01:00 AM EDT on Sunday, July 24, 2005

BY PAUL GRIMALDI
Journal Staff Writer

WARWICK -- Game plans don't always work to perfection, but that doesn't mean they're abandoned the minute something unexpected happens.

"Even if you have some setback -- you still work your plan," said Michel Coutu, president and chief executive officer of Brooks Pharmacy.

A year after Warwick-based Brooks took part in the biggest purchase in drugstore history, the chain is still trying to digest its share of the Eckerd pharmacy network.

The year has brought a lot of travel and taken a few unexpected turns for Coutu as he's tried to get his enlarged company headed in the right direction. It's meant being chronically overscheduled and hearing your cell phone ring in the middle of phone calls.

Among the twists is a new headquarters in East Greenwich that will be larger and more expensive than expected.

Rhode Island became home base to two of the nation's largest drugstore chains last summer when J.C. Penney Co. Inc., of Plano, Texas, sold its 2,800-store Eckerd unit for $4.6 billion to Woonsocket's CVS Corp. and The Jean Coutu Group, Brooks' Canadian parent company.

Jean Coutu, of Longueuil, Quebec, paid $2.4 billion for 1,539 Eckerd stores, six distribution centers and Eckerd's headquarters in Largo, Fla. CVS paid $2.2 billion for its share of Eckerd, acquiring 1,260 stores, three distribution centers and its pharmacy-benefit management business.

Jean Coutu became the fourth-largest drugstore chain in North America, with 2,231 stores in 18 U.S. states and 3 Canadian provinces. Brooks Pharmacy runs about 1,900 of those stores, while its Canadian counterpart runs 321 pharmacy franchises north of the border. Nine warehouses supply the Brooks and Eckerd stores, which stretch from Maine to Georgia.

In an interview at his Warwick office, Michel Coutu said the deal "represented a unique opportunity to expand our presence in North America.

"We looked at this deal five years ago -- and finally it happened," he said. "It was a long courtship."

The block of stores it bought was nearly five times the 332 stores Brooks operated in the Northeast before the purchase.

Sales at the chain, projected at $9.8 billion for 2005, are nearly 10 times what they were just five years ago.

"We believe we're making Eckerd a higher quality location to shop," he said.

But industry analysts immediately questioned the corporation's ability to meld together the two chains.

"Coutu is more problematic," said David Pinto, editor of Chain Drug Review, an industry trade publication.

Judging by the questions Coutu and other Jean Coutu executives field during conference calls with analysts, the investment community remains to be convinced that the corporation will make the deal pay off.

Investors will have a better picture of how Jean Coutu is faring early next month, when it releases its annual report.

The 52-year-old Michel Coutu has a history of bringing bigger chains under control. He moved to Rhode Island after his first deal -- the 1990 purchase of Rhode Island's Douglas Drug chain.

Coutu moved his family to East Greenwich from Massachusetts shortly after the purchase, together with his wife, Manon Coutu, and their two sons and a daughter. They moved to Providence's East Side several years ago.

The couple's oldest son, Jean-Michel, has a pharmacy degree from the University of Rhode Island and is getting a master's in business administration at Babson College. Their daughter, Genevieve, is now in pharmacy school in Montreal. Their youngest son, Pierre, will start his senior year this fall at Skidmore College.

Michel Coutu comes from a pharmacy family.

He and his brother Francois started working in their father Jean Coutu's Quebec drugstore as teenagers. Francois took control of The Jean Coutu Group's day-to-day operations when their father stepped down as chief executive in 2002. At 77, Jean Coutu remains chairman of his self-named corporation.

The family ties positioned Michel Coutu professionally and financially to build a business in the United States.

He opened his first store -- Maxi Drug -- in West Springfield, Mass., in 1986. By then, he had earned an MBA from the University of Rochester and had learned to speak English.

Three stores came in the following years. In 1990, as Maxi Drug opened its fifth store, it also acquired the 16-store Douglas Drug chain in Rhode Island.

The 220-store Brooks Pharmacy chain, of Pawtucket, followed in 1994; and then, in 2002, he added 80 Osco Drugs locations in New England to the group. The chain was renamed Brooks/Maxi Drug.

When Brooks made its play for Florida-based Eckerd last year, the chain, now based in Warwick, had 332 stores in New England and New York, including 46 in Rhode Island.

"Our plan was the right plan for that [Eckerd] business," Michel Coutu said.

The plan called for dividing the Brooks and Eckerd stores into four groups ,of about 450 stores each, with each group to be run by a "very seasoned vice president."

