The story of how a small group of pharmacies has survived one economic plague after another over the past 25 years.
A Small-Business Life
Spending a quarter century weathering one economic plague after another can leave a man wondering what's so new about the 'new economy'
Doug Meredith first arrived in Sturgeon Bay, Wis., on a raw March day in 1974, wind and rain lashing out from a dark sky. "It was an ugly, ungodly day," Meredith recalls. "Everything about it said, 'Don't come."
But Meredith, intent on owning a business, was out to defy the gods. He set his sights on a local pharmacy whose owner wanted to retire. Meredith was managing a pharmacy a couple of hours south, in a Milwaukee suburb, but that meant working for someone else. One night, he and a fellow employee had gotten to talking. "We could do this ourselves," they said.
The two men spread the word via the network of salesmen who made the circuit of pharmacies in the Upper Midwest, and soon a reply came back. There was a drugstore for sale in Sturgeon Bay, a town of 7,000 in the northeastern corner of the state, on Lake Michigan. Meredith, who grew up deep in the northern reaches of Wisconsin, hard by Lake Superior, was looking to get back to the country. Sturgeon Bay, even on that ungodly March morning, looked just fine to him.
The deal was struck 23 years ago this November, and Doug Mere-dith, now 58, has since spent the core years of his life tending a small business in a small town. Today Bay Pharmacies encompasses two locations, 38 employees, and enough sales per square foot to put the business in the top 5% of all U.S. pharmacies. Meredith's payroll now exceeds his first-year sales by 50%. When he first came to Sturgeon Bay, the town had five pharmacies. Now it has three: Meredith's two stores and Wal-Mart.
Meredith put every dime he had into the purchase of the business--$20,000 for his half share. The seller, in fact, financed the down payment on Meredith's house, where he moved with his wife and four small children. Looking back across the years, Meredith concedes that he never thought about not making it: "I was too young to know better."
Others--competitors, partners, neighboring merchants--have quit along the way, affirming what many small-business owners already know: there may be greater opportunity for the lone entrepreneur these days, but that promise is often mined with grim surprises. Partnerships have blown up in Doug Meredith's face. Employees have stolen from him--and have been stolen away by competitors. The local economy, supported by an old-line industry, nearly collapsed. Wal-Mart came to town, as did Kmart. Both in the same year.
"Brutal" is how Meredith describes the past five years of intensifying competition and eroding profitability in his industry. The average independent pharmacy now nets less than 3% after taxes, a 20% drop in five years. In the 10 years before 1993, 1,000 independents across the country went under; in the three years since, 3,000 have. "Sometimes it seems," concluded a weary Meredith on an afternoon last winter, "like the only time you win is when you die."
Bay Pharmacies' history--with its litany of late-century economic and managerial plagues--is unique in its particulars but universal in its kind. It is also a reminder that all the happy talk about the new economy can ring hollow when the reality behind the rhetoric is faced square on. Struggle and survival are the operative words here. Victories are few, and rewards are mainly intangible. The little that Doug Meredith has accrued as a small-business man has come from hard work and fair dealing. For him, the mere act of staying in business for nigh a generation now amounts to a private sort of honor.
His is the tale of a small-business life.
At the outset of Doug Meredith's stewardship, Bay Pharmacies occupied a single 5,000-square-foot downtown location on the corner of Third and Jefferson Streets, which today is the home of the Donna movie theater. Meredith and his first partner pumped new life into the business, watching it grow by 15% a year from 1974 to 1977. The previous owner didn't advertise much; they did. He kept his prices high; they cut theirs.
They were also quick to heed customers who resisted change. Meredith inherited 300 personal charge accounts, which he wanted to eliminate. But the idea offended the first three customers he queried. Didn't he trust them? Didn't he know they always paid their bills on time? "People up here don't believe in plastic," says Meredith. "When they get a bill, they pay it." He quickly relented and, in fact, later expanded the store's charge program to keep pharmacy accounts from drifting over to Wal-Mart.
In 1976, a local independent grocer left downtown for a site in a new shopping center on Sturgeon Bay's west side. Meredith and his partner followed in 1977, opening a second--larger--location. Because of construction delays, the store wasn't up and running until November, and Meredith cursed himself for trusting the builders. "People don't change their buying habits in the middle of the winter. We died on the vine, just died."
