Genovese Drug Stores, Inc.

1924–1996

Genovese Drug Stores, Inc. is a major regional drugstore chain, serving the metropolitan New York area. As of September 1996, the company operated 121 super drugstores: 111 in Long Island and New York City, 4 in New Jersey, and 6 in Connecticut. It also operated two specialty stores--a professional photo store and an arts and craft store. The Genovese family owned 60 percent of the company's stock.

Early History: 1924-78

Joseph Genovese opened his first drugstore in 1924, in Astoria, Queens, New York. A 21-year old graduate of the Columbia College of Pharmacy, Genovese implemented a philosophy of taking care of the customer ... always.

The early years of the company saw the beginning of trends which would continue to effect the drugstore business through the rest of the century. One such trend was competition from stores outside the drug industry. For example, in the late 1930s, R.H. Macy & Company, New York City's giant department store, began wholesaling its private line of 48 drug and cosmetic items to other stores. Unlike the major national brands, whose prices were fixed under fair trade laws, "Macy's Own" brands could be sold for less. At the same time, on the West Coast, the state pharmacy board in California went to court to try to stop supermarkets and variety chains such as Woolworth's from selling cosmetics, toothpaste, soaps, and other proprietaries. Druggists were faced not only with competition from department stores and groceries, these retailers were offering less expensive products.

Another trend was the discounts on drugs demanded by hospital associations on the West Coast. These associations, which were privately owned or physician-controlled, had contracts with big companies to sell them drugs, usually at a flat rate. The employees of those big companies no longer had to get their prescriptions filled at the drugstore. Instead they could get them cheaper from the company hospital association.

Finally, the industry had to deal with government regulations, including the Food, Drug and Cosmetic Act of 1938, which, in addition to establishing strong consumer protections such as labeling requirements, also placed the cosmetic industry under the aegis of the Food and Drug Administration.

Despite these external influences, the Astoria drugstore flourished, continuing to concentrate on customer service. In addition to operating his business, the elder Genovese served on the board of trustees of the College of Pharmaceutical Sciences of Columbia University for 11 years, and was a director of the National Association of Chain Drug Stores.

In 1950, the founder's eldest son, Joseph Jr., entered the business full time after graduating from Fordham College of Pharmacy and began to expand the company. In 1955 he introduced self-service to the chain, and began buying other small drugstores and opening new locations. Over the next 20 years, under Joseph Jr.'s leadership, the company grew dramatically. That growth was obvious as, beginning in fiscal 1963, the company began achieving record sales year after year.

In 1968, the Genovese family took the company public, with its stocks trading on the American Stock Exchange. In 1974, they merged the subsidiaries created from the various acquisitions into the parent company.

For the year ended January 31, 1991, the company had annual sales of $465 million, a record for the 28th consecutive year.

1975–1993

Joseph Jr. died in 1975, and Leonard Genovese, the youngest son, took over the business. When Joseph Sr. died three years later, in 1978, the company had 50 stores in New York, New Jersey, Connecticut, and Massachusetts.

Marketing Innovations: 1980-92

During this period, the company continued the family tradition of customer service and innovative marketing. Genovese Drugs recognized that drugstores lost a lot of their health and beauty business to supermarkets if customers took the coupons they had clipped from the newspaper with them when they shopped for groceries. Although Genovese used coupons heavily, offering them three times as often as other drugstore chains, the company was not loath to experiment. In 1986, Genovese became the first drugstore chain in the U.S. to make free coupons available to customers at the push of a button.

The company did this as part of a test, introducing Promovision Video Displays Corp.'s Coupon Connection in one of their Long Island stores. The 7

foot high machine operated like a bank's automated teller machine, with a customer inserting a Coupon Connection card into a slot. Advertising messages flashed across the top screen, and the customer could choose from some 32 coupons, making her coupon selection from the bottom screen. The coupons then slid out of a slot like money would in an ATM.

Later that year, Chairman and CEO Leonard Genovese assumed the position of president. During the end of the decade and the beginning of the 1990s, drugstores were a relatively strong segment in a poor economy. Forbes suggested, in an October 14, 1991 article, that investors interested in small-cap stocks should consider Genovese. For the year ended January 31, 1991, the company had annual sales of $465 million, a record for the 28th consecutive year. Earnings doubled to 75¢ a share. This was an improvement on the previous year, in which earnings had declined, and set the stage for five consecutive years of record earnings.

Most of the Genovese stores were located in the suburbs and served relatively large areas. In addition to a prescription drug department staffed by registered pharmacists, the stores offered a wide selection of national brand merchandise, many products selling below the manufacturer's suggested retail price. Customers could purchase housewares, toys, books, hardware and small appliances, office supplies and paper goods, greeting cards, film, and tobacco goods as well as name and private label vitamins, cosmetics, toiletries, and health supplies. These products accounted for about 68 percent of company sales in fiscal 1992, with prescription drugs representing the remaining 32 percent. The company also operated a division that provided nursing homes with prescriptions and related medical supplies, and a photo-processing facility for developing and printing film for its customers.

Part of the company's success was due to its marketing, particularly of beauty aids and perfumes. For example, stores maintained a cosmetic profile of customers, borrowing the idea from the pharmacy's patient profiles which recorded medications. The cosmetic files kept track of customers' color and product preferences on profile cards. Employees contacted a customer when her favorite items were on sale. In 1992, the company received a FiFi award from the Fragrance Foundation for its leadership in marketing perfumes.

