The Jean Coutu Group (Pjc) Inc. Business Information, Profile, and History

Company Perspectives:

From the outset, we grounded our success on two basic principles: our partnership culture and our ability to adapt. Consequently, we have continuously ensured that our company fosters value not only for our customers but also for all those involved in the company: our franchisees, our employees, our suppliers, and our shareholders. Moreover, we have never lost sight of our primary mission: meeting consumers' needs by continual monitoring of current markets and adapting our product selection to the special needs of every generation we serve in all the areas where our stores are located.

History of The Jean Coutu Group (Pjc) Inc.

The Jean Coutu Group (PJC) Inc., headquartered in Longueuil, Quebec, was founded in 1969 by pharmacist-entrepreneur Jean Coutu, whose unique vision of the pharmacist's role has redefined the profession. The Jean Coutu Group is the largest retailer of pharmaceutical and parapharmaceutical products in Quebec, ranks second in Canada and, after the major acquisition of 80 Osco Pharmacies in January 2002, is in seventh place among the top 10 pharmaceutical retailers in North America. The firm manages three subsidiaries and 544 establishments. In Canada, the Jean Coutu Network (JCN) consists of 293 franchised outlets located chiefly in Quebec, Ontario, and New Brunswick. The Jean Coutu Group (PJC) U.S.A., a subsidiary, operates the Brooks Pharmacy Network (BPN) of 251 corporate outlets situated in the six New England states and the state of New York. Each outlet is organized in four sections: clients go to the Pharmaceutical Center, the main focus of The Jean Coutu Group, for professional consultation, prescriptions, and laboratory services. The Boutique Photo Center sells photography supplies and equipment, develops over 3.5 million rolls of film annually, and ranks as the leading film developer in Quebec. Cosmeticians in the Beauty Section are available for consultation; customers may choose from a large array of beauty products and accessories, treatments, perfumes, etc. The Commercial Section contains health and beauty aids, baby supplies, household items, natural products, and confections--to name but a few retail products. Another subsidiary, RX Information Center Ltd., develops and implements the technological services related to management of professional and business activities. In Canada, the systems of subsidiary Services Sécurivol Inc. provide rigorous management of security.

In both Canada and the United States--over and above supporting the professional advancement of its pharmacists and catering to customers--The Jean Coutu Group provides support and financing for many social and charitable causes related to public health, including help for indigent persons and the ongoing fight against drug abuse, alcoholism, and family violence. The National Awards Institute awarded two trophies to The Jean Coutu Group: a trophy for Entrepreneurship and another for Marketing. For three consecutive years, a poll conducted for Commerce magazine found that The Jean Coutu Group is "The Most Admired Company in Quebec." In 2001, the editors of Drug Topics magazine selected the Brooks Pharmacy Network as the "Pharmacy Chain of the Year."

The Early Years

Jean Coutu, eldest child of pediatrician Dr. Lucien Coutu, was born in Montreal in 1927. After obtaining degrees in the liberal arts and in science (physics, biology, and chemistry), he enrolled at the University of Montreal for a degree in medicine. However, after an unfortunate experience as student leader, he had second thoughts about a medical career. Recalling "the good smell" of the pharmacies belonging to his cousin, Jean Locas, Coutu thought about how this successful and esteemed businessman managed many employees and also participated in a variety of professional and civic activities. "As a pharmacist, it will be easier for me to be actively involved with many people in the very place where I conduct business," Coutu said to himself, according to Cardinal and Lapierre's essay in the 1996 issue of the Canadian magazine Gestion. Coutu then registered for a pharmacology degree at the University of Montreal.

Jean Coutu's background in academic medicine facilitated his pharmaceutical studies; he took part-time work in a branch of Pharmacies Leduc, the most important pharmacy chain of the era. As clerk, assistant manager, and then manager at the age of 23, Jean moved his Leduc branch from tenth to first place in the network. Flush with his success, pharmaceutical diploma in hand, he approached the chain's owner with a proposal: "I've worked for you for five years," said he to Mr. Leduc, "and I like the work. In the branches of your network, five of us young pharmacists would like to enter into a partnership with you." The astonished owner replied that Pharmacies Leduc was, and always would be, a family business. Jean saw the handwriting on the wall and within six months had resigned from the Leduc store.

During the 1950s, pharmaceutical research was making rapid strides in Montreal; patented medicines and discoveries in endocrinology and virology were opening up new markets. In 1955, he enthusiastically agreed to partner with his cousin, Jean Locas, to open three pharmacies in Montreal. At the end of the five-year contract with his cousin, Jean struck out on his own. By year-end 1965, Jean owned and managed four pharmacies in Montreal.

