on Monday that its Rexall division acquired Dell Pharmacies, an 18-store chain in southern Ontario with about $70-million in annual sales. It will be folded into the Rexall network, it said.

The rush to pick up new business comes as Canada's drugstores are feeling the pain of new generic drug reforms, even as pharmacy profits remain healthy compared to other retail segments.

Net profit rates of pharmacy and over-the-counter medications can be up to twice as high as those of many other general merchandise and food categories, not including high-margin fashions, industry insiders say. And drug stores are expected to have a growing customer base as baby boomers age and seek more medications.

But the competition to pick up Zellers' pharmacy files will be fierce, as grocers and general merchants, including discount giant Wal-Mart Canada Corp., all sprint to bolster their drugstore businesses.

"It's been a challenging environment," Mr. Loporcaro said. "All the more reason for us to be innovative and look at new solutions to help our retailers and independent pharmacies."

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