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Cardinal diversifies 
with Kinray deal

BY Jim Frederick


DUBLIN, Ohio — Say goodbye to Kinray, the service-obsessed regional drug wholesaler. But say hello to a more muscular and diversified Cardinal Health.


The wholesale and health services giant announced Nov. 18 it will buy Kinray for $1.3 billion. The buyout, set for completion in early 2011, will be a boon to Cardinal, boosting its customer base to more than 7,000 independent drug stores, extending its reach in the Northeast and adding scale versus its wholesale rivals, McKesson and AmerisourceBergen.


Equally important, the addition of Kinray’s 2,000 independent customers in the New York/New Jersey metro area propels the company ahead in its efforts to diversify its customer base, which in recent years has become precariously dependent on two chain pharmacy giants, Walgreens and CVS, for half of its distribution revenues.


“The acquisition grows [Cardinal’s] base of customers by [more than] 40%,” said Adam Fein, founder and president of Pembroke Consulting. However, he warned, “they’re going to have a big challenge in retaining those customers. Kinray had a unique reputation.”


Indeed, Kinray’s service reputation and close ties to independents are legendary. Applying that kind of personalized culture to the much bigger scale of Cardinal’s business model will be challenging, but Cardinal chairman and CEO George Barrett appears to put a high premium on Kinray’s customer service standards, saying his company will work “to continue that tradition.” And Kinray’s customers, he said, will benefit from Cardinal’s “branded pharmaceutical programs, inventory and pharmacy management tools, and … extensive generic 
drug program.”


For Kinray, it’s the end of a remarkable, 36-year run as a privately owned juggernaut, and a bonanza for its owner and CEO, the colorful and socially connected philanthropist and billionaire Stewart Rahr. Beginning in the 1970s, Rahr built the Whitestone, N.Y.-based company into a distribution powerhouse, thanks to an obsessive commitment to personalized, responsive service; high-tech order and fulfillment muscle; and rapid order turnaround. Kinray ships prescription and over-the-counter medicines, health-and-beauty aids and home health products across the United States, but its real strength lies in the Northeast, where it generates most of its $3.5 billion in 
annual revenues.


One thing that motivated Rahr to exit the market now, Fein observed, is “the level of competition in the wholesale market. Margins are continually under pressure, and the scale to buy generic drugs is crucially important.”


That last factor, he told Drug Store News, will work to Cardinal’s advantage, given the company’s massive generic purchasing and distribution capabilities and economies of scale.


On the other hand, Fein said, “Cardinal … has numerous challenges in rebuilding a position in the independent market,” given its efforts to rejuvenate its Medicine Shoppe franchise program. With Kinray, “they’ve acquired a company that has a reputation, culture and heritage in serving that customer very well. That’s a big net positive for them,” Fein added.


Cardinal also is restructuring its Leader marketing program for independents, Fein noted. “Their over-focus on large customers, and the big competitive threat from Health Mart, has really put them in a defensive posture. So they’re trying to go on the offensive by restructuring Leader, bringing new management to Medicine Shoppe and acquiring 
Kinray,” he said.


Wall Street endorsed the deal. Standard & Poor’s upgraded its investment rating on Cardinal to “buy,” noting that the acquisition provides the wholesale giant with “needed diversification, since 57% of [Cardinal’s fiscal 2010] revenues comprised only five customers.”


Morgan Stanley Research called the Kinray acquisition the “optimal use of cash” for Cardinal, giving it “greater exposure to independent pharmacies … and to generics.”

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Small formats gain momentum, grab attention

BY Mike Troy


BENTONVILLE, Ark. — Walmart’s Neighborhood Market concept finally is getting its due more than 12 years after the first unit opened in late 1998. Next year, the company expected to open between 30 and 40 small stores, the majority of which will be Neighborhood Market units, in addition to a handful of pilot stores measuring less than 30,000 sq. ft. that the company views as a potential growth vehicle for either urban or rural markets.