For the next three years, the store struggled to atone for that blunder. Meredith was putting in 70-hour weeks, and his partnership was fraying.
The partner accused Meredith of stealing. He claimed that the incidentals Meredith typically signed for--a meal here, a new set of tires for the delivery van there--were, in fact, personal expenses. Then, on the day before Thanksgiving, the partner summarily called in auditors to review the books. Disgusted by the charade, Meredith sent the bookkeeper home. The auditors found nothing.
Meredith's main wholesaler offered to back Meredith in a buyout of his partner, lending him two months' worth of inventory to keep the west-side store afloat while Meredith, unable to carry the business alone, searched for a new partner.
Sturgeon Bay is 45 miles east of Green Bay, the seat of the Door County peninsula that juts into the blue expanse of Lake Michigan. I went there to report this story in mid-January, arriving at what felt like the onset of the next ice age but what passes instead for January in Wisconsin--subzero temperatures intensified by a cutting wind. Ice jammed the harbor, which was dominated by the hulking shapes of the 1,000-foot-long freighters that haul iron ore down through the Great Lakes.
Those boats were built in Sturgeon Bay, but that was another time. The shipyards experienced a downturn in the 1980s, when defense funds dried up and the Cold War ended. Demand for naval minesweepers--also built in Sturgeon Bay--dropped. Eighteen hundred well-paying shipbuilding jobs have melted down to approximately 700, mainly in service and repair.
Meredith has seen a diaspora of good friends and able craftsmen. One man worked 28 years in the yards before striking out for Elgin, Ill. "The last I heard from him," says Meredith, "he was headed for Louisiana."
In 1894, Meredith's grandfather opened the first general store in the northern Wisconsin town of Mellen. Doug started working in the family business at age 10 and has been in merchandising ever since: a half century of putting things on shelves and seeing if anyone will buy them.
He saves every newspaper ad he's run for the past 22 years, complete with notes on the results. You can't trust the memory, he says. Last January, he ran a sale that failed miserably--but he duly noted that on two key days, the temperature didn't top 20 below. Meredith can tell you that if Easter falls in March, even on the 31st, candy sales will be one-third lower than when the holiday falls in April. An advertised sale on vitamins will do best in September and October, when kids are returning to school, but will do even better if it's timed to coincide with the arrival of monthly social-security checks.
Meredith has always believed in giving up some margin to get a payback in customer loyalty. In the spring of 1975, six months after buying the pharmacy, he cut prices. Back in Milwaukee, chain supermarkets already bestrode the retailing jungle. "I knew it would only be a matter of time before the chains came up here."
Meredith figured that if he cut prices at the outset and trimmed his cost structure accordingly, he'd be ready. "We could have made more money in those early years," he says. "But look, at least I'm still here."
High prices were a fact of life in Door County back then, owing to limited competition, the absence of chains, and the seasonal presence of "turkeys"--summer tourists vulnerable to gouging. Meredith recalls a fellow merchant walking into his store one day while he was changing prices. He even remembers the item in question. "A tube of Crest had a suggested retail price of $1.29, but it cost me 65¢. I could charge 79¢ and still make a profit." The man tapped Meredith on the shoulder and asked, "You already raising your prices for the turkeys?" Meredith replied that he was lowering his prices. "He said, 'You're nuts.' He went absolutely berserk. He told me I was undercutting all the other merchants in town. I told him, 'If you keep your prices high, you end up screwing the natives."
Meredith found a new partner, a Walgreen manager from Milwaukee who was looking to leave the big city behind. But that proved short-lived. The new partner, who had had polio as a child, broke out into a drenching sweat when he worked at the store, even on the coldest winter days. "I couldn't let him unload a truck or do any heavy work," says Meredith. The man was diagnosed with a rare malady: post-polio syndrome. For the second time in two years, Meredith had a dysfunctional partner--and, again, one he couldn't afford to buy out.
