Smaller drugstores in a squeeze, circled by sharks

Los Angeles —- The pharmacy business is cutthroat. Just ask John Tilley, the owner of four small drugstores in Downey.

The Los Angeles-born pharmacist has seen drugstore chains such as Sav-on, Thrifty and Drug Emporium fade away. In their place are ever-larger nationwide giants such as Walgreen Co., CVS Caremark Corp. and Rite Aid Corp.

This summer, for instance, CVS agreed to buy Longs Drug Stores Corp., one of the last major regional drugstore chains. And Walgreen jumped in with a rival bid until pulling out of the fray last week.

“It never, ever stops being a shark tank,” said Andrew Wolf, an analyst who follows drugstores for BB&T Capital Markets. “The smaller players have gotten squeezed, their profits have gotten squeezed, and at some time they decide to throw in the towel.”

To keep up, Tilley has stocked hundreds of new drugs and added a wider selection of products. More recently, he’s had to compete with mail-order prescription services, which have gained a foothold.

In the meantime, rivals try to woo his pharmacists. The large chains court him and seek to buy him out. One even threatened to plunk one of its superstores across the street from his busiest location.

“We get offers, I would say probably not every week, but at least once or twice a month,” said Tilley, 54. “Usually it’s just a little feeler-type letter: ‘Why don’t you sell to us now while you still can make some money?’ “

Many customers said they felt frustrated by the pace of consolidation.

Maria Sykes-Free, a Los Angeles retiree, said she longs for the days when she would get her prescriptions filled at a “small, quaint” neighborhood pharmacy.

“Pretty soon, there will just be one drugstore, one department store, one bank. People can’t have their own individual businesses, is what it seems to me,” said Sykes-Free, who was buying cosmetics at a Walgreens recently. “Everything is being gobbled up.”

Longs, based in Walnut Creek, became the latest prize. With 526 stores, mostly in California but also in Hawaii, Nevada and Arizona, Longs developed a significant presence in key markets that its bigger rivals envied.

The chain announced in August that it had agreed to sell itself to CVS, the second-largest chain with 6,300 stores, for about $2.7 billion. But a month later, Walgreen, which operates 6,500 stores, jumped in with a $2.8 billion offer.

Longs quickly said it planned to stick with its previous agreement with CVS. Then, in a move that highlighted the industry’s fierce competitiveness, Walgreen Chief Executive Jeffrey A. Rein wrote a public letter to Longs’ board of directors saying the company was “disappointed with your unwillingness to discuss our proposal” and would continue its pursuit.

“Although we would unquestionably prefer to work directly with you to complete a negotiated transaction,” Rein wrote, “we are prepared to take our transaction directly to your stockholders.”

In a statement Wednesday, Walgreen said it was withdrawing its offer, citing not wanting shareholders to be unsure “for an extended period of time” and noting the “deterioration of the national economic outlook over the past few weeks.”

The chains that have succeeded have built expansive networks of well-placed stores, said John U. Bacon, author of “America’s Corner Store: Walgreens’ Prescription for Success.”

“What Walgreens figured out, and what others figured out, is that they weren’t selling just a product or a price,” Bacon said. “They were selling convenience.”

The competitive pressures on retail pharmacies are tough on both chains and independent stores, said Laura Miller, senior economist at the National Association of Chain Drug Stores.

“You can buy all the things that you can get in a drugstore in another kind of store,” she said. “And increasingly you can buy all the things you can get at a supermarket or a mass merchant at a drugstore.”