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Shopping Centers Today -> January 2001
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A bitter pill for centers?
Drugstores relocating to freestanding sites
By Debra Hazel
 Drugstores are increasingly choosing freestanding locations over strip centers. |
Their stores are getting bigger, they're consolidating and they're moving away from their typical locations. Drugstores just aren't what they used to be, and that's creating headaches for some developers now left with empty spaces.
A one-time mainstay of neighborhood shopping centers, major chain drugstores increasingly have declared their independence, opening larger freestanding units to increase the number of goods and services they provide. The pattern is not limited to just one chain or one geographic region: Walgreen Co., Eckerd, Rite Aid and CVS all are opening hundreds of freestanding units in place of strip center locations around the United States.
For the chains, the reasons behind the moves vary, from the desire to offer more goods and services, to wanting to control their own real estate and eliminate percentage rent. For landlords, the problems are how to use the vacant spaces, how to avoid conflict with the super drugstore on the pad nearby and how to determine when the current cycle will end.
"In 90 properties, I'm looking at seven of these relocations," said Louis Meshon Sr., president of Kramont Realty Trust, Plymouth Meeting, Pa., a neighborhood center REIT.
Perhaps the most important reason for the change in location strategy is that the chains say it allows them to offer customers more conveniences, including an expanded merchandise mix. In fact, drugstores increasingly have come to resemble large convenience stores, offering everything from prescription drugs to snack foods, videos, car wax and computer software.
"Retail pharmacies have become the convenience-shopping destination of choice for time-starved consumers," said Michael DeAngelis, a marketing manager at Woonsocket, R.I.-based CVS, which is opening 400 to 450 new stores over the next year.
One of the chief benefits is drive-through pharmacies, which cater to the busy customer on a high-margin item. They also provide a convenience beyond that of supermarket pharmacies.
"Back in the 1970s, grocery stores did not have their own pharmacies, but now they increasingly do, and we no longer locate ourselves in a strip center," said Carol Hively, marketing director for Deerfield, Ill.-based Walgreen. "With freestanding stores we're building the type of store that is best for us rather than having to conform to the available space."
Some 40% of the chain's 3,000-plus stores now are freestanding, and that trend will continue: 90% of the 500 stores that Walgreen plans to open during the current fiscal year, which ends Aug. 31, will be freestanding units. The units will average 15,000 square feet (vs. less than 10,000 square feet previously), allowing far more SKUs to be sold, including such nondrug or health-and-beauty items such as frozen pizza to reflect "the way people shop," Hively added.
Finances also are a factor. The move to larger freestanding facilities allows some companies to own their real estate. Walgreen, which owns 14% of its 3,165 stores, is moving to buy, rather than lease, more locations in the future, the company has said in SEC filings. The decision, which Walgreen said would require long-term borrowings, came after 60% of the chain's stores were either opened or remodeled during the past five years.
In moving out of in-line space, Walgreen and other chains also are avoiding percentage rent, Meshon noted, which could be significant to a developer's bottom line.
"They could be paying $8 to $10 per square foot in percentage rent, plus $8 to $10 per square foot in base rent," he said.
Freestanding sites also mean the chains do not have to suffer if other parts of the center are struggling.
"It's better for them: They're providing convenience for the customer, and don't have to suffer the vicissitudes of co-tenancy," observed Richard Wolf, senior vice president of Colliers International, Highland Park, Ill., an international brokerage firm.
But the opening of new stores generally means that competing units are being shuttered. For most chains, store closings largely will be in strip centers. However, "if a store is doing very well in a shopping center, we're not rushing to close it," Walgreen's Hively noted.
 Of the drug chains, CVS has the most stores, with 4,100 across the United States. |
Walgreen anticipates a net gain of 400 stores, meaning 100 units will relocate or shutter entirely this year. After gaining nearly 300 stores in 1999 through the acquisitions of Genovese, an independent regional store in the New York metropolitan area, and some Revco units from CVS, the J.C. Penney-owned Eckerd recently closed 289 of its 2,898 stores. Revco, which was at one time an independent chain, was acquired in 1997 by CVS, which sold off some of its stores to Eckerd two years later as part of an antitrust deal. CVS now has 4,100 locations.
Rite Aid, meanwhile, saddled with $6 billion in debt and SEC investigations, has moved to sell or close 379 West Coast locations, 31 of which have since been purchased by Longs Drugs. Walnut Creek, Calif.-based Longs has stores located mainly on the West Coast.
The problem for developers then becomes which tenants can replace relocating in-line drugstores. Contrary to what many believe, this can be an advantage for an owner/manager, who may re-lease the space for a much higher rent, while retaining the drugstore on an outparcel.
"That 8,000-square-foot space can be looked at as either an opportunity or an obscenity," Wolf said.
Good centers can find a buffet restaurant or other use for the vacated drugstore, while more challenged projects may have a much harder time.
"If the fundamentals of the property are good, then we view a drugstore move as a long-term opportunity to improve the center even when the short-term impact may result in decreased traffic," said R. Michael Goman, president of Konover & Associates, West Hartford, Conn., a real estate developer that owns 8.7 million square feet and manages 926,000 square feet of shopping center space.
"When the drugstore opens in a freestanding location, its sales volumes go up substantially—which benefits the overall center as well as our company when we're managing and leasing both properties."
But whether the drugstore will have exclusivity becomes an important consideration, according to Meshon, who observed that they sometimes leave to get away from supermarkets in the same center that have an exclusive on food items.
"Allowing broad exclusivity can have a harmful effect on the long-term success of the shopping center, particularly if there is the potential for future expansion," said Scott Riddles, COO and executive vice president of Staubach Retail Services in Dallas.
Interestingly, some observers say the trend toward freestanding drugstores may not have much of a future: Some municipalities are now restricting drive-throughs and the resulting curb cuts to keep traffic flowing.
"So the idea is let's build as many freestanding stores as we can," while it's still possible, Wolf said.
Developers, meanwhile, will handle this challenge as they've handled all the others. Drugstores aren't the first tenant to relocate, nor will they be the last.
"Retail is like life," Meshon said. "It's cyclical."
Additional reporting by Mark Seavey.
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