But his luck turned. Within six months, he met Bill Divine, a pharmacist in Appleton who had been buying into small pharmacies in rural Wisconsin. The struggling west-side store was filling only 60 prescriptions a day, not enough to turn a profit. Divine came to town and assessed the situation. A man named Greg Rohde ran a small prescription shop in Sturgeon Bay, and, he, too, was struggling at 60 prescriptions a day. "Greg and Doug were butting heads," Divine recalls. He brought the two together and persuaded Rohde to close down his shop. The combination gave the business a merchandiser in Meredith, a pharmacist in Rohde, and a silent partner in Divine, all of whom understood where the pharmacy industry was headed. Volume on the west side leapt to 120 prescriptions a day, well past breakeven. Meredith now recalls: "Greg and I had been fighting tooth and nail. If things hadn't changed for me, I was going to close the west-side shop."
Things changed. He renewed his five-year lease on the store.
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."
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.
The footage revealed a conflicted perpetrator--a man taking money from the till, then putting it back; a man picking up the cash box, then disappearing out of the frame. Finally, the camera did not lie. Meredith's employee confessed when confronted. He had stolen $5,500 in cash.
The lack of trust between people, the lack of conviction in them, still eats at Meredith. He now makes it a policy not to socialize with any of his partners. Ask him about personnel, and he will nudge his office door closed before heaving a deep sigh. "There's no respect today. It's all 'me, me, me.' 'When do I get a raise?' 'How much vacation do I get?' Nobody asks, 'What can I do for the business?" Meredith now has a simple remedy: he prefers to employ older, more experienced workers. "The other day, I hired someone who's 68."
"To survive in a business like this, you'd better be sure you got a good partner, and I don't mean a business partner," says Meredith. His partner is Pat, to whom he has been married for 34 years. When I first met Pat, an erect and handsome woman, she eyed me carefully. "What's this article about? We're private people."
I told her that I was interested in the business.
"Well," she said, "the business is part of our private life."
The next day, over lunch, Pat was less wary, but no less acute. She wanted to know what I thought, what conclusions I have drawn in my travels as a business writer. Then she and her husband told me a little about their lives.
Doug and Pat have four children. Three are teachers, and one is a landscape architect. Pat says, "We told them, Do something you enjoy, and don't marry for money." Doug completes the thought, laughing: "And they took us too literally."
Pat works about 20 hours a week in the store. She also promotes literacy in the county. She says she is leery of computers. What will happen, she wonders, in a technologically driven future bereft of people inspired to make art?
Pat buys crafts for the business, a thankless task given that Wal-Mart, practically next door, often sells the exact items in bulk below her cost. She recalls one such case concerning felt fabric: "I kept looking at it and wondering how they could afford to charge so much less. For the longest time, I couldn't figure it out. They looked exactly the same." Then one day the sales rep was in town. Pat asked, "What's going on here?"
He disclosed that Wal-Mart often sold goods manufactured to its specifications. Look more closely, he said. And she did. The thread count in the Wal-Mart fabric was 120 threads per square inch. Meanwhile, Bay Pharmacies' felt had 144.
A Lake in the Woods
Doug and Pat Meredith grew up in the woods of northern Wisconsin. She's from the Hurley area, and he's from Hurley's sister city, Mellen, in Ashland County. The area once had a population of almost 18,000. Now there are only 6,500 residents, and 65% of the population is over age 65. The iron mines have long since closed, having lost out to lower-cost foreign sources. Technology has transfigured a marginal timber industry, with half the number of men now able to cut twice as much forest.
Doug and Pat first met when he was 12 and she was 8. Their families had cabins on a small lake in the woods. She graduated second in her high school class. He chose to pursue much of his education elsewhere. "I always loved being outside," he says. He would often leave school after lunch to hunt, fish, or trap. In the summers, he fought forest fires.
The lake of their youth centers their life still. Once a month they drive up to the cabin for a restorative weekend. They eschew snowmobiles and opt for cross-country skis. Meredith splits his own wood and makes his own sausage and sauerkraut in 100-pound batches. Until just five years ago, the cabin had no plumbing or electricity; most of the amenities it has now Meredith installed himself.
Back in the 1950s, after high school, he went into the army for two years. He came back to run the store in Mellen that his father inherited from his father. Then Doug's father had a disabling stroke, and Doug took over. As Cold War tensions wound tighter around Berlin in 1961, Doug received orders to ship out. But he had already served. His letters of protest went unheeded. As induction day approached, he had no choice but to sell the store's inventory at 50% off and close down. Three days before he was to ship out, the Pentagon caught its mistake and revoked the order. But by then, it was too late. The merchandise was gone, and with it went the customers and then the family business.
