It's September and retailers are already feeling the pinch of sluggish consumer spending, but not here in a wealthy enclave in north Toronto. Shoppers Drug Mart Corp. is opening one of its biggest, glitziest new outlets and it doesn't look much like a drugstore, with its high ceilings, large windows and bright ambience.
Glass shelves filled with fancy bottles of cosmetics and fragrances greet consumers at the entrance. Organic foods and Nintendo portable consoles are among the products further inside. Customers could pick up $435 facial creams, pose for passport photos and even drop off their prescriptions (it is, after all, still a drugstore).
Under the direction of former chief executive officer Glenn Murphy, Shoppers transformed itself into a Canadian retail powerhouse. Its expansion has been dramatic, growing to more than 1,100 stores from about 800 in 2001. These were the best of times, and they continued under the leadership of Jurgen Schreiber, who became CEO in early 2007. Shoppers has been continually evolving, branching out into high-end beauty products, groceries and seasonal gifts to the point where it is more like a neighbourhood mini-department store. Throw in a burgeoning array of high-margin private labels, a loyalty card that is the envy of retailers across the country and a near doubling of profit in the past five years and it's not hard to make a case it is the most successful retail chain in the country.
But all that was during good times for the broader economy. Now that the tide is turning, it's up to Mr. Schreiber to keep up the momentum.
"We all would love to live in better times," Mr. Schreiber says in a rare interview, surrounded by a team of his executives but fielding almost all the questions himself. "We have to work a little bit harder, be a little bit sharper ... But we don't feel it [the slowdown] in the same way. We are winning market share."
INVESTORS' HAVEN
Drugstores are considered a haven for investors and operators alike in recessions. They carry products - from pills to nose sprays - that consumers need, rather than just want.
But Shoppers and other drugstore chains now have diversified way beyond the pharmacy to carry discretionary items ranging from jewellery to iPods. These are often the first to be dropped from customers' shopping lists in tight times.
At the new north Toronto store, there are no signs of grim times. Mr. Schreiber says its launch is the chain's most successful. His only regret is that City Hall barred Shoppers from building a second store entrance to the parking lot, which Mr. Schreiber thinks would bolster the outlet's business even more. The economic downturn isn't sidetracking his further expansion plans.
Mr. Schreiber, 46, may be well positioned to ride out a recession. He's a seasoned executive of health and beauty companies, having led a global retail giant's European operations before joining Shoppers as president in 2006. At A.S. Watson & Co. Ltd., the retail division of conglomerate Hutchison Whampoa Ltd., he spearheaded growth in cosmetics and fragrances, partly by introducing new brands in thousands of stores in 23 countries. And he oversaw the acquisition of the Drogas and Spektr chains.
And he's worked through recessions, watching the fragrance business soften and learning that promotional deals are needed to lure cash-strapped consumers in harder times, he says. "And do not give up on your staff. The moment you start seeing a sales reduction, and you cut the sales force, or the people behind the counter, you have problems with your customers. Be relentless taking weak brands out, and putting new brands in."
He's a strong presence at meetings, and gets right to the point. He's a detail person: He visits the new north Toronto store at least every two weeks, even though it's not in his neighbourhood.
Today, as other North American retailers struggle amid sagging consumer confidence, he continues to break new ground at Shoppers. It is becoming a destination for pricey and in-demand beauty brands, the likes of the hot Harajuku Lovers fragrances ($49 for a 30 ml bottle). Early this month, it took the bold step of rolling out an entirely new concept - an upscale, standalone beauty store and spa called Murale, developed by star design firm Burdifilek. It is the author of remodellings of luxury retailers' stores, including Holt Renfrew's flagship in Toronto and a Neiman-Marcus near Boston.
"Shoppers Drug Mart has an advantage because it's dealing with health care and necessity items that guarantee them a clientele," says David Cunningham, a partner in Cunningham LLP, which advises independent pharmacies.
"During good times they'll buy something else while they're in the store. But during a recession, people are picky about what they buy and the prices they pay ... That should put pressure on profit and sales for these front-store [non-pharmacy] products."
Industry observers think Shoppers will feel some pain alongside other retailers as the economy gears down and heads into what could be a strong recession. What they are convinced of is that under Mr. Schreiber, Shoppers will come through it better than most.