Inside The Jean Coutu Group, Coutu said, the thinking went that "we would recreate four little Brooks chains."

Splitting the stores allows the vice presidents to cater to customers in their respective regions, he said. It also made it easier to retrain the Eckerd workers -- who, Coutu said, didn't seem sure whether they worked at a convenience store, a food market or a drugstore.

Brooks executives made sure their new employees knew they were in the health-care business. "People understand what business they're in," he said. "The pharmacists know they're the most important worker.

"Before that [deal], I think the Coke delivery guy was the most important person in the store."

Reorganizing the marketing department took two months, he said.

The Warwick chain's new possession also had to support the CVS portion of the Eckerd stores for four months, by administering computer systems, overseeing human-resource functions and managing other company-wide tasks.

Meshing the computer systems took about seven months, Coutu said, but there are a lot of issues left to resolve.

Except for the logos, the advertising circulars the company produces are identical for both parts of the chain. But the circulars are printed by two contractors, making the process more costly and more cumbersome than needed.

One of the major shortcomings of the Eckerd chain, Coutu said, was its inability to keep its stores stocked, but Brooks isn't finished installing an inventory-tracking program -- Never Out of Stock Ever -- in its new stores.

NOSE is in place now at all the Eckerd stores, but it handles only about half the 1,200 products they stock.

"Our biggest expense will be on pharmacy technology," Coutu said. He added that the program fills a gaping hole in the Eckerd operation. "Eckerd had no real loss-prevention department," he said.

Coutu is not so much concerned with counting the boxes of cough drops that move from the warehouses to the stores as he is with making sure there is a box on the shelf when a customer comes into those stores.

"My goal is not inventory turn, my goal is to satisfy the customer," he said. "If you're out of stock, you're out of a customer."

To that end, Brooks is surveying people in its new markets to gauge how they view changes at the stores. In addition, executives are visiting the Eckerd stores constantly, he said.

He regularly sits down for breakfast with groups of 30 or so store associates. "There's nothing more informative than your store associates," Coutu said. "If we don't carry certain products, they're the ones that know it."

A chronic problem for drugstores is finding pharmacists.

Brooks expects to hire more than 250 recent pharmacy school graduates this summer, and will employ as many seasoned pharmacists as can be found.

But, Coutu said, "We do not close stores because we don't have a pharmacist."

Brooks has enough of them to staff every store, every day, he said, although he won't hire people just to have somebody behind the pharmacy counter every minute a store is open.

"You're better to hire one good pharmacist later than to hire a mediocre one now," he said. "You don't fool around with the health of your customers."

While Brooks is hiring for jobs all along the Eastern seaboard, it's also bringing more workers to Rhode Island -- including about 500 to its new headquarters.

Considerable thought was given to moving the headquarters to Florida, Coutu said, where Eckerd had twice as much office space as even the new headquarters that Brooks is building in East Greenwich.

Florida offered "substantial" tax advantages and lower operating costs, he said, and the warm weather would have made it easier to recruit workers.

"We definitely looked at putting our offices in Largo," he said. "Let's be honest, it's a little bit more expensive to live in Rhode Island than it is to live in Florida.

"That would have been the easy way -- to move all our people to Florida."

Instead, Jean Coutu decided to keep its U.S. headquarters in Rhode Island and bring some Eckerd managers here. About 100 former Eckerd workers are now working for Brooks in Warwick.

The transition forced Brooks to rent space in a former Ann & Hope store, on Post Road, in Warwick, to accommodate the new personnel.

In November, Brooks broke ground for its new Rhode Island headquarters.

Its employees must continue to work hard over the next three or so years to make the Eckerd deal pay. The Jean Coutu Group Inc. took on a lot of debt to finance the acquisition.

By the time the Eckerd deal closed, Jean Coutu had $2.56 billion of long-term debt.

Following the acquisition, U.S. sales account for 86 percent of the group's annual revenue of $11 billion.

Changing the way the Eckerd stores operate has yet to show up on the revenue side of the ledger, as retail sales per square foot for the combined Brooks-Eckerd outlets have dropped from $613 to $565 since the deal was completed.

Coutu won't discuss how much it costs to remodel an Eckerd store and mesh its operations with the Brooks system.

Acquisitions like this one often result in firing workers and closing underperforming stores. By April, Brooks had eliminated 1,278 jobs from the combined operations, through closing Eckerd's headquarters and consolidating field operations.

But Brooks has added 366 workers in Warwick, and its parent company has hired 130 information technology workers, in Canada, to help manage the new stores.