1966-89: A Pharmacist-Entrepreneur

Consumer attitudes toward the purchase of medication were slowly changing. After obtaining information from pharmacists who prepared prescriptions, customers often went elsewhere to buy comparable patented products at prices lower than those of pharmacies. A realist and entrepreneur, Jean asked Louis Michaud, another pharmacist, to accompany him to Toronto to visit the chain of Top Discount stores, Gérard Virthe reported in the December 1980 issue of Revue Commerce. Reportedly, the owner of one of the discount stores commented, "You pharmacists will succeed when you no longer think about 'big fat profits.'" Challenged by these words, Jean and Louis returned to Montreal to experiment with a new kind of establishment: a "Farmateria," that is, a store that could not be called a pharmacy because it did not offer prescription services but stocked and sold at discount prices all the other products available in traditional pharmacies. This venture was so successful that within two years the partners opened 17 Farmaterias. However, similar stores quickly surfaced as strong competitors. Jean and Louis liquidated the Farmaterias and returned to management of their traditional-style pharmacies.

Still, Jean persisted in his desire to operate a "total service" discount pharmacy; in short, he thought of setting up "a Farmateria within a pharmacy," reported Cardinal and Lapierre in Gestion. Assisted by Jacques Masse, in 1969 Jean invested his life savings of C$250,000 to open Quebec's first Pharm-Escompte Jean Coutu (Pharm-Discount Jean Coutu; Canadian law did not allow use of the word pharmacy with the word discount). In this new store, customers could not only obtain prescriptions from an ever-present licensed pharmacist but also buy over-the-counter drugs and all the retail products previously offered in the Farmaterias. Pharm-Escomptes were open till late at night and remained open on weekends. Jean's goal was to have the commercial side of the enterprise take in enough money to supplement the cost of always having a certified pharmacist present in the store--as mandated by Canadian law. "Other pharmacists were skeptical about the future of an establishment that operated on such a slim profit margin, but Jean was banking on mass merchandising," wrote Cardinal and Lapierre.

Skeptics notwithstanding, the first Pharm-Escompte was a resounding success. In 1971, Jean and Louis renewed their partnership and opened a second discount pharmacy in Verdun. Then Louis converted his Côte-des-Neiges drugstore to the new format; Jean did likewise for his Mont-Royal store and sold his other pharmacies. In 1973, the partners opened their fifth discount pharmacy in Montreal--and incorporated as Services Farmico, Inc. (SFI). Having persuaded Pharmacie Montreal's owner that discount drugstores were the pharmacies of the future and that bulk-buying allowed for very low prices that attracted more customers, Louis Michaud won SFI's first franchisee: the renowned Pharmacie Montreal. This pharmacy, commented Jean Coutu in Gestion, was a "central downtown institution having 250 employees, 35 trucks making deliveries on a 24-hour basis throughout Montreal, and no doors, because it was open day and night."

The franchising of Pharmacie Montreal was a turning point for Services Farmico. Noticing the obvious success of the "Jean Coutu prototype," many pharmacists wanted to be franchised; the SFI network soon spread all over Quebec. In 1974, SFI bought a warehouse in Longueuil, on the south shore of the island of Montreal, and organized a wholesale-delivery service for the franchisees. A year later, SFI established its headquarters in Longueuil and expanded the center to further facilitate the wholesaling and distribution activities required of a franchiser. By year-end 1980, the SFI network consisted of 50 pharmacies and reported revenues of more than C$150 million dollars.

Jean then discussed the future of the company with his partner, Louis Michaud. "We've been in business together for 13 years," the Gestion writers reported Jean as saying. "All is well. My children are interested in the firm and yours are not. For you, the pharmacy is an investment; for me it's a reason for living and a way of life. ... Either you buy me out or I buy you out." Louis sold his shares of stock to Jean, who was then the sole owner of the SFI network; in 1982, he opened a store in New Brunswick, and in 1983 expanded into Ontario. In 1986, completion of an Initial Public Offering brought additional capital to Services Farmico, which was then listed on the Montreal and Toronto stock exchanges as The Jean Coutu Group (PJC) Inc. The Jean Coutu Group (PJC) Inc. U.S.A. was incorporated as a subsidiary.

1987-94: Expansion into the U.S. Market

During 1987, JCG Canada built a 280,000-square-foot distribution center near its headquarters in Longueuil. Ever-mindful of the health and leisure of its employees, the company also put up a Sports Center for them--thereby introducing a "first" for employees in the pharmaceutical industry. During the healthy economy of the 1970s and 1980s, the company seized every opportunity not only to define professional and marketing practices in the Canadian pharmaceutical industry but also to establish itself as one of the most dynamic and profitable firms in its sector in North America. In 1987, the Jean Coutu Network (JCN) integrated the 12 stores of the Cloutier Pharmacy Network into its franchise network.