The uptick in interest in smaller-format development comes as the Walmart supercenter is close to saturation. At the end of the third quarter, there were 2,882 supercenters in operation, and with next year’s plan to add between 155 and 165 supercenters, the company easily should surpass the 3,000-unit market. By comparison, there were only 181 Neighborhood Markets, four Marketside stores and two Supermercado stores. Overall, the level of capital expenditures and square footage expansion next year will remain the same as this year, with plans calling for between $7.5 billion and $8 billion spent on adding roughly 11 million sq. ft. of space.


The upshot for the coming year and beyond is that urban markets, and to a much lesser extent rural areas, represent the single greatest domestic growth opportunity available to the company, which is why there is an increased, albeit modest, amount of capital being devoted to smaller stores. However, aside from indicating that the majority of next year’s small- and medium-format stores will be Neighborhood Markets, the company has not disclosed the size or location of its experimental stores, or indicated whether they would carry a different name.


What’s clear is that there is intense interest in Walmart’s small-format plans and that the product mix is likely to include food, consumables and health and wellness due to the high-velocity nature of those categories. Plenty of retailers have experimented with or indicated they plan to open smaller stores in the years ahead, but they don’t attract the interest of Walmart due to the company’s deep pockets and the ability to expand rapidly a retail concept that meets financial 
performance targets.


In addition to the means and motive to pursue small-format growth, several things have changed since the first Neighborhood Markets stores opened in the late ’90s and fueled speculation about growth. Today, Walmart has the distinct advantage to leverage its abundant international experience as it operates thousands of small-format stores in multiple formats across multiple markets. In addition, the company has improved its sullied reputation to the point where elected officials in urban markets now are more likely to green light growth plans as evidenced by recent wins in Chicago and Washington, D.C.


That said, Walmart’s small format will remain a work in progress throughout the coming year, with any type of meaningful expansion unlikely to occur until 2012 and beyond.

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Sam’s opens its ‘Portfolio’ to a health-and-wellness focus

BY DSN STAFF

BENTONVILLE, Ark. — Sam’s Club promises to be an even more formidable competitor in the health-and-wellness space in the years ahead, judging from the strategic priorities now in place as part of a broad-based strategy known as Project Portfolio.


Not to be confused with Walmart’s Project Impact strategy, despite the abundant similarities, Sam’s Project Portfolio approach has as one of its key elements an increased focus on health and wellness. Space devoted to those categories, as well as to food, is being expanded as clubs are remodeled. Unchanged in the new Project Portfolio merchandise layout is the prominent position of the health-and-wellness area at the front of clubs.


The changes are occurring under the leadership of president and CEO Brian Cornell, who joined the retailer a little less than two years ago and quickly embarked on a strategy to expand space and improve the productivity of frequently shopped categories while reducing exposure to such less-attractive growth areas as large appliances and hardlines.


By the end of the current year, Sam’s expected to have 100 of its approximately 600 clubs in the Project Portfolio format, which Cornell contended improves sight lines and clarity, and results in sales improvement in focus categories. As evidence of the strategy’s success, Cornell highlighted the 2.4% increase in same-store sales Sam’s produced in the third quarter.


During the coming year, Sam’s expects about $700 million of its approximately $1 billion capital budget will be used to remodel 60 to 70 clubs, with an additional $300 million spent on the new construction or the relocation and expansion of seven to 12 clubs.


The emphasis on food and health and wellness in the Project Portfolio strategy is understandable given the growth characteristics, frequent replenishment cycle and a margin profile that enables Sam’s to demonstrate value. Also playing a factor is the background of the executives now leading the company. Cornell joined Sam’s in March 2009, after serving as president and CEO of Michael’s for two years. However, his more relevant experience was obtained in the supermarket and consumer packaged goods world. He arrived at Michael’s from Safeway, where he served as chief marketing officer, and prior to that he held senior management positions with PepsiCo and Tropicana.


A month after Cornell’s arrival, Sam’s named Linda Hefner as EVP merchandising. She joined Walmart in 2007 as a merchandising EVP to lead the home business. Hefner came to Walmart from Kraft Foods, where she served as EVP global strategy and business development, and prior to that was a senior executive with Hanes, which at the time was a division of Sara Lee.


In August, Sam’s appointed Todd Harbaugh EVP operations. He is a 20-year veteran of Walmart who spent the past seven years at Sam’s, where prior to his current position he served as SVP inventory management, supply chain, pricing, planning and execution.

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