Maybe it didn't matter. Doug and Pat were married in September 1962, and north-woods Wisconsin was changing. The last iron mine closed in April. Everyone was heading south to find work in the auto plants of Kenosha and Janesville. "I couldn't see how I would be able to raise a family there." He knew he had to quit the country for jobs working in other people's stores, in other people's places like Chicago and Milwaukee.
Bill Divine, the partner from Appleton, thinks Doug Meredith is a crack retailer. "He knows the front end of these stores better than anybody I've ever seen." Divine says Meredith rarely gets stuck with inventory that will not move. He knows his audience.
Perhaps that's because Meredith is a bulldog, never one to sit back and let things just be. He remodels one of his stores every year. He has to keep things looking fresh. In the midst of such an effort, his workweek lengthens from 65 hours to 80. He and Pat are believers in the faith of hard work. For them, the ability to outwork the competition provides a necessary edge. Bay Pharmacies has 24-hour emergency service every day of the year. It delivers prescriptions; Wal-Mart will not.
Still, people now and then will walk into the store, ask the pharmacist for the recommended medication for a sick child. Then they'll turn and walk out just as quickly, saying they'll buy it at Wal-Mart, where it's a few pennies cheaper. To that, Meredith will simply shake his head and say sadly: "People are crazy.
"Wal-Mart has done a great PR job with old Sam Walton in his pickup truck," he continues. Meredith asserts that it's a myth that Wal-Mart's prices, on average, are lower than his.
Meredith's style has always been not to get mad but to get even. He spends much of his day on the retail floor or shuttling inventory between his two stores in an aging van. He built a crafts counter in his east-side store that's always supervised by an employee who knows the merchandise--a familiar face that customers can recognize. He built the aisles at an angle so that shoppers could glimpse all the merchandise at once, not just the hyped goods at the end. If customers are left waiting at the pharmacy, Meredith gives them "Baybucks," a coupon that entitles them to a discount on their next prescription.
Meredith intends to survive by hammering service. He will wade into the labor-intensive niches where the big discounters would never go. A glance around his west-side store offers evidence of the lucrative, yet sobering future to which Meredith seeks to lay claim. "The prostheses are for mastectomies and the turbans for cancer," says Meredith, motioning toward a display case filled with merchandise.
Behind that, there's a newly built section of the store devoted to the maintenance, repair, and customization of wheelchairs. In the era of managed care, as more insurance companies and hospitals edge more people out the door faster, serving the home health-care market has turned into a growth business for Meredith. Though it currently accounts for 7% of his volume, it is growing by 15% a year and affords 50% gross margins. Meredith will attack it.
Doug Meredith is 58, and one day soon he'd like to retire. But his retirement money is locked up in the equity he holds in the business. Asked what the future will bring, Meredith again eases the door shut. He says he feels a responsibility to employees, but ...
Could he sell the business to them? "That doesn't work. And besides, they couldn't afford it." His current inventory is worth more than 20 times what he and his partner originally paid for the entire business. It stuns him to think that at one time he and his partner bought a business for so little, and it depresses him to think that he could never do the same today. His best hope, in fact, is that a large chain, the sort he's been warring against, comes along and makes him an offer.
"It's tougher all the time," says Meredith. People look at his sales and figure he's in clover. They don't look at that shrinking net margin of 3% that has to be divided among three partners and gets further eroded by the need to carry an incrementally larger inventory each year. And besides, there are other things that have nothing to do with money that Meredith must one day see to. "I would like to counsel teenagers," he says. He'd like to help them through the pressures of modern life. And then he hopes there will still be time to seek solace by the lake in the woods--which for now is little more than a three-by-five snapshot on his office wall.
Coda: The Primacy of Soul
It's strange in the practice of journalism how infrequently the questioner becomes the questioned. Reporters' subjects often show little curiosity about journalists' lives or what they think. They tend to be wrapped up in the arduous yet exciting work of growing a business. But Doug and Pat Meredith were different. They seemed especially attuned to the world beyond Sturgeon Bay.
Sitting down at lunch one day with me, they wanted to know what impressions I had formed in my travels around the country. I thought a moment and then replied that what we call the new economy--what in fact passes for modern-day capitalism--had perhaps grown too efficient, too successful in meeting our everyday needs. I said that there were too many stores in America, too many choices beguiling the consumer, and that the economy was now built on too much debt. Doug and Pat quietly nodded in agreement.
