The Competitor Next Door

By Edward Cone Print this article Print

Retailing is getting cutthroat. In major metropolitan areas, direct rivals are opening up shop across the street, daring the other to blink and pull up stakes. Among neighborhood pharmacy chains, Eckerd is now in a fight for its life, as Walgreens threate

PDF Download Jack Delgado is confused. Wan and sniffling, he has come to the Walgreens drugstore at the corner of State Road 7 and Wiles Road in Coconut Creek, Fla., to pick up a prescription—forgetting that the order had actually been phoned in to an Eckerd pharmacy on the other side of the busy intersection. That's how interchangeable the two stores are in his mind.

"It's all convenience—whichever one's closest," says Delgado as he leaves Walgreens, clutching a bag of cough drops.

One chain drugstore is much like the next, with cashiers in the front, pharmacy in the rear, personal hygiene and grocery products in between. Yet Eckerd has fewer stores than competitors Walgreens, CVS and Rite Aid. By most measures, Eckerd is in fourth place in a business where convenience is king and cross-corner combat is common. The Largo, Fla., drugstore chain is an important part of parent J.C. Penney Co.'s growth strategy, yet it trails its rivals in sales and sales growth.

Eckerd's revenue in its most recent quarter was up just 1.3% to $3.8 billion. Meanwhile, over the same period, Walgreens revenue was up 12.8% to $8.4 billion, CVS revenue jumped 5.7% to $6.3 billion and Rite Aid revenue rose 2.5% to $4.1 billion.

Eckerd's operating profit margin is less than 3%. But if the company is going to catch Walgreens and its other rivals, it needs to open new stores and sustain expensive marketing programs.

It also needs to catch up to Walgreens, the industry leader in information technology, at managing its supply chain and core pharmacy business—or it may be left behind for good.

In late 2000 Eckerd saw a chance to save more than $70 million in computer costs over the next three years, while speeding its ability to develop the supply chain and pharmacy systems it needed to stay competitive. The decision was dramatic, but Eckerd felt it had no other choice.

It fired its outsourcer.

For seven years, beginning in 1993, Eckerd had relied on IBM Global Services for nearly all of its computing.

When Eckerd made the final decision in February 2001 to take back its computer operations, IBM had between 400 and 500 computer professionals working on behalf of the drug chain.

When chief information officer Ken Petersen arrived from Penney shortly after the department-store chain acquired Eckerd in 1997, he found a staff of six technology workers at headquarters. He gradually built his group up to about 100 people by the end of 2000, before the IBM contract was finally canceled.

The task before Petersen and his once-small staff was formidable. He had to create a highly skilled, complete information-technology department, where none existed. At the same time, he had to launch a set of enterprisewide information systems that would let Eckerd catch up to—and maybe pass—Walgreens, itself a moving target.

Just look at the hiring task. Petersen had to hire about 500 programmers, network administrators, database administrators and other staff in the six months before the contract with IBM expired on Aug. 1, 2001. Eckerd now has 800 professionals in its information-technology department.

Not only did Petersen have to build his organization in a hurry, he had to do it without disrupting the ongoing development of a project critical to Eckerd's attempt to catch Walgreens. The initiative, known as Quantum Leap, is designed to drive down the costs of dealing with suppliers and to improve inventory management. Of course, Petersen also had to avoid derailing everyday computer operations in the process.

This article was originally published on 2003-06-01
Senior Writer and author of the Know It All blog

Ed Cone has worked as a contributing editor at Wired, a staff writer at Forbes, a senior writer for Ziff Davis with Baseline and Interactive Week, and as a freelancer based in Paris and then North Carolina for a wide variety of magazines and papers including the International Herald Tribune, Texas Monthly, and Playboy. He writes an opinion column in his hometown paper, the Greensboro News & Record, and publishes the semi-popular EdCone.com weblog. He lives in North Carolina with his wife, Lisa, two kids, and a dog.
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