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billyblancoNYC
February 4th, 2004, 02:00 PM
http://www.icsc.org/srch/sct/sct1203/page1a.html

NYC DRUGSTORES NEVER MORE THAN A FEW STEPS AWAY

BY NANCY COHEN


Photo: Ian Ritter
Now showing all over NYC: Duane Reade.
A new kind of drug war has broken out on New York City’s streets. Over the past five years, the city has become the battleground in a fight over turf among chain drugstores.

Three chains in particular have transformed the streetscape as they jockey for market share, their storefronts situated, in many cases, a mere block or two away from one another. Nearly every American lives within five miles of a drugstore, according to the National Association of Chain Drug Stores — but every New Yorker, it seems, lives within five steps of one.

“The strategy is in-your-face,” said Robin Abrams, executive vice president of Lansco Corp., a New York City commercial real estate brokerage. “You walk out the door, and there’s one; wherever you go, there’s another one.”

Duane Reade, a drug chain born and bred in New York, has aggressively expanded since 1998, when it had 67 stores, into a 239-unit local powerhouse. About 85 percent of its stores are in the city’s five boroughs — Manhattan, the Bronx, Brooklyn, Queens and Staten Island — with the rest operating in nearby suburbs of New York and New Jersey.

By blanketing the city with branches, Duane Reade has maintained its leadership of the nation’s largest drugstore market, where sales jumped 17 percent in 2002 to $8.8 billion. But CVS and Rite Aid, which operate thousands of drugstores across the country, have made some inroads since entering the New York area in 1995, growing to about 100 and 160 units, respectively.

Manhattan’s Upper West Side is probably a typical New York City neighborhood in terms of the ubiquity of its drugstores. Last year The New York Times counted 11 chain drugstores and five independently owned pharmacies on the 30 blocks of Broadway from 76th to 106th streets; additional drugstores line the parallel avenues. Nearby, on Columbus Avenue between 89th and 90th streets, two Duane Reade stores actually face each other across the avenue — apparently assuming that a city of pedestrians won’t cross the street for a tube of toothpaste.

Could the omnipresent drugstore be a stroke of tactical genius? Or is it simply overkill?

According to Anthony J. Cuti, Duane Reade’s chairman, president and CEO, it’s merely a reflection of the unique physical constraints in New York City, where large retail spaces are hard to come by and a successful store is likely to be hemmed in on all sides. Unable to expand a “maxed-out” unit, he told Drug Store News in 1999, “we build another store two blocks away, but we keep the first store open too.” He called the strategy “planned cannibalization.” (Cuti did not respond to requests for an interview with SCT.)

Others, however, view Duane Reade’s proliferation as an audacious defense against the national chains. “They’ll outbid everybody else to protect their turf,” said Faith Hope Consolo, vice chairman of Garrick-Aug Worldwide, a New York City brokerage. “And they take second and third locations within blocks of the first to protect their hold on the neighborhood.”

At certain sites, drugstore competition has driven rents 15 percent to 20 percent beyond their value, says Victor Menkin, president of New York City-based Menkin Realty Services, which specializes in retail brokerage and consulting. “It was more important to brand the location than to make money there. In the process of growing the company, Duane Reade made it prohibitive for the nationals to enter the market. They’ve played their hand pretty well.”

It was only after national chains expressed an interest in the New York market in the mid-1990s that Duane Reade began its dynamic rise. Founded in 1960 on lower Broadway between Duane and Reade streets, the company had grown to 67 stores by 1998, when it went public. Over the four years following, it more than doubled its sales, from $587 million (generated by 128 stores) to $1.27 billion (228 stores) in 2002.

Meanwhile, the national chains — CVS (which operates 4,124 stores in 32 states), Rite Aid (with about 3,400 stores in 28 states) and Eckerd (which has more than 2,700 units in 21 states) — penetrated New York City more slowly than they had anticipated. In 1999 Woonsocket, R.I.-based CVS announced plans to add 200 New York stores to its base of 47 over the next three years. The current store count — about 100, according to media relations director Todd Andrews — doesn’t come close to those projections.

