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Shoppers Drug Mart Canada - Face lift

Shoppers CEO Glenn Murphy has injected new life into an old brand.

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If you're ever in Shoppers Drug Mart on a Saturday and you see a stocky guy with black hair and thick eyebrows lingering in the aisles, it just might be Glenn Murphy, CEO and chairman of the drugstore chain. On days when most other execs are out on the greens, Murphy is known to drop in on some of the 911 stores that make up the Shoppers network. Sometimes the 42-year-old executive arrives with advance notice, other times it's a surprise. But it's always to chat with the 33,000 employees who work at the franchise stores, from cashiers to managers, on their turf. To observers both within and outside the company, Murphy is passionate about retail.

It's a good thing Murphy is devoted to his job, because it offers plenty of challenges. The company had been around for more than four decades before Murphy joined in 2001. Sure, Shoppers Drug Mart Corp. (TSX: SC) of Toronto was doing well financially, but its stores were looking run-down, its product selection stale and its locations outdated. Still, that wouldn't have been such a problem, except that colossal retailers like Loblaw Co. Ltd. (TSX: L) and Wal-Mart (NYSE: WMT) were jumping on the Shoppers gravy train. To muscle in on the lucrative sector, they've beefed up their pharmacy businesses by offering customers a chance to fill prescriptions while crossing off other items on their shopping lists. In short, the new competitors have smashed the traditional idea of a drugstore to pieces.

Enter Murphy, a man with a sharp eye for merchandising and, perhaps more important, 14 years of experience with the competition. Since being parachuted into the top spot in June 2001 by Kohlberg, Kravis, Roberts & Co. (KKR), the massive international private equity fund that controlled Shoppers at the time, Murphy has begun opening bigger stores in better locations. There are new products on the shelves, including higher-end cosmetics, convenience foods and more private-label products. And his fans in the analyst community say he's only just begun. But standing up to retailers like Loblaw, with yearly sales of more than $23 billion, or Wal-Mart's staggering revenue of US$260 billion worldwide, is a hefty challenge for a company that brings in a measly $5 billion a year. In fact, despite his apparent success, Murphy refuses interview requests because he doesn't feel he's proven himself yet, even after seven consecutive quarters of increasing profitability. In its last quarter, ended June 14, the company reported a profit of $58 million, up 42% from the same period a year before, on increased revenue of $1.35 billion. Despite the positive numbers--and Murphy's talent as a retailer--molding Shoppers into a company that can tackle the giants is no easy task. All eyes are glued on Murphy to see if he can pull it off.

KKR made a big splash when it led a group of investors to snap up Shoppers Drug Mart from Imasco for $2.55 billion in February 2000. After the initial buzz died down, the company set about deciding how to bring Shoppers into the next generation. Like all private equity firms, though, KKR was on the lookout for an exit strategy, and the best option was through an initial public offering of 30 million Shoppers shares. (KKR continues to own 19.5%, but has steadily reduced its stake.) Before that could happen, they needed someone to lead the new public company--David Bloom, who had held the rank of CEO for 18 years, was ready to retire.

When the Shoppers board settled on Glenn Murphy, it probably had the old saying in mind: Keep your friends close, and your enemies closer. Murphy moved up the ranks at Loblaw, eventually running its Atlantic Canada operation. He impressed president John Lederer enough that the senior executive put Murphy in charge of rolling out the grocery chain in Quebec. "Quebec was an acknowledgment that he could handle almost anything," says Perry Caicco, an analyst with CIBC World Markets in Toronto.

But after more than a decade on the job, an aspiring Murphy identified a problem with his career path at Loblaw: with Lederer just a few years older than himself and showing no signs of leaving, Murphy was running out of rungs on the corporate ladder. So he bolted. After a brief stint as CEO of Chapters in 2000, Murphy took the reins at Shoppers. Leslee Thompson, one of the few independent directors on Shoppers' board, says Murphy's past experience made him a natural choice. "He is absolutely the right leader for this company," she says. "I've worked with lots of CEOs, and he's a leader in every sense of the word."

Since taking over, Murphy has shifted the company's attention from more obvious competitors such as PharmaPlus and Jean Coutu, to the likes of Loblaw and Wal-Mart. That's not to say Shoppers should ignore other drugstore chains. Jason Bilodeau, an analyst at UBS Warburg, thinks that, while Shoppers is leading a renaissance in the drugstore industry, other chains are close on its heels, citing the Edmonton-based Katz Group, which has 1,800 stores under such banners as IDA and PharmaPlus, as the biggest threat. (See "Drugstore wars," page 94.)

Wal-Mart looms large, too--all 214 of its Canadian outlets already have pharmacies, and the chain will open 30 new stores next year--all with drug counters. Caicco insists, however, that Loblaw is the company Shoppers needs to watch most. The grocery chain has vowed to include a pharmacy in every one of the 30 to 35 new large-format stores it builds each year from here on. It already has about 350 drug outlets in its 1,000-plus stores. Geoffrey Wilson, vice-president of industry and investor relations at Loblaw, says the company sees a tremendous opportunity for growth in drugstores, even if in the past the grocer has been unable to match the selection of health and beauty products available. But Wilson says that's changing. "If you go to one of our newer stores, you'll see a wider assortment of health and beauty aids," he says. "We have cosmetic counters that would rival any drugstore." And that's the challenge. "There's only one company expanding in pharmacy almost as fast as Shoppers, and that's Loblaw," says Caicco. "If you ignore them, you're going to get killed."

