Dart Drug Stores Inc. has managed to avert bankruptcy by restructuring $160 million in debt, but it has yet to face the reality that competition in the drug chain industry no longer favors an operation such as Dart's.
In many ways, the fiercely competitive drug chain industry that thrived in metropolitan Washington for the better part of three decades is becoming anachronistic. Changes in ownership, stiffer competition from other retailers and marked changes in consumer shopping habits have significantly eroded market shares of conventional drug chains in the Washington area.
Most knowledgeable observers agree that the decision by Washington's Haft family to sell the drug chain three years ago was a sound one and a signal that the Hafts recognized the very real prospect of diminishing returns.
The formula that Herbert Haft, Dart's founder, employed so successfully in making Dart Drug a formidable competitor obviously had run its course. Bigger, more formidable competitors had emerged, significantly altering the industry in the Washington area. The Hafts obviously concluded that greater opportunities lay elsewhere and that there was less competition in selling books and auto parts at discount prices.
Thus, the Hafts sold Dart Drug and launched a series of unsuccessful attempts to buy a national retail company. The sale was completed at a time when other conventional drug chains in the area were rapidly losing market share and were under severe pressure to restructure. Indeed, each of the three major conventional drug chains -- Dart, Peoples and Drug Fair -- has changed hands at least once in the past seven years.
It had become increasingly clear to the Hafts, among others, that Giant Food Inc. of Landover and Safeway Stores Inc., the nation's biggest supermarket chain, were cutting deeply into the drug chains' business.
Indeed, Giant now is generally considered the leading discount drug chain in the region. At least 90 of its 145 supermarkets in the Washington-Baltimore area are food-pharmacy combinations. Forty-five of Safeway's 145 supermarkets in the Washington-Baltimore corridor are food-pharmacies. The two food chains not only dominate competition in the region's retail food industry but control a major share of the chain drug market.
Safeway and Giant not only dispense a major portion of the prescription drugs sold in the region but ring up substantial sales in key profit-center areas such as personal-care products and nonprescription pain relief remedies. What's more, the food chains continue to add product lines generally associated with drug chains. Safeway, for example, does a brisk business in contact lenses. Giant was among the first to install a computerized prescription system that enables pharmacists, with a customer's cooperation, to maintain a patient profile to guard against potentially harmful drug interaction.
The key to the food chains' success in competition with Dart, Peoples and Drug Fair (now Rite Aid) is apparent. The food chains are better able to capitalize on the one-stop shopping concept. The typical food-pharmacy combination, which contains 40,000 to 50,000 square feet of retail space, is a grocery,drugstore, bakery, salad bar, delicatessen, newsstand, hardware store, florist and, in some instances, a branch bank. Thus, supermarkets, more than conventional drugstores, are primary destinations in consumer shopping. Supermarkets depend heavily on high-traffic volume to maintain narrow profit margins.
Meanwhile, nonfood retailers have neutralized, if not weakened, the drug chains by utilizing their merchandising strengths in discount pricing and greater variety in inventory. Major expansions into the area by chains such as K mart, Bradlee's and Caldor have stripped the chain drugstores of any advantage they might have enjoyed in selling a variety of general merchandise at discount.
All of this suggests the need for operators of the leading drug chains in the area to restructure their business. The old formulas no longer apply to competition or inventory mix.
Shortly after announcing last week that Dart Drug had completed a financial restructuring plan, chairman Stephen H. Hansbrough observed that the company now has the money to put in changes that it promised customers. Even with the money, Dart is in a struggle for survival.
Given its history of launching price wars to knock out the competition, Giant can be expected to wreak further havoc among the drug chains. Safeway won't stand by idly and watch Giant gobble up more market share. K mart and other major national nonfood retailers in the market obviously have greater financial muscle and will make it difficult to cut into their general merchandise sales base.
Lacking the muscle to compete against such odds, Hansbrough probably would do well to consider a different retailing niche for his chain. Converting Dart Drug to a food-pharmacy chain might not be too far-fetched. The Hafts, after all, hadn't really soured on the drug chain business. Their attempt to acquire Safeway strongly indicates that they saw the advantage of linking drug chains with supermarkets.