Rite Aid, Harrisburg, Pa., also scaled back its plans. In 1999 the company said it aimed to increase its 147 stores by more than 50 percent within three years. More than four years later, the Yellow Pages lists some 162 stores in the city, a 10 percent increase. (Company officials did not respond to requests for precise information.)

Clearwater, Fla.-based Eckerd attempted to establish a presence in New York City through its 1998 acquisition of the local Genovese chain, then 141 stores strong, now down to 60. According to Drug Store News, Eckerd plans to add 18 stores to the market by the end of next year, but the struggling chain’s future is unclear. J.C. Penney, which acquired Eckerd in 1997, put it on the block in October.

As for Walgreen, the U.S. market leader, it has sketched only modest designs on the city to date. The chain has a couple of dozen stores and plans to open two or three next year.

In an industry overwhelmingly dominated by four companies, it is decidedly unusual for the No. 1 market to be led by a chain unknown beyond that market’s borders. (On a list of the country’s top 100 drugstore markets compiled by MMR, a magazine for mass-market retailers, the only other markets dominated by local chains that lead no other markets on the list are Wilmington/Newark, Del., ranked No. 66; Canton/Massillon, Ohio, at No. 75; and Tulsa, Okla., No. 80.) New York City brokers credit Duane Reade’s nimbleness and local know-how with stemming the national chains’ incursion. That, combined with the city’s unique challenges — including sky-high occupancy costs, a dearth of large, uniform store spaces, and complex distribution and operations logistics — handed Duane Reade a distinct hometown advantage, they say.

“The nationals have a huge learning curve in any new market, but especially in New York,” said Abrams. “They’re trying to do their typical layouts, which you can’t do here. You won’t get a perfect box or this amount of frontage. Duane Reade is very flexible in their real estate — they’ve even taken old theaters and other multilevel sites the others weren’t comfortable doing.” Although Duane Reade’s stores average 7,000 square feet, they range from 1,600 to 14,500 square feet.

Rents presented another barrier to entry. “You’re talking as high as $200 a [square] foot, and that’s nosebleed territory for a drugstore,” Duane Reade’s Cuti told Drug Store News in 1999.

New York City real estate by no means fits most retail chains’ pro formas, Menkin notes, “but once they saw the volumes Duane Reade was cranking, they couldn’t ignore it anymore.” In the mid-1990s Duane Reade reportedly generated sales per square foot in excess of $1,300 — almost four times the industry average.

Beyond its local expertise, Duane Reade may simply have been in the right place at the right time. It was in a position to expand, following a $120 million IPO, while its competitors were distracted. Although CVS, Rite Aid and Eckerd have now revived their expansion plans, they all contracted in recent years while contending variously with acquisitions, relocations, operations and, in Rite Aid’s case, an accounting scandal that sent former executives to prison for fraud.

During the same period, a window of opportunity presented itself to Duane Reade. “There was all this space — former banks, Gaps, big restaurants, like Harley-Davidson, that failed,” said Consolo. “By virtue of the retail climate, they could cover the streets.”

Drugstore-covered streets are not popular with all New Yorkers, however. In a celebrated case, residents of Manhattan’s Upper West Side protested what they deemed one drugstore too many. Some 4,400 people signed a petition to boycott a CVS that replaced a supermarket on 102nd Street and Broadway and brought to five the number of drugstores within four blocks. The store opened in the summer of 2000 and closed within 18 months.

Despite this rebuff, CVS remains undeterred about the market’s prospects. “There continues to be tremendous room for growth,” said Andrews. “It’s a densely populated and understored city.” CVS plans to add another half dozen units citywide within the year.

Although he wouldn’t project how many drugstores the city could ultimately support, Andrews notes that explosive demand for prescription drugs is driving the segment’s expansion. (U.S. sales of prescription drugs increased 11.3 percent to $183 billion in 2002 and are expected to more than double within 10 years, reaching $446 billion by 2012.)

In fact, New York’s burgeoning drugstore market (see chart) reflects not only surging pharmaceutical sales, but two profound shifts in drug retailing. As has happened across the country, the independent corner pharmacy has given way to the large chain drugstore, which has itself evolved into a kind of convenience store. Sales of basic groceries, cleaning supplies, paper goods and other everyday necessities are boosting the volumes high.