Few corporate turnarounds are as visible at the street level as the one Shoppers Drug Mart is going through. To avoid getting trampled by the retail giants Murphy has introduced a new format for his stores. The new Shoppers outlets, averaging 14,000 square feet, are twice the size of the old pharmacies and brighter--almost like walking into a supermarket. Since opening its first new-format store in Brampton, Ont., in March 2002, Shoppers has launched about 80 more countrywide. (Where possible, old locations are converted to the new format.)

Going for more spacious digs makes sense for a number of reasons, says Bilodeau. With everyone in retail following the "bigger is better" trend, Shoppers can scoop up free-standing locations vacated by retailers like Canadian Tire, who in turn are moving into larger spaces on city outskirts. To fill all that extra space, Murphy is updating and expanding Shoppers' line of private-label products, which already number more than 500 and account for about 10% of sales. By comparison, private-label products account for more than 15% of revenue at U.S.-based Walgreen's, and over 45% at British drugstore chain Boots.

Up to another 100 products, such as health food and hand cream, will be available in the next year. Developing private-label products is not an easy task. Each product requires long negotiations with suppliers about its look and quality. And then there are Shoppers' shoppers--the chain will, in effect, have to train customers to accept the new, less expensive counterparts to brand-name products. Caicco thinks Shoppers is up to the challenge. "Don't forget," he says, "some key members of management came from Loblaw." The grocer all but invented the private-label game in Canada, with its President's Choice line. As a top executive at Loblaw, Murphy got first-hand experience that he's now putting to use.
The same can't be said for another of Murphy's plans--selling high-end cosmetics. Shoppers has always sold lipstick and mascara made by names like Revlon and Maybelline, brands that don't hold designer appeal--or designer price tags. The idea now is to stock prestige cosmetics like Chanel and Christian Dior. Typically, women head to department stores to stock up on pricey moisturizer and eye cream, but have to deal with pushy sales clerks every time. Jochen Zaumseil, president of L'Oréal Canada, says younger professional women want to get advice from someone who is not committed to a particular brand. The new Shoppers cosmetic counters offer just that.

The cosmetic industry is worth $1.6 billion in Canada, with about $1 billion of that coming from moderately priced cosmetics. Shoppers estimates it has almost 40% of that market, but only a single-digit share of the $600-million prestige cosmetics business. But to manufacturers in the makeup industry, appearances are everything, and drugstores don't exactly carry the same prestige as a high-end department store. Nonetheless, "in Canada, there really is only one department store that would fit into that category," says retail analyst Maureen Atkinson. "And the Bay is not the healthiest, to put it mildly. Suppliers who would never have considered selling to Shoppers are now saying we have to look at other possibilities."
Shoppers seems to have gone through a massive change almost overnight. When contacted a few months ago, Richard Talbot, a retail consultant in Toronto, said that if the chain wasn't careful how it merchandised its new stores, it could turn off customers familiar with the old format. "It's a bit of a balancing act," he said. "It's always difficult when you add new products, because you're watering down the impact of other products." He also cautioned that Shoppers must still have the feel of a drugstore: "Does it look like the kind of place I want to buy my prescription drugs, or does it look too much like a 7-Eleven?" Months later, after visiting some new locations, Talbot is impressed with the stores' "wow factor" and thinks the changes are a win-win situation for everyone.

At the end of the day, Shoppers is still a pharmacy--drug sales account for about 55% of its revenue. The question is, will the chain be able to find enough people to sell those drugs? True, Loblaw and Wal-Mart pose the biggest threat, but Murphy must also be mindful of a less visible challenge--a shortage of pharmacists. The Canadian Association of Chain Drug Stores estimates there is about a 10% vacancy rate for pharmacists, leaving some 2,200 lab coats on hooks instead of on the backs of these much-needed health workers. Demand is so high that salaries have gone up almost 19% since 1994. In addition, under most provincial rules, the pharmacy business in a drugstore must be owned by a pharmacist. A severe shortage could hamper expansion plans at all retailers, not just Shoppers.

Wayne Hindmarsh, dean of the University of Toronto's Leslie Dan faculty of pharmacy, says some drugstore chains seem desperate for new hires, but Shoppers has proven the feistiest. "They are the most aggressive in their recruitment," he says. "I think others are seeing that and saying, 'Hey, something's happening. Why is Shoppers getting a higher percentage of grads than we are?'" It doesn't hurt that Shoppers gave $2 million to a $75-million U of T pharmacy facility due to be completed in 2005. The new space will allow the university to churn out 240 grads a year, up from the 180. "That's got to ring with the students," says Hindmarsh.

Under Murphy's reign so far, Shoppers appears to have taken all the right steps to deal with the challenges it faces. Few retailers have gone through as much change in such a short time as Shoppers, and fewer still have been able to keep growing the bottom line at the same time. Analysts say it's Murphy's ability to understand customers that counts. Maybe his tendency to prowl the aisles is his prescription for success.

(This article was published on October 11, 2003 on the web site of Richard Talbot of TALBOT CONSULTANTS INTERNATIONAL INC. is quoted in this article. For more details on this and how we can help you, please contact us at )


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