"They can't avoid a consumer pullback," says Jonathan Wellum, chief executive officer of AIC Ltd., whose Diversified Canada Fund is a big shareholder with about two million Shoppers shares.
"But they can still continue to have positive earnings growth. In a tougher environment that's pretty good, especially getting market share. Then you're setting yourself up for when things are a little stronger."
WILL OLD RULES APPLY?
It would be great if Mr. Schreiber could sit back and just ride the company's advantage as a defensive play in a downturn. But its success rides on its moves away from its core pharmacy business and that means old market rules of thumb don't necessarily apply.
"Traditionally, Shoppers was more of a defensive business," says Colin Cieszynski, market analyst at online brokerage CMC Markets Canada. "It sold staples that you buy every day, even if times are bad ... If they've moved into higher price points, they would be exposing themselves to more of a cyclical" business.
One fact in Shoppers' favour is that consumers hanker after "affordable luxuries" during tough times and Shoppers and other big chains carry a fair share of them, adds Martin Hubbes, executive vice-president at AGF Management Ltd., whose funds hold Shoppers shares.
"Where people might not buy the new sports car, maybe they treat themselves to higher-end cosmetics," Mr. Hubbes says. "It's a little high-ticket item that makes you feel good."
Headwinds, however, include competitors that have started muscling in on the drug business, where grocery chains and discounters have been stocking up on merchandise. In a serious slowdown, consumers could be swayed to make a trip to Wal-Mart Canada Corp. if it means cheaper groceries and consumer goods, including getting their prescriptions filled.
And yet, based on past recessionary performance and the recent U.S. experience, the major drugstore chains will be relatively recession-resistant, says Keith Howlett, retail analyst at Desjardins Securities.
Prescription drug sales are an anchor for these retailers, drawing consumers to the neighbourhood stores where they may make a few other purchases. Prescriptions still make up 47 per cent of sales at Shoppers and 61 per cent at Jean Coutu.
Shoppers stock, which has dropped about 18 per cent since the beginning of the year, has lost only half as much as the overall TSX has so far this year.
"Drugstore retailers themselves appear to be the most confident of all retailers in Canada, remaining committed to aggressive increases in square footage even as most other retailers restrain capital expenditures for new retail selling space," Mr. Howlett told clients yesterday.
One thing Mr. Schreiber can count in his favour is demographics. An aging population buys more medications.
Katz Group of Companies, with its Rexall and Pharma Plus stores that are prominent in Ontario and smaller pharmacies in all provinces but Quebec, has seen no dent in its business yet in the early months of this slump, chief executive officer Andy Giancamelli says.
THE BEAUTY OF THE BUSINESS
Shoppers, founded in 1962 by Toronto pharmacist Murray Koffler, was already expanding beyond the pharmacy counter into discretionary merchandise under the ownership of conglomerate Imasco. The chain was taken private by private equity investors in 2000, and the diversification process picked up considerably after it went public more than a year later with Mr. Murphy at the helm. He was a veteran of Loblaw Cos. Ltd., which in its heyday had been the shining star of retailing.
Mr. Murphy quickly took on flagging department store rivals by pushing into luxury cosmetics and fragrances, whose profit margins can be more than twice as high as those of some prescription drugs, analysts say.
Unlike in the United States, there were very few competitors in the pricey beauty field. And the department stores that ruled the roost offered what Shoppers considered to be weak service and a limited number of locations.
He expanded the stores to almost twice the size of older ones, and launched beauty boutiques within them to tout the products; in 2006, he scored a coup by sealing a deal to stock the high-profile Clinique line, which had been the preserve of department stores.
Mr. Murphy borrowed a leaf from Loblaw's successful President's Choice private label by expanding Shoppers' store brands. Again, their margins can be compelling: In-house brands on average ring in 15-per-cent more profit than national brands, because of reduced marketing and other costs tied to producing and pitching products. Customers like private labels because they can cost about 25 per cent less than the equivalent national brand.
He lured customers back to the store by transforming Shoppers' Optimum card into one of the most successful loyalty programs in Canada that offer cardholders discounts just for buying more. Today, in harsher economic times, the card serves the chain well, targeting customers with more deals if they use their card.
'A VACUUM IN THE MARKET'
When Mr. Schreiber stepped into the top job in 2007, he set out to build even more aggressively on Mr. Murphy's initiatives. Coming from a global beauty giant, he lost no time tapping into his large rolodex of industry contacts to sign up new suppliers for Shoppers. It added new brands to its shelves, such as Gosh and Boots No. 7. It forged new ties with overseas vendors, generating savings by dealing directly with them and cutting out the middle man.
