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Rivals see opportunity in closing of Zellers pharmacies

Debbie Cabrera fills a prescription at the Zellers pharmacy in Square One Mall, Mississauga, Ont. As Target Corp. prepares to take over Zellers properties, other drugstores are hoping to attract Zellers' pharmacy customers.

Brett Gundlock for The Globe and Mail/brett gundlock The Globe and Mail

The impending arrival of the cheap-chic U.S. Target Corp. has raised fear in domestic retailers, but drugstore chains see a silver lining in the new entrant.

When Target starts to convert Zellers stores to its banner in the next year, closing them for up to nine months of remodelling, the Zellers' pharmacies are expected to turn off the lights also – forcing their customers to look for temporary alternatives. The shutdowns create a big opportunity for existing drugstores to snatch away Zellers' lucrative pharmacy business, with the aim of holding on to it long term.

Already other drugstore chains, including Shoppers Drug Mart Corp., the country's largest, are hankering after the Zellers prescription customers.

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"We're going to try to benefit from that, from that strategy, by servicing those customers and taking a disproportionate share of those patients that are going to be looking for another pharmacy during the blackout period," Domenic Pilla, Shoppers' new chief executive officer, said last week.

The timing couldn't be better for Canada's drugstores, whose financial results are being squeezed by new generic drug reforms. And while Zellers struggles to keep up with discount archrival Wal-Mart Canada Corp., its pharmacy division is one of its most profitable. Net profit rates of pharmacy and over-the-counter medications can be 1.5 to 2 times higher than those of many other general merchandise and food categories (excluding high-margin fashions,) industry insiders say.

Still, Shoppers and others have to act quickly. By March of 2013, Target will begin launching its stores with pharmacies, which are a key part of the U.S. discounter's focus.

"The pharmacies are all going to be doing their best to attract Zellers customers to their locations," said Alex Arifuzzaman, partner at retail real estate specialist InterStratics Consultants. "This is one of the larger opportunities in the pharmacy business that's come up in a while. But it's a short-lived opportunity."

Even with restrictive new generic drug legislation, pharmacies generate healthy enough returns. In its third quarter, Shoppers profit rose more than 11 per cent to $172-million on revenue growth of 2.1 per cent from a year earlier. (Excluding a one-time gain, profit stood at $170 million.)

What is more, pharmacy sales will pick up in the coming years as baby boomers age and need more medications. Drugstores draw both rich and poor customers, who are mostly covered by insurance plans and ready to open their wallets. Retailers ranging from Wal-Mart to Costco Wholesale and Loblaw Cos. Ltd. are racing to beef up their pharmacies, partly to lure more customers who will also shop for other items while they're in the stores.

Target also knows the value of its pharmacy business. "Patient care is of paramount importance to us and we are looking into options to provide a continuum of care for patients during this time" of transition, Target Canada spokeswoman Lisa Gibson said.

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Mr. Pilla, who stepped into the top job at Shoppers on Nov. 1, told an analysts' conference call last week that he is still assessing the magnitude of the opportunity presented by Zellers' pharmacy business. "We are going to analyze that extremely carefully, and be very vigilant."

Shoppers will be active in searching for potential takeover targets as smaller drugstores grapple with the economic pinch of the drug reforms, he said.

Luring Zellers' pharmacy customers is crucial because prescription customers tend to be loyal, said Wynne Powell, chief executive officer of London Drugs Ltd. in Richmond, B.C.

Roughly 25 to 50 per cent of pharmacy customers stay for life, his data show. "You have a percentage that you can get for life and you build upon the transient ones to try to convert them into lifers," he said. "We all need more business because with the current changes that occurred, it's a lot tougher to make an adequate income."

While virtually all drugstores will chase the Zellers' business, the big chains with multiple, convenient locations will have an edge, Mr. Arifuzzaman said.

Zellers, whose parent sold the rights to most of its store leases to Target this year in a $1.8-billion deal, is looking into options for its pharmacy customers during the temporary closings. "It's difficult to conceive of how the pharmacy will continue to operate" during the transition, Mark Foote, chief executive officer of Zellers, said in late October.

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Retailing Reporter

Marina Strauss covers retailing for The Globe and Mail's Report on Business. She follows a wide range of topics in the sector, from the fallout of foreign retailers invading Canada to how a merchant such as the Swedish Ikea gets its mojo. She has probed the rise and fall (and revival efforts) of Loblaw Cos., Hudson's Bay and others. More

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