Creation of PJC USA, the U.S. subsidiary, was a first move toward the realization of what reporter Virthe, in Revue Commerce, had quoted as Jean Coutu's hope of "covering North America with his pharmacies." Jean, who had insisted on the best possible professional education for his children, placed his son Michel in charge of the new venture. Michel had watched the U.S. market since the age of 19. After earning a degree in law from the University of Sherbrooke, he had practiced law for three years before obtaining, at his father's insistence, a Master of Business Administration degree from the University of Rochester in New York. In 1987, The Jean Coutu Group acquired the 22 branches of Maxi Drug pharmacies and gradually launched five Maxi Drug pharmacies (later converted to Brooks Pharmacies), in the United States.

In 1990, Jean Coutu withdrew from some of his administrative responsibilities but remained active as chairman of the board and chief executive officer; his youngest son, François, was named president and chief operating officer. François, after matriculating in business at McGill University, had earned a degree in pharmacology from Samford University in Alabama. He then interned for eight months at a Walgreen Pharmacy in Hollywood before returning to Montreal to manage a pharmacy, buy a few pharmacies for himself, and then work his way through the administrative ranks of JCG Canada. Jean Coutu gave Louis, his eldest son who also had a flair for business, the position of Vice-President of Commercial Policies.

The Jean Coutu Group acquired 16 pharmacies in Rhode Island from Douglas Drug, Inc., thereby raising the number of U.S. outlets to 21. The following year, JCG Canada established a division for acquisitions and real-estate development and purchased 11 properties housing Jean Coutu outlets. Furthermore, to favor the needs of its growing number of employees--many of whom were women--in 1992 the firm opened a day-care center next to its Sports Center. The new building could accommodate up to 60 children ranging in age from newborn babies to six-year-old youngsters.

During the 1990s, a lethargic economy began to reduce the buying power of consumers, thereby affecting the break-even point of some franchised outlets. JCN opened 15 new outlets, including three new Maxi Drug stores in Ontario. So that franchisees could have purchasing options that would allow them to sell at lower prices, JCG Canada completely restructured the operation of its distribution centers. Thus, in accordance with its internal partnership philosophy, The Jean Coutu Group voluntarily reduced its profit margins in order to increase sales and ensure the network's financial stability.

The financial and marketing landscapes were changing: consumers were more aware of quality and prices; a lower inflation rate and the emergence of new competitors were shifting market share within the retail industry. Like major corporations in the United Sates, The Jean Coutu Group sought to maintain profitability by increasing sales volume. "There is only one way to achieve this objective: sharpening our competitive edge and outperforming the competition," wrote Chairman Jean and President François in their 1994 Annual Report. "Variety [of products], quality of customer service, and a competitive price policy," they maintained, would distinguish the company from "the new forms of competition, including warehouse-stores, department-store chains, and mail-order drugstore services."

However, part of the solution still slept in Jean Coutu's hope of becoming the North American leader of the pharmaceutical industry. In 1994, at a cost of C$204.7 million, subsidiary JCG USA purchased 221 pharmacies and 16 commercial properties from Ohio-based Revco D.S. Inc.'s Brooks Drug Stores. This purchase placed The Jean Coutu Group among the 15 largest North American organizations in its industry. The newly acquired stores, ideally located in the six New England states, ranked high in the prescription-drug sector; prescriptions generated 45 percent of sales and Brooks salespeople were expert merchandisers: precisely the pharmaceutical and commercial combination Jean Coutu had envisioned. The U.S. subsidiary also leased a warehouse-distribution center in Dayville, Connecticut.

The Brooks acquisition created an unusual challenge for JCG USA: management of some 4,000 new employees and administration of the 221 outlets added to the 21 stores already installed in New England. Fortunately, the Jean Coutu Group had resources for in-house management. Another JCG subsidiary--Le Centre d'information Rx lté (Rx Information Center Ltd)--set up information systems for the U.S. network. In fewer than four months, a completely new infrastructure was designed, implemented with new software that included a prescription allocation package, and integrated with the information system at Longueuil headquarters.