By last summer, Mr. Schreiber was convinced that there was still more ground to cover in high-end cosmetics. Consumers travelled the world, and were familiar with enticing products at U.S. department stores and European perfumeries. "We saw a vacuum in the market," he says, "The customers were asking for it."
Canada wasn't heading into a recession at the time. Now that it is, Mr. Schreiber isn't changing his plans nor scaling back on pricier items. He launched the upscale Murale beauty and spa division with its first store in Ottawa this month and a second in Montreal on Dec. 4, and a targeted total of 50 in five years. Some analysts think he'll go much further, envisaging 200 stores by 2014.
Mr. Schreiber considers the unit to be a fashion business that constantly has to offer its customers new beauty labels to keep them coming back for more.
He has other ways of navigating the rougher economic waters. Shoppers has stepped up promotional markdowns to draw cash-strapped consumers. It's introducing more private labels in organic foods and other new areas. And his team is driving better deals from its suppliers as Shoppers gains more clout in the market.
"Everybody has to work a little harder in these times," Mr. Schreiber says. "Customers are value-conscious. Customers buy more private labels. In general, they trade down.
"But in our case, it's different. We've added so many new brands into prestige [luxury] cosmetics. For us, more people are up-trading than down-trading, because of the new brands."
For women, cosmetics are a personal indulgence that they won't do without, even in harder times, he says. However, fragrance sales do suffer during recessions, he adds. They are often purchased by men as gifts, rather than being bought for personal use. A lipstick, on the other hand, provides women with an instant, and visible, gratification.
To help rev up fragrance sales, Shoppers is offering more promotions (buy 10 samples for $70 and get a voucher on the next purchase of one of those regular-size fragrances) and racing to bring products to its shelves as soon as they come on the market, he says. Some designer brands are hot for a few months and then quickly fade, as new ones emerge. "The moment a new designer perfume is out, you have to be in the customer's face."
The work seems to be paying off. Today, Shoppers' share of the Canadian luxury cosmetics market, estimated at about $1.3-billion, has risen about threefold to 20 per cent from 2003, according to company and analysts' figures.
LOOKING PAST THE RECESSION
Mr. Schreiber isn't letting the economic downturn rein in his plans to add new stores, expand old ones and bolster the cosmetics business at Shoppers.
The ambitious plans have raised some red flags because the "go-go times" of the past five years appear to be over, says David Hartley, retail analyst at BMO Nesbitt Burns. The "aspirational" consumers created during that period could disappear. U.S. retailers are already learning that lesson, and Canadian merchants may find it out soon enough.
"The fear is that in an economic slowdown, cosmetic purchases will be curtailed. Or there will be a trade down to less-expensive products," Mr. Hartley says.
But Mr. Schreiber has a clear vision for the chain and it involves growth. It is increasingly snapping up smaller pharmacies as their owners get older and look for an exit strategy. It's easier to set up shop in a community if the drugstore has an established prescription customer base, rather than having to start from scratch.
Mr. Schreiber can look to the United States as a model. The big drugstore chains dominate the industry, while independent pharmacies have closed or been bought up by national retailers.
And Mr. Schreiber sees big opportunities at the pharmacy counter, and not just because of aging demographics. Generic drugs, although at lower prices, generate better margins for drugstores. There's a growing trend to prescribing generics as patents on popular branded drugs expire.
Shoppers recently launched a chain of small stores, Simply Pharmacy, for medical buildings. And now its latest venture, the Murale beauty stores, is a concept that could go international, although he says he has no such plans "at this point in time."
It's an engine of growth for the company, but it's not a substitute for building the flagship chain in future years, nor is Simply Pharmacy, he says.
Even so, he's searching for the next new concept for Shoppers to ensure that it doesn't bump into a wall in five years. "Hopefully we're smart enough and good enough in that time to develop and find something new and exciting. This is stuff we work on internally."
Shareholders, for one, seem to be betting on his vision. "In better economic times they can touch higher growth rates," Mr. Hubbes says. "In these kinds of time it will probably make Shoppers a little more volatile than it would have been 10 years ago. I'm willing to trade off that volatility for the long-term growth potential."