In a city where supermarkets have declined, chain convenience stores are rare and storage for big shopping trips is limited, the drugstores’ inescapably abundant locations and breadth of merchandise do suit local shopping patterns, says Abrams. “Here it’s about running in as you pass by on your way to the office, getting orange juice or milk on your way home, picking up a few items a few times a week.”

Even so, she said, “we don’t need as many [drugstores] as there are. It’s similar to the coffee bar wars of several years ago — one or two chains will end up dominating, and the others will fail.”

And for all its success maintaining control of the market so far, Duane Reade will have to reckon someday with the high cost of doing so, she says. “They did a lot of deals and paid very aggressive rent. Eventually that should catch up with them, and they will have to close some stores.”

The self-cannibalization has already taken a toll on Duane Reade’s sales per square foot. Although the company still leads the industry by that measure, sales per square foot tumbled from $1,040 in 1998 to $836 in 2002.

Its standing on Wall Street has also taken a hit. In October Merrill Lynch downgraded its investment rating on Duane Reade to “sell” from “neutral” after the chain slashed its quarterly and 2003 profit outlooks, largely blaming a soft economy. Its stock, priced at a 52-week high of $20.45 in October 2002, had dropped to $13.45 a year later.

Its expansion may finally be slowing, too. Duane Reade had announced plans to open as many as 20 stores in 2003, but by the end of October showed a net gain of 11. This slowdown might stem in part from renewed competition for real estate as different kinds of tenants enter the market, perhaps restoring some diversity to the streetscape in the process.

“They’re starting to see resistance,” said Consolo, “because the banks are back — small ones like Wachovia, Independence, Atlantic, that are new to the market, want to position themselves and are paying more rent. And landlords like them because they’re clean, they build great-looking units, they have no glaring signs, no deliveries at midnight. And everyone likes to live above money.”

Schadenfrau
February 4th, 2004, 05:03 PM
The number of drugstores in the city is outrageous. Is it really that difficult for people to walk a few blocks?

The saddest Duane Reade I've seen is the newish one on 86th Street, near Lexington. It used to be a gorgeous old movie theater and is now a two-story monstrosity.

New York City: we've got less movie theaters per capita than pretty much any place in the country, but we've got chain drugstores every 20 feet.

Ninjahedge
February 4th, 2004, 05:23 PM
Well, that is because in NYC, we have the highest cost per ticket.

They don't want to make NYC overbalance any box-office records or anything!!!

Also, DR is one of the most overpriced stores I have been in. It is no small wonder with all the real estate they are buying in order to try to squeeze out the competition...

billyblancoNYC
February 5th, 2004, 01:21 AM
I'd love less drugstores, but I'd rather have a local dominate than som PA, RI, or Fla joint.

fioco
February 5th, 2004, 02:50 AM
How odd to see this article, for just this very evening I was sitting on the steps of the Main Post Office waiting for friends (and waiting, and waiting). In my boredom strange thoughts began to possess me:

* These Duane Reade stores seem to multiply like rabbits. Do they construct two of them on the same block and just wait to seed the offspring elsewhere?
* Or perhaps they are controlled by aliens who are preparing for an all-out colonization of New York?
* Or...But then my friends showed up and I returned to a semblance of sanity.

Ninjahedge
February 5th, 2004, 02:59 PM
As for my opinion, I am going on a few things said here such as:

"The strategy is in-your-face"

"He called the strategy “planned cannibalization.”"

"they take second and third locations within blocks of the first to protect their hold on the neighborhood"

"drugstore competition has driven rents 15 percent to 20 percent beyond their value" - A competition mostly fueled by DR's "planned cannibalization".

“You’re talking as high as $200 a [square] foot, and that’s nosebleed territory for a drugstore,” (Which can also be attributed to the aforementioned 15 to 20 percent overvaluization due to the inherent attempt to dominate the market.

I do not believe this is a simple case of supply and demand, but more of a monopolization of the market. An aggressive takeover. Make sure you are everywhere, in a relatively closed market (NYC is not known for its residents traveling far for anything) and saturate it to the point where new business would require a large initial expenditure and a good length of time to develop a customer base.

krulltime
July 8th, 2004, 11:41 PM
Walgreen to take on New York City
Deep-pocketed chain pursues big sites; enough room for everyone?


