Drugtown stands by positioning as rural neighborhood chain

Tina Kyriakos

The opening of the first Drugtown Pharmacy in Cedar Rapids, Iowa, in 1969 marked a new direction for Hy-Vee, then a 75-store upper Midwest-based supermarket chain operating a few in-store pharmacies it inherited as part of a buy-out of a small grocery concern in the early 1960s.

The new venture, which meant a headlong plunge into the drug store waters with a full-line assortment of products and professional services, was at first daunting. "With its history tracing back to the 1930s when it operated general stores in southern Iowa arid northern Missouri, the company was until then firmly rooted in the grocery business," said Ruth Mitchell, assistant vice president of communications for Hy-Vee Inc. But what was a small introduction to pharmacy through the in-store dispensaries was, however, enough to open up the company's eyes to the opportunities of setting up free-standing drug stores.

The gamble paid off. Within a year of opening the Cedar Rapids store, Hy-Vee opened its second Drugtown outlet. Today there are 26 stores operating under the Drugtown Pharmacies division. Sales rose to $101 million in 1998, up 16 percent from year-end 1997. Over the years, its parent Hy-Vee, with its headquarters in Des Moines, Iowa, has become a player in the food/drug sector, too, with 75 pharmacies in its two grocery formats.

Clear positioning

Hy-Vee's market presence has some obvious benefits for its Drugtown division. "Without the economies of scale afforded by Hy-Vee, a small 26-store chain such as Drugtown would not be able to survive in today's competitive drug store environment," said Gary Goodhall, assistant vice president and director of operations for Drugtown. Along with maximizing its grocery and general merchandise buying power by using Hy-Vee's two distribution centers in Sheraton and Cherokee, Iowa, Drugtown also gains by joining forces with the food store pharmacies to buy its prescription and OTC pharmaceuticals.

At the same time, Drugtown retains its own clear positioning. While the combo and supermarket stores flying under the Hy-Vee name are found in the major markets of seven upper-Midwest states, including Des Moines and Cedar Rapids, Iowa; Kansas City, Mo.; Omaha and Lincoln, Neb.; Sioux Falls, S.D.; and Rochester, Minn.; the Drugtown chain, with the exception of two stores, is concentrated exclusively in Iowa. "We got our start in rural Iowa, and that's where many of our strong stores are now," explained Goodhall. In fact, the 10 percent to 15 percent growth that's projected for Drugtown over the next five years is likely to come from expansion within its traditional market.

"Iowa has more independently owned stores than any other format, and that in itself presents clear opportunities for us to grow our business," said Goodhall. He added that the potential for expansion is increasing annually as more independents in the state retire or look to sell their businesses because they're finding it hard to compete in today's environment of large chains and mass merchants.

Indeed, Drugtown is well suited to take over in these markets. Store formats run anywhere from 8,000 square feet to 15,000 square feet, and while all feature traditional drug store lines, there's a strong attempt to tailor the mix to the community. For example, the chain decided to up selection in six stores' durable medical equipment departments to fill a need in those communities that was not being serviced by the large home health retailers.

"These stores were in small rural towns and people had to travel long distances to get these products, so we decided to step in and fill our customers' needs," said Goodhall.

This strategy of meeting the demands of the marketplace blends well with the chain's positioning. "Our best results are in neighborhoods," explained Goodhall, noting that ideal locations, under an expansion policy that calls for opening about two new stores a year, continue to be freestanding or strip mall sites, on busy intersections and in areas close to where people live.

With its customer base clearly identified, the chain has developed a retail formula grounded in convenience and service. "As the neighborhood pharmacy, we want to be known for our high service levels--both retail and professional," said Mitchell. Along with a strong emphasis on building personal relationships and serving the needs of the entire family, the chain has what she described as a retail orientation that can include value-added elements, such as hours of operation suited to the community's needs and even delivery services.

Professionalism is key

According to management, the high level of professional service sets the chain apart from many of its competitors. "We train our pharmacists to take care of customers' needs and that means coming out from the pharmacy and talking about everything from nutritional supplements to acetaminophen," said Goodhall, noting that the chain makes sure there's enough support staff at the stores to allow this type of service.

One of the most ambitious plans recently has been a two-stage disease management program. What started as some basic training on conditions such as asthma, diabetes and high blood pressure has now become an intensive program to certify one pharmacist from each location on a single disease state. Now that a four-month effort targeted at asthma education is complete, Drugtown--as well as Hy-Vee--pharmacists are being trained as specialists in counseling on diabetes management. "These programs give our pharmacists the confidence to counsel even more effectively on a condition and its treatment options," explained Goodhall, adding that despite the lack of reimbursement for these efforts, the chain views it as a selling point with customers, with an immediate pay-off in terms of building loyalty and, perhaps, some long-term paybacks at the cash register. Indeed, a double-digit-13 percent- increase in prescription count in 1998 is one indication of the strength of the chain's professional services.

Growth of all formats

With Hy-Vee's rapid rate of expansion- its numbers have climbed to 179 food/drug combo and supermarket locations alone-it's no secret that upping pharmacy operations will be a key strategy over the next few years. While availability of the right type of locations has meant slower pace of growth for its Drugtown division, plans call for the chain's expansion outward from its base geographically, as well as for higher penetration within key markets.

"We see pharmacy as a growth area for our company, so we'll be looking to add more pharmacies to stores of various sizes in all the communities in which we operate," said Mitchell, noting that all six new supermarkets that opened last year featured in-store pharmacies. While independent owners are generally a source for the free-standing operations, the company often purchases the pharmacy and incorporates it into the supermarket operation. If this has become what Mitchell called a "major thrust" over the past three years, it's because Hy-Vee, like other major chains, is committed to the one-stop shopping trend. Like its food business competitors, the company has found that not only is it a service its customers want, it can help build business in other departments. In fact, Hy-Vee has found that having a pharmacist on duty in the store can, in some cases, double sales of HBC items and nonprescription drugs.

One of the challenges for the chain is finding staff to support its growing pharmacy businesses in its key markets. To that end, Bob Egeland, assistant vice president of pharmacy operations, and Helen Eddy, director of pharmacy education, have not only put a strong push on developing specialized training for pharmacists in disease counseling, but also on certifying technicians who can help free pharmacists to take on a wider role in providing service, which is expected to remain at the top of the company's list as it grows all of its formats.

Hy-Vee Inc.

Headquarters: West Des Moines, Iowa.

1998 sales: $3.2 billion; $ 101 million for Drugtown

% change vs. 1997: +7 percent; +16 percent for Drugtown

No. of units: 247 (26 Drugtowns)

Average store size: 8,000 square feet to 15,000 square feet

Pharmacy sales: $163 million

% of sales from pharmacy: 5 percent

COPYRIGHT 1999 Reproduced with permission of the copyright holder. Further reproduction or distribution is prohibited without permission.
COPYRIGHT 2008 Gale, Cengage Learning