A FOCUS ON GROWTH PAYS OFF FOR INVESTORS
Nov. 21, 2001
Shares fall flat on the first day of trading, closing below the $18 issue price.
May 27, 2002
Shoppers' backers announce plans to float another portion of the company.
May 8, 2003
Chairman and CEO Glenn Murphy announces a building program that will double the size of some of its stores to more than 12,000 square feet. He also plans to expand private label offerings.
July 16, 2003
Mr. Murphy said he expects that all cosmetic brands will be carried in some Shoppers stores 'in the near future.'
Feb. 10, 2005
Announces it will start paying a quarterly dividend of 10 cents a share.
September, 14, 2006
Shoppers scores a major coup with a deal to carry the popular Clinique line, becoming the first North American drugstore chain
to carry the upscale brand.
January 17, 2007
Mr. Murphy, who held the top job since June, 2001, announces he is leaving the chain.
March 7, 2007
New CEO Jurgen Schreiber says he wants to add another 700 private label items, to a total of 3,200 by year's end.
Sept. 2, 2008
Shoppers announces it will launch Murale stores, a free-standing luxury beauty chain.
Nov. 6, 2008
Third-quarter profit rose 15 per cent to $162.5-million, the 18th-consecutive quarterly increase.
THE GLOBE AND MAIL: SOURCE: THOMSON DATASTREAM
Come for the drugs, stay for the merchandise
Shoppers is posting the highest comparable store sales growth amongst North American pharmacies
| (%) | Total sales ($-millions U.S.) | Year over year change (%) | Rx sales to total sales (%) |
| Walgreens* | 14,649 | 8.9 | 66.2 |
| Shoppers Drug Mart ($-millions Can.) | 2,793 | 9.8 | 48.3 |
| Jean Coutu ($-millions Can.) | 568 | 5.0 | NA |
| Rite Aid*,** | 6,402 | -1.0 | 67.2 |
| CVS Caremark retail division | 11,542 | 5.3 | 68.3 |
| Longs Drugs* | 1,164 | -1.0 | NA |
| Duane Reade | - | - | - |
*Using blended monthly same-store sales growth rate to estimate performance over a duration comparable to Shoppers' reporting period;
**Rite Aid same-store sales include the Brooks/Eckerd chain
Drugstores relative valuations (November 5, 2008)
| Company ($U.S.) | Ticker | EBITDA margin (%) | Market cap ($-millions) |
| Rite Aid | RAD | 3.0 | 422 |
| Express Scripts | ESRX | 7.0 | 15,237 |
| Shoppers Drug Mart ($ Can.) | SC | 11.6 | 10,348 |
| Medco Health Sol | MHS | 4.8 | 20,971 |
| Jean Coutu Group ($ Can.) | PJC.A | 9.8* | 1,871 |
| CVS/Caremark | CVS | 8.4 | 44,046 |
| Walgreen | WAG | 7.3 | 24,213 |
| Group Average | 7.4 | 16,730 |
*Using adjusted share price, Canadian operations only, excludes loss or contribution from US operations/Rite Aid
THE GLOBE AND MAIL: SOURCE: DESJARDINS SECURITIES, COMPANY REPORTS, BASELINE
By the numbers
1,045
Total number of Shoppers Drug Mart stores in 2006
1,309
Estimated number of Shoppers stores by the end of 2009
$4.5-billion
Total front-store sales in 2007
$3.9-billion
Total drug sales in 2007
$8.5-billion
2007 revenue
$10.2-billion
Estimated 2009 revenue
$493.4-million
Profit in 2007
$626.3-billion
Estimated 2009 profit
Sources: BMO Nesbitt Burns
DOMINANT IN DRUGS AND HEALTH PRODUCTS
Shoppers is the king of retail in Canada when it comes to sales of drugs and health care products. The challenge is to hold on to its third of the market v. its peers (and fifth of the market including all competition) when the recession bites.
| Drugstores | All other stores | |
| Shoppers | 34.5% | 21.2% |
| Jean Coutu | 10.2% | 6.4% |
| Loblaw | 9.3% | |
| Wal-Mart | 7.0% | |
| London Drugs | 10.6% | 6.6% |
| Sobeys | 5.3% | |
| Katz | 7.0% | 4.4% |
| Metro | 4.2% | |
| Other | 37.7% | 35.6% |
© The Globe and Mail