But if I were asked the question again, I might answer differently. I would say that I'm stunned by how much small-business owners like Doug Meredith work and how little they complain. I would say that the "new economy," when viewed from up close, appears in some ways not new at all. It is harder, yes, because nothing ever stays the same now, and the lulls that in the past allowed for complacency or a mistake have disappeared. But owning a small business has never been easy. I would say, too, how remarkable it is that despite years of betrayal and adversity the Merediths exhibit no rancor. There is instead a serenity, a bone-deep sureness about what has been accomplished. The Merediths have built a good business and in so doing have built a good life.
One can't know the Merediths without believing that every small business, even one as seemingly ordinary as a local pharmacy, can assume its own special nobility--because of the tests it presents, the self-knowledge it offers, the life it makes possible. But mostly, as the Merediths' story makes plain, to make it in business here in America at the end of the century, you must first safeguard your soul.
Do that, and the rest is simple.
'I Feel Your Pain': Consolidation is hitting industries of every kind
What makes Doug Meredith's life as a small-business owner so tough is what's going on around him--namely, ongoing and widespread consolidation. Although the pharmacy business has been hit hard in recent years, it is far from unique. These days, it seems as though every business--from veterinary hospitals to charter-bus companies--is being consolidated. Retailers, manufacturers, distributors--everybody's feeling it. Here is a snapshot of what's happening in a few representative industries across the country--and why.
What's happening: From 1994 to 1995, independent drugstores saw sales climb just 0.5%, while drug chains experienced an 11% rise in sales. Since 1990, nearly 9,000 independents have disappeared, and the segment has seen its share of the total market decline from 26% to 18%.
Why: Managed care drives insured patients to high-volume prescription providers. Large drugstore chains and supermarkets have merged to capture that business at lower margins while they enjoy economies of scale. Insurance companies, meanwhile, favor high-volume providers.
What's happening: Suppliers to the auto industry are getting bigger and fewer; their numbers have dwindled from 10,000 in 1975 to 2,800 today. Their estimated average annual revenues have risen from $100 million to $300 million in the past five years.
Why: Most suppliers must have global manufacturing capabilities. Automakers are desperate to drive costs down. Suppliers must add more value by making more components and controlling more of the "geography" of the car.
What's happening: Independents are losing market share to chains. In 1995, the restaurant industry grew by 3%. But the top 200 "quick service" chain-restaurant companies saw sales grow by 6%, twice the industry average. The top 10 companies accounted for 28% of the industry's total sales. In 1995, the top three companies brought in 18% of total sales, versus 12% in 1980.
Why: Fast-food operators have grown more flexible at situating stores and changing menus to suit consumer tastes. They have also spent a lot on advertising, with the bigger players spending more to reinforce brand image. At the same time, cash-strapped consumers search out value and convenience.
What's happening: Market-forced mergers. From January 1996 to February 1997, there were more than 2,100 radio-station mergers, representing an aggregate value of $15 billion. That compares with 1,400 deals in calendar-year 1995, worth $5.5 billion. The average-size deal among publicly reporting radio broadcasters increased from $14.7 million in 1990 to $39.4 million in 1995.
Why: New federal regulations allow media companies to own substantially more media outlets. Multistation companies can cut better deals with large advertisers and can spread out "canned" content, such as music, traffic, weather, or business reports, across more stations.
What's happening: Bigger players are taking greater share. In 1995, the number of general-purpose and retail private-label credit-card accounts in the United States rose by 12%, to 808 million. The number of accounts processed by the top 10 third-party credit processors rose by 23%, to 197 million, or 24% of the total.
Why: Credit-card processing combines a high fixed cost--a big central computer facility that supports a global network--with very low variables (or incremental costs), motivating processors to aggressively add customer volume to raise profits. Consumers, meanwhile, are carrying more credit cards.
Edward O. Welles is a senior writer at Inc.
BAY PHARMACIES, Doug Meredith, 112 Cherry Point Mall, Sturgeon Bay, WI 54235; 414-746-2970 88
NATIONAL COMMUNITY PHARMACISTS ASSOCIATION, 205 Daingerfield Rd., Alexandria, VA 22314; 703-683-8200; www.ncpanet.org 88