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Cloud of Sept. 11 still darkens lucrative NYC market: Manhattan-based Duane Reade continues to dominate its home turf, as it has mastered the science of nailing prime locations and making the most of small, pricey real estate space

Drug Store News, June 6, 2005 by Antoinette Alexander

While New York City has yet to make a full recovery from the terrorist attacks on the World Trade Center nearly four years ago, the city undoubtedly has made significant headway as the unemployment rate declines and the retail vacancy rate improves, paving the way for solid growth of Manhattan retail. But it won't be, easy.

As the words Frank Sinatra sang suggest--"If I can make it there, I'll make it anywhere"--the dense and extremely diverse Manhattan market is challenging for the aspiring Broadway actor and the drug retailer alike.

The aftermath of Sept. 11 has been especially difficult, as local companies such as Duane Reade, the largest drug chain in metro New York with 249 stores, can attest.

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According to the Lower Manhattan Development Corp., a joint state-city corporation created following Sept. 11 to help rebuild lower Manhattan, it is estimated that New York City lost 146,000 jobs as a direct result of the events of Sept. 11. LMDC puts the city's total economic loss resulting from Sept. 11 at between $83 billion and $95 billion and attributes most of that to lower Manhattan. However, thanks in part to federal government grants to large and small businesses to help keep businesses downtown and attract new businesses to the devastated area, the city's economy appears to be on the upswing.

Downtown, however, "is far from its pre-Sept. 11 prosperity, with revitalization of the area expected to last for at least 10 years," stated real estate firm Grubb & Ellis in a recent research report. "Improving transportation access is crucial to the revitalization plan."

In general, the city's economy is expected to continue its slow upward climb through 2005. According to real estate brokerage firm Marcus & Millichap, New York City should see 69,000 new jobs in 2005. Employment rose 1 percent in 2004, and a 1.7 percent hike is forecast for 2005.

Marcus & Millichap noted that Manhattan retail properties are in line to post a 40-basis-point reduction in vacancy this year to 5.9 percent, as retail sales in the region are forecast to hit $98 billion this year, up 2.7 percent from the year-ago period.

"When residential real estate is strong, so is the retail market. The veracity of this adage will be confirmed in the months ahead, as Manhattan's surging residential market will stimulate retailer space demand," stated Marcus & Millichap in a recent Retail Research Report.

While the economic upswing is, of course, good news, for retailers looking to crack the already challenging Manhattan market, it means battling a decline in property vacancies and an increase in lease rates.

There are five major drug chains within Manhattan's borders--Duane Reade, Rite Aid, CVS, Brooks-Eckerd and Walgreens--but the competition is bound to get tougher as big-box retailers including Wal-Mart loom and newcomers such as Boulder, Colo.-based Pharmaca Integrative Pharmacy eye the market. These developments are not likely to be good for Duane Reade.

Manhattan-based Duane Reade continues to dominate its home turf--at least for now--as it has mastered the science of nailing prime locations and making the most of small, pricey real estate space. However, the company, which is now private following its July 2004 acquisition by Oak Hill Capital Partners, has been experiencing a decline in its operating performance since the fourth quarter of 2001. Citing the chain's leveraged capital structure, thin cash flow protection measures and narrow geographic focus, Standard & Poor's recently lowered the chain's corporate credit rating to CCC+ (i.e., vulnerable) from B- and stated that the outlook is negative.

"The downgrade is based on the company's weaker-than-expected operating trends in the first quarter of 2005 and our heightened concern about management's ability to turn around a deteriorating performance," stated Standard & Poor's credit analyst Diane Shand.

The downgrade came after the chain posted a loss for the first quarter ended March 26 of $11.7 million, including expenses, compared with a gain in the year-ago period of $1.8 million.

Duane Reade, which plans to open eight to 10 new locations and close about 10 to 12 units in 2005, also is feeling heat from industry observers regarding its own potential self-cannibalization in Manhattan, resulting in a dampening of comp-store growth.

The chain has been looking to more outer-borough locations, given its mature Manhattan store base. However, the difficulty is that outer-borough stores take longer to mature and face greater competition from rivals such as Brooks-Eckerd.

Since Brooks Pharmacy closed on its acquisition of 1,539 Eckerd stores on July 31, 2004, the Warwick, R.I.-based chain has been working at a blistering pace to reverse Eckerd's lackluster performance, and the efforts are paying off. According to Chain Store Guides data, Brooks' management boosted front-end market share at the former Eckerd stores in file New York area from 9.6 percent to 10.8 percent in the remaining four months of 2004.

Health Care Industry

Cloud of Sept. 11 still darkens lucrative NYC market: Manhattan-based Duane Reade continues to dominate its home turf, as it has mastered the science of nailing prime locations and making the most of small, pricey real estate space

Drug Store News, June 6, 2005 by Antoinette Alexander

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