The Competitor Next Door - ' Seven Against the World'

When Ken Petersen arrived at Eckerd from J.C. Penney in 1997, just after the department store chain acquired the drugstores, the information technology department was a skeleton crew. The six people in place acted as liaisons to IBM Global Services. They gathered requests for improvements to systems for sales tracking, inventory management and merchandising, prioritized those requests, and kept tabs on IBM's efforts to meet them. Petersen, who came from Penney's technology department, brought the headcount to seven.

Upon this thin foundation, he would have to create a technology organization capable of competing with Walgreens.

Petersen had overseen the network that supported Penney's stores nationwide. Originally, he was supposed to be an advisor to Eckerd. "But you know how quickly that goes from 'assisting' to 'you're it,'" he says. After a year of commuting from Plano, Texas, he moved his family to Florida in 1998.

Eckerd's technology infrastructure was in worse shape than Penney realized when it paid $3.3 billion for the drug chain in 1997, says former Penney CIO Evans. "In terms of what you needed to compete with Walgreens—I mean, Walgreens is the benchmark—they just weren't competitive."

He remembers discovering Eckerd hadn't organized a project to eliminate year 2000 date bugs, an effort that ultimately cost more at Eckerd than for all of Penney.

No one company dominates the chain drugstore business, but Walgreens has momentum. While Walgreens and CVS are similar in size, at $28.7 billion and $24.2 billion, respectively, Walgreens is a profit powerhouse with $1 billion in net income in fiscal 2002 compared with $717 million for CVS. J.C. Penney as a whole had net income of $202 million, but Eckerd reports only operating profit, which was $412 million for the fiscal year ended in January. Calculated the same way, operating profit last year was $1.6 billion for Walgreens, $1.5 billion for CVS, and $284 million for Rite Aid. Beyond lagging in operating profit, Rite Aid suffered a net loss of $112 million for the fiscal year ended in March.

Right now, CVS and Walgreens each have about 4,000 stores. Rite-Aid has 3,400. Eckerd has just 2,640. Walgreens' stated goal is to operate 7,000 stores by 2010—creating, in effect, another drugstore chain as big as Eckerd in the next seven years. To keep up, Eckerd needs cash to build and market new stores that can turn a profit. Each new store costs between $3 million and $3.5 million to build and open. Eckerd knows one way to goose a store's sales is by using integrated information systems to serve customers better, and to track and analyze customer behavior in order to wring additional dollars from each visit.

One of the barriers to building integrated information systems has been the company's strategy—shared by CVS and Rite-Aid—of growing through acquisition. Eckerd gobbled up smaller chains in its years as an independent company, then got combined with Penneys' Pittsburgh-based Thrift Drug unit, which had also been buying smaller chains. In 1998, Eckerd got into the New York, New Jersey, and Connecticut markets by buying Genovese. Each chain came with its own systems.

In contrast, Walgreens' growth has come from within. It chooses its own locations and replicates its technology in each store it builds. In technology, Petersen says, "I think the reason they got ahead of the pack is they didn't have to integrate some of the things the rest of us had to integrate."

Now Walgreens just keeps expanding, while other chains are busy closing underperforming stores. Eckerd has closed 279 stores since 2000 and is just starting to expand again.

One chain drugstore is much like the next one. Walgreens knows that consumers don't want to drive very far to fill a prescription. The chain particularly doesn't want customers to drive the extra mile to Wal-Mart and its low-price prescription counter. So it buys up street corner locations on the borders of residential areas. Competitors like Eckerd now play the same game, sometimes building within sight of a rival store.

But location, location, location may not be enough. Not if Eckerd fails to keep shelves stocked and make it easy to fill prescriptions. Walgreens has developed proprietary information systems that give customers and its pharmacists access to their records from any store in the country.

Its inventory management systems have a first-rate reputation, and the company is investing in making them better. For example, one way Walgreens is trying to eliminate out-of-stock products is by improving the accuracy of order fulfillment to the stores. At Walgreens' new Jupiter, Fla., distribution center, digital-imaging software analyzes a snapshot of each carton on its way to the truck and catches errors like a case of bottled water being mistakenly picked from the shelf when the order was for Coke.

And Walgreens has built a network that allows stores to share prescription records—a key to serving the "snowbirds" who visit Eckerd's home state of Florida during the winter, then go back north for the rest of the year.

Petersen readily acknowledges that Walgreens leads. "They invented the centralized pharmacy system," he says.

Originally, Eckerd and other chains developed systems that allowed each store to operate autonomously. But data networks are now more reliable over long distances. And costs are dropping. For example, the price for high-speed corporate communication services known as frame-relay networks have been dropping about 8% per year for the last five years, according to IDC. So now Eckerd is moving toward a more centralized model—but it won't happen overnight.