The Years of Living Dangerously

Things changed. He renewed his five-year lease on the store.

Wal-Mart

Seventy percent of Bay Pharmacies' sales comes from filling prescriptions, known in the trade as "scrips." The other 30% of the business involves the "front end": toys, crafts, cosmetics, sundries, and health and beauty aids. Independent pharmacies have historically lived and died on prescription volume, which for many might represent 90% of total sales. Major chains such as Revco and Walgreen take in about 40% of their sales in prescriptions.

In the past, filling prescriptions might have fetched the industrious independent a 30% gross margin, but in the brave new world of managed care, that margin has been cut to 20%--or even less. (Meredith's margin right now is closer to 25% because half his prescriptions are paid for in cash, bypassing the paperwork associated with insurance.)

Everything in today's health-care market favors size and efficiency. Margins are being squeezed because insurers reimburse less for prescriptions, or they channel patients into restricted networks of chain stores that deal in larger volumes and thinner margins. Mail-order pharmacies further crowd out independents, while drug companies offer high-volume HMOs lower prices than they do independent pharmacies for an identical quantity of the same drug.

Meredith estimates that his sole competitor, Wal-Mart, fills 220 prescriptions a day. (His total is higher than that, but he won't disclose it for the record.) However, what constitutes the core business for Bay Pharmacies, its bread and butter, represents maybe 15% of sales for Wal-Mart--little more than one of several ways to lure customers into the store.

When Wal-Mart opened in Sturgeon Bay, in 1989, Meredith knew the retailing giant would make a hard run at his prescription business. It offered a $5 coupon for any new or transferred prescription. Through sources at the local paper, Meredith knew precisely when Wal-Mart would open: June 1. Both he and Rohde had hit the road in 1988, touring small towns in southern Wisconsin and Illinois to see how merchants fared in Wal-Mart's shadow. While a neighboring hardware store simply closed before Wal-Mart even opened, Meredith expanded his main store by 4,000 square feet, reasoning, "If I'm going down, I'm going down in flames."

In May, Meredith began advertising more heavily in the local media. "We lit up the radio." The medium was inexpensive, and Meredith knew that a lot of old-timers listened to the one station in town, especially the morning news. He ran ads in the newspaper carrying his pharmacists' pictures, emphasizing their experience, trustworthiness, and roots in the community. The tag line was, "Here to help you." He ran that ad for as long as Wal-Mart ran its $5 discount--an offer that Meredith vowed to match in his own ads.

Meredith then began plotting his next thrust. He needed to bring in more prescriptions, so he persuaded another independent pharmacist, the son of the man whose business he had bought, to merge with him. That would add another 50 scrips a day. Meredith figured Wal-Mart would take 50 scrips from him, so at least he'd be treading water. He then opened up more charge accounts, frozen at 300 since he had bought the business, to encourage customers to stay. The number has since soared to 1,250.

Still, Wal-Mart came in and took 18% of Meredith's business. But that was just the half of it. Meredith believes his doggedness irked the chain, and now it was payback time. The discounter hired away one of his floor managers, an employee with 10 years of experience. It also hired his lead pharmacist. That stunned Meredith. "We had a long conversation before he left," says Meredith. "He told me they bought him."

The two men were close. Now that bond was broken, replaced by forced conversations at chance meetings around town. "This really hurt," Meredith reflects. "This was like losing a friend."

Guardian Angel

A world of sundered partnerships, disloyal employees, and oppressive competitors makes for a lonely business owner. The bottom dropped out of Meredith's faith in human nature three years ago when he suspected a trusted 10-year employee of stealing. Disbelieving and knowing that he needed proof, Meredith went so far as to stake out the store at 5:30 a.m., slumped low in his wife's car across the street, binoculars ready on the seat beside him. When that yielded little, he installed a hidden surveillance camera.

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