- CVS closed a store on Rocky River Drive that was built only three years ago.
The company continues to pay Schwartz rent, even though it closed the store and opened a new one down the road in North Olmsted. Rite Aid did a similar thing at a center Schwartz owned in Chardon. "It's like paying on a car you can't drive," he says, sounding baffled.
Schwartz is not the only landlord to watch drugstores leave and then resettle within a few hundred feet. For chains, the trend has been to build freestanding Sanctuaries of Sudafed, where the parking is ample and the selection wide. The new stores top 10,000 square feet and offer everything from board games to photo finishing.
Graying hair and wonder drugs propelled the expansion race. The nation is aging, and drug makers are creating all sorts of potions to ward off death and decay. As Ernie Boyd of the Ohio Pharmacists Association puts it, "These baby boomers are starting to take everything the pharmaceutical companies make." Chains sought to cash in by building the prettiest, most accessible stores.
A CVS, Rite Aid, or Walgreens only seems to inhabit every busy corner of metro Cleveland. Actually, there are fewer drugstores today than there were 30 years ago, when pharmacy was a ma-and-pa business. While fewer in number, the stores have gotten larger and more obtrusive. In response to the chains' cookie-cutter designs, the National Trust for Historic Preservation placed the symbolic Main Street on its endangered list. Communities like Mentor and Northfield Center Township wailed when old buildings were razed to accommodate the cinderblock and fluorescent haze of new drugstores.
But a funny thing happened on the way to the pharmacy. In October, CVS announced the shuttering of 200 stores nationwide, including 8 in Northeast Ohio. One location, at Puritas Avenue and Rocky River Drive, was built only three years ago. CVS is leaving Canton and Toledo altogether, while Rite Aid is exiting Columbus.
Why did the boom turn to bunkering so fast? Too much competition, for one. Drugstores are fighting not only among themselves but with the health-and-beauty aisles at supermarkets, Wal-Mart, and Target, as well as the Internet. The chains also battle for workers. A shortage of pharmacists drove up costs.
Then the economy soured. The pharmacy trade would seem to be recession-proof, but drugstores earn about 40 percent of their sales from convenience items -- cigarettes, Altoids, stuffed monkeys. Managed-care companies have whittled margins on prescriptions to a nub, so stores rely on discretionary goods for profits. "Drugs, none of us make money on anymore," says Tom McConnell, chief financial officer at Discount Drug Mart, a regional chain based in Medina.
For Jim Kastelic of the Cuyahoga County Planning Commission, CVS's scaling back supports his case that there are "too many stores, not enough people" in Northeast Ohio. (Retail vacancies climbed by almost 2 million square feet in 2001.) Kastelic also wonders if new drugstores aren't cursed by their own convenience. Recently, he needed to fill a prescription. The drive-thru line was five cars deep, so Kastelic parked and walked into the store. The customers using the drive-thru, it occurred to him, weren't tempted to make impulse purchases.
CVS insists the "consolidation" isn't a big deal. Spokesman Mike DeAngelis says the 200 stores make up less than 5 percent of the company's base of 4,100. McConnell agrees that it sounds worse than it is. "For a CVS or a Rite Aid to close 200 stores is like us closing one store," he says. Schwartz, however, believes the chains are riding a herd mentality over a cliff. "I used to think that, because these companies are so big, they're so smart. I no longer think that's true."
A lesson from the Enron meltdown is that corporate America hides a lot of garbage behind silver hair and talk of paradigm shifts. Rite Aid, in fact, nearly unraveled in a way reminiscent of Enron's plunge. In January 1999, Rite Aid stock traded north of $50 a share. Nine months later, the chief executive was gone, the auditors resigned, three years of profits were reduced by $500 million, and 800 employees lost their jobs. Stockholders, furious the share price had dwindled to $5, sued. New management cleaned up the books and settled with the shareholders, but the stock price remains below $3. Spokeswoman Sarah Datz says Rite Aid is now focused on "execution" rather than expansion.
CVS has had its headaches, too. Pharmacists, seeking overtime pay, filed a class-action lawsuit last summer. The chain also paid $4 million to settle allegations it submitted false prescription claims. And while the stock hasn't fallen as steeply as Rite Aid's, CVS shareholders have also sued, accusing the company of holding back damaged goods to delay taking a hit on the balance sheet.
"Both of them are swimming uphill at the moment," says Midwest Research analyst Eric Bosshard.
Of the Big Three, Walgreens is the strongest. It doubled its store base without taking on a lot of debt. "Walgreens is the one company that seems to have no problems," says Jason Fox of H&R Block Financial Advisors. He also likes CVS, as drug sales are expected to keep growing at a nice clip. "From our perspective, there's still plenty of room for drugstores to open and expand."
Schwartz, meantime, will collect rent from CVS for another three and a half years. He's also stuck with a dead zone where an anchor tenant should be. "A vacancy creates a shadow," he says. "A big vacancy creates a big shadow."