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BJ's Getting Out of Pharmacy Biz

January 5, 2007

By George Anderson

BJ's Wholesale Club has decided to close all of its pharmacies.

The decision to get out of the pharmacy business was made, according to interim CEO Herb Zarkin, for a number of reasons. These included the company getting into pharmacy at a later stage (2002) than its primary competitors and not having conveniently located stores (46 of BJ's 171 stores have a pharmacy) to make it easier for consumers to pick up their prescription medicines.

"We haven't seen the [prescriptions] grow on a regular basis," Zarkin said. "It just didn't make a lot of sense for us to keep on putting the investment in."

BJ's has also felt the effect of increased price competition, which started when Wal-Mart began pricing some older generics at $4, as well as dealing with reduced reimbursement rates from Medicare.

The announcement BJ's is shuttering its pharmacies is likely to increase speculation of a company sale.

"There's a very legitimate case for it being sold -- they're not big enough to compete with the Sam's and Costcos," David Strasser, an analyst with Banc of America Securities, told the Boston Globe.

Discussion Question: What is your reaction to BJ's closing its pharmacies?

Discussion Questions:

While we value unfettered opinion, we urge you to show respect and courtesy for people or companies about whom you comment. Keep in mind that this is a public, professional business discussion. RetailWire reserves the right to edit or refuse the publication of remarks that we deem unsuitable. We may also correct for unintended spelling and grammatical errors.

Instant Poll:

Has BJ's made the right decision by getting out of the pharmacy business?

Comments:

Everyone who has responded to this announcement has talked about the effect it will potentially have on customers. But what about the major effect this will have on employees, even those not in the pharmacy? They will begin to worry about the stability of the company, the opportunities for growth, and their jobs. If I was in the retail business and looking for some great managers and great employees, I just found a new potential source.

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Mel Kleiman, President, Humetrics

Bigger is not always better. It is better for them to concentrate on those elements of the business where their strengths are and where they can be most effective. It is probably a very smart decision for them to make. If their ROI is not there, then why do it?

Bernie Slome, VP of Business Development, ICC/Decision Services

Competition for prescriptions is so tight right now, especially with companies like Walgreens and Wal-Mart rapidly increasing their market share, that it makes sense for BJ's to exit the business and dedicate the space in the store to a concept that can generate significantly higher revenues. It sounds like they are making the right decision.

John Lofstock, Editor-in-Chief, Convenience Store Decisions

BJ's got into pharmacies to compete with Sam's and Costco. They have been mostly successful overall in doing that. However, the margins they operate on are very thin and if pharmacies are not contributing, then it makes sense to close them. Two considerations that need to be understood are: first, which of their customers use the pharmacies? If they are large purchasers then there may be a risk of losing that business. Second, do potential suitors view pharmacies as a necessity and will closing them negatively impact a purchase?

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J. Peter Deeb, Managing Partner, Deeb MacDonald & Associates, L.L.C.

Yes, being profitable is key. But, let's look deeper. The location and no drive through area may have limited BJ's efforts. Keep in mind, most of the direct and indirect competitors in pharmacy were all late to enter the business.

Walgreens and some of the other progressive foods/grocery operations secured a major competitive advantage before Wal-Mart, BJ's, etc. The major GPM contributor for Walgreens is the pharmacy...which may support the reason that Walgreens has 2 billion dollars on the balance sheet.

So is the real excuse that the BJ's consumer doesn't want to buy medications there; or marketing efforts were unproductive?

Interestingly, future BJ's may find a better location to secure a very high gross profit margin business.

Hmmmmmmmmmmmmmmm

Stephan Kouzomis, Faculty and Staff Member, University of Louisville's College of Business

Too little too late is generally not profitable. Introducing a clinic in conjunction with a pharmacy is on the forefront of development. If that concept would be important to BJ's consumers, that might have been the better route to take. Trying to follow what was an established trend 7 years ago is not a good innovation because consumers have already established their pharmacy relationships at this point and getting on the approved list by local insurance companies could be time consuming.

Following the trend is useful if done in a reasonable time period. Following the trend long after it is established is not typically a good idea because the leaders are moving on to new ideas by then.

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Camille P. Schuster, Ph.D., President, Global Collaborations, Inc.

I have to agree with the other comments, that if something is not profitable and not growing, then either fix it or drop it. Apparently they didn't see a suitable fix and are right in cutting their losses. While that is admirable, it makes me wonder about the health of their overall business. While I am no expert on pharmacy, I wouldn't think it should be too hard to grow that category with today's demographics and price increases on prescription drugs. Making money is probably much more difficult, however.

