Business

A prescription for prudence and profits

Quebec’s leading pharmacist sizes up Shoppers Drug Mart

Brenda Branswell August 16 1999
Business

A prescription for prudence and profits

Quebec’s leading pharmacist sizes up Shoppers Drug Mart

Brenda Branswell August 16 1999

A prescription for prudence and profits

Quebec’s leading pharmacist sizes up Shoppers Drug Mart

Brenda Branswell

Jean Coutu could not shop unrecognized in many drugstores at home in Quebec. After all, the company he founded—Jean Coutu Group Inc.—is Quebec’s largest pharmacy chain, with 267 stores in the province. But last month, the energetic 72-year-old Coutu prowled almost unnoticed through dozens of Shoppers Drug Mart Ltd. stores in Ontario. He was no casual customer. Shoppers is owned by Montreal-based Imasco Ltd., which in turn is controlled by British American Tobacco PLC. With BAT intent on buying the rest of Imasco and disposing of its non-tobacco assets—the proposed $8-billion sale of Canada Trust to Toronto Dominion Bank being a step in that direction—Shoppers is also destined for the auction block.

Coutu is making no secret of his ambition to acquire his bigger rival. Last month, the company dispatched a number of senior officials to scout half of Shoppers’ 824 stores across the country. Coutu’s personal fact-finding mission took the chief executive to 72 stores in a week, starting in Toronto and working his way back to Montreal. “They recognized me in a few places even though I had a T-shirt and dark glasses,” laughs Coutu, sitting in his comfortable suburban Montreal office wearing his accustomed uniform, a white pharmacist’s lab coat.

Financial analysts consider Jean Coutu Group a leading contender for Shoppers, Canada’s largest drugstore chain—valued by BAT last week at $2.1 billion. Edmonton’s privately held

Katz Group, operators of Canada’s third-largest chain, is another interested suitor. And some analysts suggest that other potential bidders could include American companies such as CVS Corp. of Rhode Island.

That the gregarious Coutu would aspire to be Canada’s biggest pharmacist comes as no surprise to anyone who has been exposed to his entrepreneurial drive. His interest in Shoppers is merely the latest chapter in the Quebec company’s 30-year history. Since he opened a Montreal discount pharmacy in 1969, he and his managerial team have turned the firm into a business powerhouse. With 16,000 employees, Coutu Group ranks second in Canada (in addition to Quebec, it has eight stores in eastern Ontario and 16 in New Brunswick) and eighth in North America among drug chains. It is one of the few Canadian retailers to have successfully penetrated the U.S. market, where it owns 254 stores in seven states. Last year, revenue from American operations accounted for just over half of the firm’s $2.3 billion in sales. Financial analysts paint a picture of a well-run, highly profitable company. “Jean Coutu has an impeccable record,” says Christiane Dubeau, an analyst with Desjardins Securities.

Yet Coutu never set out to become a business tycoon. The Montreal native wanted to be a doctor like his father. But following a run-in with a professor during his second year in medical school, Coutu switched to the pharmacy program at the Université de Montréal. After graduation, he worked briefly for a pharmaceutical firm, then

hooked up with a cousin to run three pharmacies. In I960,

Coutu set out on his own, using $16,500 in savings as a down payment on his first pharmacy in Montreal. Coutus face lights up when he describes one of the promotional events he conjured up to boost business: a childrens popularity contest— for every cent spent in the pharmacy, customers got a vote for their favourite child. The contest generated $10,000 in sales in six weeks.

In the late 1960s, Coutu recognized that the pharmacy business was changing. “We were judged more by our prices than by our talent,” he says. He teamed up with another pharmacist and former classmate, Louis Michaud, and the two opened their first discount pharmacy in Montreal in 1969 with $250,000 worth of inventory. The partners sold their first franchise in 1973 and the chain quickly grew. Coutu eventually bought out Michaud, taking the company public in 1986. In 1994, Jean Coutu Group paid $200 million to acquire 221 stores in the U.S. Northeast from Brooks Drugs Inc. Despite problems with several stores, the deal proved lucrative. Sales per store have shot up from $2 million in 1995 to $4.7 million in 1999. Coutu attributes some of the success to the fact that the U.S. operations are managed from the United States. His 46-year-old son Michel— one of three Coutu brothers in the family business—lives in Rhode Island

where he oversees the U.S. operations.

The company’s financial success has been matched by an enviable reputation. In a survey by the Montreal polling firm Groupe Léger & Léger last year and again this year, Jean Coutu Group ranked as the most respected business in Quebec among 50 major Canadian players, including Bombardier Inc. and Le Cirque du Soleil. “What’s also remarkable,” says Normand Cadieux, director general of Quebec’s pharmacists owners association, “is that he has always moved ahead prudently and expanded but never at the expense of the profitability of his business.”

Observers expect Coutu to follow the same prudent approach in any bid for Shoppers. While several analysts believe

Shoppers could command more than $4 billion, double the value set by BAT, Dubeau doubts Jean Coutu would bid above $3 billion. “They’ve never had the reputation of making acquisitions by paying big premiums,” says Dubeau. “We’re not interested in spending wildly,” says Coutu. “After 30 years, we don’t want to risk the solidity of the company just to satisfy a superego.” Keith Howlett, a financial analyst with Research Capital Corp. in Toronto, thinks the purchase would be a financial stretch for Jean Coutu. But he believes the company would have the support of the caisse de dépôt et placement du Québec—the provinces

$69-billion public pension manager—“and I think of investors generally because at least to date they’ve succeeded where other people haven’t.” Coutu contends the two companies would be a good fit: “Just advertisingwise there’s a big economy of scale.” But if a bid for Shoppers doesn’t work out, there are other markets to explore in the United States and Canada, he says.

Coutu’s family retains 62 per cent of the company’s stock. In 1990, Coutu donated two million shares worth almost $32 million to establish the Marcelle and Jean Coutu Foundation, which funds a variety of activities, from work in developing countries to drug abuse projects in Canada. The couple’s daughters, Marie-Josée, 39, and Sylvie, 36, are directors of Jean Coutu. Their son, François Jean, 44, is president and chief operating officer and is slated to succeed his father as CEO, while a third son, Louis, 47, is vice-president of commercial policies. But the eldest Coutu remains an omnipresent figure at the company’s headquarters in Longueuil. “I work less often but just as intensely,” says Coutu. His enthusiasm for the business is palpable, as he eagerly ushers visitors into his secretary’s office to listen to the company’s new back-to-school radio ad. As the upbeat jingle blares from the speakers, Coutu moves his hands in a mock dance. His interests extend elsewhere as well. For example, Coutu has said he is open to becoming a member of the Montreal Expos shareholders group. He hardly sounds like a man itching to slow down: “I can’t retire. I like this.” He may find it even more difficult to retire now that Shoppers, the prize he covets, appears to be within reach. EH]