Moving into Manhattan: 1993-95

1960–1995

In a highly competitive industry, Genovese maintained its position by carefully selecting the location of its stores, by its pricing and merchandising efforts, and by providing quality services.

In 1993, the company began to restructure and expand its 101-store operation. Much of its efforts concentrated on improving purchasing and distribution and on renovating existing locations. But the big news that year was the opening, in November, of the first Genovese drugstore in Manhattan. Genovese brought its super drugstore, suburban layout into the city's lower East Side, providing customers with a brightly lit interior and aisles wide enough for shopping carts. Small by Genovese standards, the 7,500-square-foot store was described as "sprawling" by WWD. The store, in a residential location, was open 24 hours a day and featured an upscale cosmetic department which took up 8 percent of the store and was staffed by full-time cosmeticians.

Within a year, the company had expanded to 110 drugstores, with each one ringing up an average of $5 million in sales, or $493 per square foot, according to WWD. By that measure of productivity, Genovese ranked sixth among drug chains&mdashead of CVS, Walgreen's, or Rite Aid. In terms of volume, the company's $570 million in sales in 1994 made Genovese the 18th largest drugstore chain in the U.S.

Prescription drugs accounted for a growing proportion (35 percent) of those sales. But where Genovese was really beating out its competitors was in the sale of beauty products. Makeup, perfume, nail polish, and related merchandise accounted for almost 9 percent of sales, double the industry average. The company prided itself on the wide selection of products and on its reputation as the place to find the latest, hottest brands. "We always want to be first in our market with new items," Allan Patrick, Genovese's executive vice president, told WWD in a 1995 article.

Genovese's performance came amid the growth in alternative sources for prescriptions resulting from the managed care movement. Third-party firms, such as health maintenance organizations, hospitals, and mail-order houses, paid 70 percent of all prescription drug bills in 1995, up from 4 percent in 1960. The trend that began with hospital associations on the West Coast in the late 1930s was now a national reality.

As more employers shifted their employees' health coverage to managed care or health maintenance organizations, drugstores were under great pressure. According to an article in Investor's Business Daily, "the name of the game is merchandising and cost-efficiency through technology. You have to have the systems and marketing expertise to attract third-party business."

The year 1994 also saw the company move beyond its traditional merchandise with the opening of The Craft Works, an arts and crafts store, in Connecticut. The 12,000-square-foot store offered more than 35,000 items, including picture frames, materials for making jewelry (including over 3,000 types of beads), water colors and artists' materials, knitting equipment, and children's crafts.

During 1995, Genovese continued to expand, opening new stores, including its second in Manhattan, and buying the pharmacy files and inventory of seven independent drugstores. Towards the end of the year the company introduced a redesigned store logo, adding the corporate tag line, "We'll take good care of you," and a small heart to the Genovese name. Signs inside the stores were updated as well, including department-specific names, such as "small wonders," for baby care. "Genovese was looking to up its recognition with consumers," a spokeswoman explained in an article in Chain Store Age Executive. "Research showed that the company was perceived as offering good, caring service. But it didn't fare so well when it came to communicating the contemporary, professional pharmacy image that today's shoppers value."

With its new signs, Genovese continued building a strong presence in the metropolitan New York area. By 1995, the company was the number three drugstore chain in New York City, with a 10 percent share of that $2.8 billion market. Its two major competitors, Duane Reade and Pathmark, each controlled about 14 percent of the drugstore sales in the city. On Long Island, which had a drugstore market of $1.1 billion, Genovese controlled 24 percent of the sales, making it the dominant player.

1996–1997

By the end of the fiscal year, the company had 121 super drugstores, and sales had increased 7.4 percent to a record $612.3 million. Unfortunately, heavy snow storms contributed to a poor fourth quarter and lower reimbursement rates from managed care and third party prescription plans put pressure on profits earned from prescriptions. As a result, earnings fell for the first time in six years.

1996 and Beyond

The year began with a tentative settlement of a class-action lawsuit brought by independent pharmacies challenging the pricing practices of 13 pharmaceutical companies. The drug manufacturers gave health maintenance organizations and hospitals big discounts while charging retail drugstores twice as much. The settlement would give the pharmacists some $400 million to divide among themselves.

During the year, Genovese opened more stores, including a third store in Manhattan. Located in an area that was both commercial and residential, the company showed its ability to respond to neighborhood tastes by providing both a large array of school supplies and a one-hour photo-processing laboratory. Building on the success of its arts and craft store Genovese introduced major arts and crafts departments in many of its stores, with more planned for 1997.

Genovese's commitment to the community was acknowledged by New York City Mayor Rudolph Giuliani as the company was honored for its response to the crash of TWA flight 700 that summer. The company's Howard Beach store in Queens shuttled supplies to the relatives of passengers as they awaited word. The company also provided emergency personnel working at the crash site with assorted paper and plastic products and well as sun block and aspirins.

Following several years of consolidation in the drugstore industry, there were rumors in September that J.C. Penney might buy Genovese, and the drugstore chain's stock rose. Penney's had already bought Thrift Drug Stores and had agreed to purchase Fay's, a 272-store drug chain. While nothing came of the rumors, Genovese did sell its nursing home pharmacy division, for approximately $3 million. Genovese appeared to be responding successfully to competitive pressures from non-drugstore chains as well as managed care.