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Its promise unmet, drug chain will die



Published: Thu, July 18, 2002 @ 12:00 a.m.



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A corporate scandal, the dropping of its retail strategy and the rise of larger chains doomed the company that once had a bright future.

By DON SHILLING

VINDICATOR BUSINESS EDITOR

Two strikes and Phar-Mor is out.

The 20-year-old company, which emerged from its first bankruptcy as a growing company, won't be so fortunate the second time around. Its second stay in bankruptcy is just about to end with the sale of the company's stores and other assets.

The future seemed much brighter 10 years ago when Phar-Mor was opening stores at a rapid clip and had become a coast-to-coast retailer.

Sam Walton, the founder of Wal-Mart, said at that time that Phar-Mor was the retailer that concerned him most.

"It's sad to see what happened to Phar-Mor over the years, given its original promise," said David Burns, a Youngstown State University business professor.

Early success

If Phar-Mor had properly executed its original retailing strategy, it still would be a major player among national retailers, Burns said.

Power buying -- buying large quantities of ever-changing merchandise -- gave Phar-Mor a retailing niche that attracted shoppers.

"It was like a hunt. What can I find dirt cheap today?" Burns said.

The other key to Phar-Mor's early success was its use of low-priced Coca-Cola products to lure shoppers into the store, he said. The limit was two 12-packs. The Coke was in the back of the store, so shoppers had to walk past the other merchandise two times.

"There were very few people up front at the cashier's line who had only two 12-packs of Coke," Burns said.

Embezzlement scheme

Despite growing to more than 300 stores and $2 billion in revenue, Phar-Mor never fulfilled its promise.

First, it was stung by the $350 million fraud and embezzlement scheme put together by founder Mickey Monus and a couple other executives. That revelation led to the company closing about 200 stores as it struggled through three years of bankruptcy court protection.

Burns said, however, that Monus' original company was viable financially.

The vast majority of the revenue and profits that Phar-Mor was reporting to Giant Eagle, then its corporate parent, were real, he said. The falsified numbers were just a small percentage, although the dollar amounts were large because of the size of the company.

Phar-Mor landed in bankruptcy court but survived. A turnaround company managed operations, eliminated stores and slashed thousands of jobs. Robert Haft, a retailing executive from Washington, D.C., led an investor group that turned Phar-Mor into a publicly traded company in 1995.

The company was healthy for a few years. It slowly opened new stores and remodeled stores with expanded food sections. From 1997 to 1998, its stock price doubled to nearly $12 a share.

Losses mount

In its past five and a half fiscal years, however, the company has reported losses of $127 million and its stock is now worthless.

In the meantime, Haft sold his stake to his minority partners, Abbey Butler and Melvyn Estrin.

Stock analysts said in recent years that the two East Coast investors didn't pay enough attention to the company and received too much compensation. Phar-Mor's unsecured creditors charged in a bankruptcy court filing that the co-chief executives, who recently resigned, were wasting company funds on corporate jets and expensive offices.

The reasons for Phar-Mor's failure in recent years are many, but Michael Morley, co-owner of the Shops at Boardman, said the forces of modern retailing doomed Phar-Mor.

In every sector of retailing, two or three major players are dominating. Smaller retailers have been put out of business all across the country by Wal-Mart and Target in discounting, by Best Buy and Circuit City in electronics, and Home Depot and Lowe's in home improvement.

"When you go up against huge corporations, it's hard to compete," he said.

Misguided acquisition

Phar-Mor executives knew they had to grow larger to spread out the company's administrative costs over more stores and receive better deals from suppliers.

Their only acquisition ended up hurting the company, however. In 1999 it acquired Pharmhouse, a New York-based chain that was losing money. The chain dragged Phar-Mor's financial results further into the red because its 32 stores were neglected during the sale process, and customers were avoiding them.

Burns said the Pharmhouse acquisition was similar to a mistake often made by small companies trying to grow larger. They try to beef up by acquiring a struggling company, but in the end they only wind up a larger company with weak stores.

Phar-Mor also became weaker in recent years because it didn't offer an alternative that was missing in the marketplace, Burns said. It tried to return to its Power Buying concept just before it filed for bankruptcy, but it was too late.

When it first began, Phar-Mor's format didn't really compete with expanding drugstore companies such as Walgreens and CVS, Burns said. Without Power Buying, Phar-Mor found itself competing directly against them and lost out because of the other chains' convenient locations.

"They had to entice people to drive farther to go to Phar-Mor," he said.

While the Youngstown area stores seemed to be doing well, this area is unusual, he said.




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