Art Williams, Retail Marketing Consultant/Analyst, Independent

Another challenge that pharmacies working out of these formats face will be in drawing the right talent to staff their pharmacies. With a significant share of the business slated to come from maintenance medication (this category is already under pressure from mandatory mail) and with little or no OTC business, pharmacists working at these stores would not have lot of avenues for patient interaction. This will be less attractive to me as a pharmacist. Add to this the operational challenges like specific storage requirements, compliance needs and then of course, the reducing margins. With more business expected to come from specialty pharmacy, it probably didn't make sense for BJ's to stay in the pharmacy business.

Santhosh Jayakumar, Category Leader - Retail Health & Wellness, Wipro Technologies

Mark is right. If you aren't making a profit, and there's no profit potential in sight, better to fold your tent and reassign resources to areas that make you more competitive. That's just good business.

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Ryan Mathews, Founder, ceo, Black Monk Consulting

The only reason to be in any business: make a profit. If pharmacies weren't profitable after 4 years, why bother? BJ's, like Costco and Sam's Club, is a department store. Department stores can pick the most lucrative categories and ignore the rest. Fifty years ago most American conventional department stores sold major appliances and fabrics, for example. It took guts for the stores to drop those categories when they became unprofitable. Great businesspeople maximize the payback from the resources they have. Surely BJ's can find something better for the pharmacy square footage.

Mark Lilien, Consultant, Retail Technology Group

Agreed. Especially when one considers that location and convenience are key drivers for choosing a pharmacy/clinic. It's just a basic...people want to go to locations close to them and be able to get in, get out and knock out a few other things during the trip. I can't imagine that research justified this as a good decision in the first place!

Laura Davis-Taylor, EVP, Customer Experience, MaxMedia

One has to get in any game or race before it starts, or at least very early, if one expects to win. BJ's got in the race late and was riding a losing horse. Location convenience was always a problem from day one. So they wisely decided to get off. But their late decision to get into pharmacies and now to get out may create other consequences. Will BJ's employees and customers now wonder if the company is still vital in other areas?

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Gene Hoffman, President/CEO, Corporate Strategies International

I am a BJ's pharmacist. I have been a registered pharmacist for the last 30 years, and in all those years I can truly say that my experience at BJ's pharmacy has been the best. I have been able to help the customers that need the most help--people that have to choose between buying food or taking their chronic medications. I've helped seniors choose the right Medicare part D plan for their needs, and I'm always available for any type of consultation. Member or non-member, it doesn't matter to me because I ENJOY helping people and BJ's gave me this opportunity for over 2 years now.

When I go home at night, I feel good about myself because I'm able to help the people that need my help the most---people without insurance plans, and patients whose physicians don't have the time to spend with them to explain the proper use of their medications and WHY they are even giving them a new prescription.

I thought BJ's was the answer to the old time pharmacy where everyone knew their pharmacist by their first name and could ask them any question and get an intelligent answer, and was always there to help the customer save money when they couldn't afford [other pharmacy's] exorbitant prices. This was one job where my intelligence and all my years of college paid off by benefiting some of the best customers I've ever had the experience of knowing. I will sadly miss this job and all the fantastic customers I've had the opportunity to know and serve.

'mowen'

People don't buy drugs on impulse, and having the added barrier of a membership requirement makes it worse. Drug stores are needed where and when the pains/doctor's orders come. Not at a big consolidated wholesaler.

John Lansdale, consultant, zaxpop.com

I would first comment on the difference in overall volume between Costco, Sam's Club and B.J.'s. A high volume Costco will pull in between two and three million per week in total sales; Sam's Club about a million across the board and B.J.'s is well behind both. A good high volume Rx department, which usually includes OTC items as well as Rx drugs, can generate well over $400,000 per month at somewhere around a 12% to 14% margin. Pharmacies are basically a draw for categories such as cigarettes, liquor, and candy which usually only carry (if your lucky) 1% margin on their sales, these are meant to pull members in. Remember, you don't need a membership in most states to utilize a club pharmacy. In conclusion a pharmacy may take two to three years to build a strong patient base, meanwhile the clubs will need to suffer through Pharmacist rates and low script counts until that kicks in. In B.J.'s case, they are struggling to compete in the wholesale market altogether and probably couldn't afford to wait it out.

'ebrake74'

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