Furthermore, the U.S. subsidiary established a management system and purchased a new building to set up headquarters in Warwick, Rhode Island. Canadian colleagues joined the U.S. team to reorganize the overall storage and distribution activities of the Dayville distribution center, which already had state-of-the-art equipment and space for storing 18,000 different items. Within four months, the Dayville center was fully operational and running at a normal pace with standard turn-around times. The Dayville center had 300,000 square feet of storage space and 50 docks for receiving merchandise. The information systems were completely overhauled and equipped with cutting-edge technology, including expansion of an electronic data interchange (EDI) system.

1996 and Beyond: Financial Challenges and Reorganization

During 1996 and 1997, The Jean Coutu Group outperformed its industry because its uniquely centralized management structure enabled franchisees to buy products at highly competitive prices. JCG Canada bought and integrated eight Quebec-based Mayrand pharmacies into its franchise network. Reacting to the trend for ambulatory care, the company also installed an Orthopedics Department in its pharmacies. Moreover, the Rx Information Center began to implement a POS (point-of-sale) management system and installed a wireless (radio frequency) communication system. Next, JCG Canada's purchase and integration of 19 Cumberland Pharmacies and POS systems marked the largest transaction in the history of retail pharmacies in Quebec.

JCG USA strengthened its position in Massachusetts and Rhode Island with the acquisition of 30 drugstores from Pennsylvania-based Rite Aid Corporation. In exchange, eighteen of the Brooks outlets in Maine--the region furthest from the American distribution center--were transferred to Rite Aid, thereby optimizing JCG USA's advertizing budget and reducing transportation costs, since 80 percent of the BPN outlets were then within a 93-mile radius of the Dayville distribution center. JCG USA also designed a computerized Rx Watch system for its customers: a personalized card gave clients free access to the information stored in their patient files--a great help in emergencies. The network developed its parapharmaceutical sector by increasing the range of private-label products to 800 items, of which 50 were new "Brooks" brands. Furthermore, JCG USA opened two outlets modeled on a new design that included areas reserved for pharmacist-customer consultations and a drive-in service window.

During 1998, The Jean Coutu Group began to reap further benefits from its focus on modernization. Introduction of commercial POS management proceeded apace in Canada; 25 percent of the corporate pharmacies had implemented POS capabilities by the end of 1998. Five new outlets were added to the Canadian network, which also concentrated on the renovation, expansion and relocation of existing establishments. Standardized computer equipment and use of Intranet, a private corporate network, further increased efficiency and performance.

Although an increase in U.S. corporate tax rates reduced JCG USA's contribution to consolidated earnings, the increased profitability of the U.S. subsidiary's corporate pharmacies made up for minimized earnings. The U.S. network opened eight new pharmacies and began to modernize its existing outlets; 25 establishments benefitted from expansions, as well as from in-store and exterior improvements. On the legal front, JCG USA joined other pharmacy chains in Massachusetts to counteract the near monopoly certain pharmacies exercised through exclusive contracts with insurance companies. Patients whose medication was covered by these contracts had to bring their prescriptions to the pharmacy designated by the insurer. In February 1998, an out-of-court settlement freed consumers from this authoritarian situation and BPN registered an average increase of 3,000 prescriptions per week for the months of March, April, and May 1998.

During 1999, an additional 38 of JCN's franchised establishments adopted the POS system, bringing to 100 the number of outlets using this form of financial management, and 50 POS venues were renovated. The network honed its competitive advantages by expanding its range of products: franchisees had access to more than 1,000 private-label products. In the United States, all the BPN outlets operated with POS systems, and close to half of the establishments offered the Interactive Vocal Response (IVR) system that allowed consumers to renew prescriptions by telephone.

At the beginning of the 21st century, after some 30 years of in operation, The Jean Coutu Group defined itself as "a modern organization with experience." Efficiency of operation enabled the company not only to cope with increased competition but also, in many instances, to implement new procedures to meet the needs created by rapid changes in health-care access and the delivery of professional services. According to its Annual Report 2000, the company's ongoing modernization program remained focused on three principal objectives: highly professional customer services, improvement of the outlets of both networks, and optimized use of state-of-the-art technologies. During 2000, 45 pharmacies in Canada and 17 U.S. corporate outlets underwent major retrofitting and, in some instances, relocation.

Demographic changes, such as urban development and an aging population, created a client base needing new services and greater professional attention. All Brooks Pharmacies in the United States could access the new IVR system; in Canada, the system was in its pilot phase. For the third consecutive year, The Jean Coutu Group was named "Most Admired Company in Quebec," according to the results of a poll published in the March 2000 issue of Commerce magazine.

The year 2001 was outstanding for the corporate development of The Jean Coutu Group, which continued its ongoing quest for greater efficiency in all areas of the company. A strong synergy existed between the various Canadian and U.S. teams through optimal use of state-of-the-art technologies and innovative business management. Never before had a Canadian retail company succeeded in establishing itself profitably in the United States. To ensure that both of its pharmacy networks remained among "the best known and the most efficient," the company enhanced professional services by continuing its training programs for all levels of personnel and by broadening the range of services available to customers. The Jean Coutu Network retrofitted 38 pharmacies and moved four of them to locations conducive to better sales growth.

In 2001, Jean Coutu Group USA's revenues peaked at $1 billion (C$1.53 billion). These results strongly testified to the business acumen in Michel Coutu's strategy for the U.S. subsidiary. With a 6.8 percent increase in the number of prescriptions filled (close to 3 million), Brooks Pharmacy outlets maintained their above-average ranking among all pharmacies in the U.S. market. Since the 1995 acquisition of the Brooks Pharmacies, BPN outlets were thoroughly overhauled to optimize sales: some 50 outlets were relocated, 120 were retrofitted, and 130 new outlets were added.

Michel Coutu's strategy was "to create a new consistent personality for the Brooks chain ... to move [it] from a dispensing facility to a provider of health-care services," Sandra Levy reported in the April 16, 2001 issue of Drug Topics. "Among the changes were a separate drop-off area for prescriptions, a separate area for pick-up, a RxCare Center, ... [and] a glass-enclosed consultation center next to the pharmacy." The consultation center allowed privacy for counseling, patient education, screenings, and immunizations. By the end of 2001, RxCare Centers were installed in 70 Brooks outlets and all other outlets were slated for installation of the Centers within three years.

At the end of 2001, The Jean Coutu Group's revenues skyrocketed to $1.9 billion (C$2.92 billion). The company managed a total of 544 establishments within its two networks. The Jean Coutu Network consisted of 252 outlets, 40 clinics, and one PJC Santé Beauté for a total of 293 franchised outlets operating in the provinces of Quebec, Ontario, and New Brunswick. The Brooks Pharmacy Network consisted of 251 corporate outlets in the six New England States and New York.

During the first half of 2002, The Jean Coutu Group declared a two-for-one stock split and attained new heights in operating efficiency and revenues. In Quebec, JCN opened four large-scale outlets; the Candiac outlet included a private office for consultations about medication and health-related concerns.

The most important event of this period, however, was JCG USA's purchase of 80 Boston-area Osco drugstores from Boise, Idaho-based Albertson, Inc., one of the world's largest food and drug retailers.

According to The Gazette of Montreal, president and COO François Coutu said that almost all the 800 stores of the Osco chain were in the West and the Midwest. The 80 New England stores, the oldest retail drug chain in New England, "were 'a solitude' being supplied from distribution centers as far away as Chicago." These stores, however, were "a perfect fit for the Brooks chain, allowing the company to finally get a foothold in Boston," commented François, who estimated that the company would invest "between $2 million and $3 million a year in each of the next four years to upgrade the Osco stores," and, in February 2002, to begin replacing the Osco banner with that of Brooks Pharmacy. The Gazette reporter added that, at the time of the Osco acquisition, the Brooks Pharmacy Network accounted "for more than 60 percent of The Jean Coutu Group's business." The $240-million Osco deal added another dimension of possibility to founder Jean Coutu's hope of "covering North America with his pharmacies."

Principal Subsidiaries: The Jean Coutu Group (PJC) U.S.A.; Le Centre d'information Rx Lté; Sciences Sécurivol Inc.

Principal Competitors: CVS Corporation; Eckerd Corporation; The Katz Group; Pharmaprix.; Rite Aid Corporation; Shoppers Drug Mart Inc.; Wal-Mart Stores Inc.; Walgreen Co.

Chronology

• Key Dates
• 1969: Jean Coutu and Louis Michaud open Quebec's first discount pharmacy: Pharm-Escompte.
• 1973: Coutu and Michaud incorporate their venture under the legal name of Services Farmico Inc. (SFI)
• 1974: SFI develops a franchise system and acquires a distribution center in Longueuil, Quebec. Pharmacie Montreal is the first franchisee.
• 1980: Jean Coutu buys out Louis Michaud's share of SFI.
• 1986: SFI goes public and is traded on the Montreal and Toronto Stock Exchanges as The Jean Coutu Group (PJC) Inc.
• 1987: The Jean Coutu Group creates an American subsidiary: The Jean Coutu Group (PJC) U.S.A. Inc.
• 1995: JCG USA acquires 30 pharmacies from Rite Aid Corporation.
• 2002: JCG USA acquires 80 Osco stores from Boise, Idaho-based Albertson Inc.