By Louise Kramer
Published on July 05, 2004

The competition is about to heat up in New York's already crowded drugstore business.

Walgreen Co., the nation's largest and best-performing drugstore chain, is targeting New York, one of the few large U.S. markets where it doesn't already dominate or have a major presence.

The $32.5 billion company--with 4,414 Walgreens stores in 44 states and Puerto Rico, but merely three in Manhattan--has inked a deal for a fourth location, on the Upper East Side, and is actively pursuing deals for more sites.

"We are putting a new emphasis on Manhattan," a Walgreen spokesman says. "It is a huge market that we don't have a large presence in right now." He declined to specify the number of stores that the Deerfield, Ill.-based retailer envisions for the city.

Patrick Smith, a principal at The Staubach Cos., Walgreen's exclusive New York real estate broker, says the company has a "slow, methodical growth plan."

The drugstore operator faces stiff competition from local leader Duane Reade and from expansion-minded national rivals Rite Aid and CVS. Duane Reade, though, is in the midst of a takeover bid and is viewed as being vulnerable to competition because of tepid sales and labor problems.


Good credentials

Walgreen has powerful weapons for its land grab: excellent credit, deep pockets and a carefully tested strategy that centers on high-traffic sites located near hospitals, which feed it customers in need of prescriptions. Pharmacy purchases are the most important contributors to a drug chain's bottom line. Prescriptions accounted for 64% of sales in Walgreen's fiscal third quarter ended May 31.

Walgreen, while having to forsake its typical drive-through pharmacy window in the city, nevertheless plans to open suburban-style stores. The aim is to provide wider aisles, larger assortments of merchandise and friendlier staff than those of its competitors.

Indeed, last week, in a rare sight for a New York drugstore chain, a cosmetics department worker at Walgreen's newest location, 33 E. 23rd St., was seen complimenting a mother and daughter on their choice of shampoo.

Walgreen's formula will be evident at the chain's next Manhattan location-1328 Second Ave., at East 70th Street-which is slated to open by early next year. It is in the heart of a residential neighborhood that is also home to numerous hospitals to the east.

At 10,000 square feet, the store, the former home to a Food Emporium supermarket, is some 25% larger than a typical Duane Reade. The asking rent was $110 per square foot, a market rate, Mr. Smith says.


All the boroughs

Walgreen also believes its expansion strategy will work in the other boroughs, where it currently has a total of 13 stores. A deal was recently signed for a store on Hillside Avenue in Queens, which is slated to open next March. Next month, a Walgreens is opening at 1401 College Point Blvd. in Queens.


Return engagement

The expansion marks a return to New York for the Midwest company. Walgreen's first East Coast store opened in 1927 in the Paramount Theater building in Times Square, and was a hangout for Broadway actors looking for a cheap meal. The company largely exited Manhattan in 1970 and shut its last store in the city, in the Port Authority Bus Terminal, nearly a decade ago.

But Walgreen is returning to a very different market. Duane Reade has mushroomed to 243 stores and is inking deals for more locations in Manhattan and the other boroughs. CVS has close to 20 locations in Manhattan, and Rite Aid, despite its own high-profile struggles, continues to search for more locations to add to its 18 sites in Manhattan.

The big test for Walgreen will be to find the real estate that it needs. There simply aren't enough suitable locations, says Chase Welles, a senior vice president at Northwest Atlantic Real Estate Services Inc., the exclusive area broker for Rite Aid. "The market is tight, and there is a lot of competition for a good site for anybody, not just a drugstore," he says.


Copyright 2004, Crain Communications, Inc

Pottebaum
July 9th, 2004, 01:54 PM
I was in Chicago a few weeks ago, and it seems like there's a Walgreens on every corner.

TonyO
May 31st, 2005, 10:15 PM
New York Magazine
June 6, 2005

The Mystery of Duane Reade
The aisles are an obstacle course, the staff moves at glacial speed, and the prices aren’t even that low. So how did it become the only place you’d ever think to go for your tube of Aquafresh?

By Ian Mount

http://newyorkmetro.com/nymetro/shopping/features/duanereade050530_1_225.jpg
(Photo credit: Michael Edwards)

Inside the Duane Reade on the corner of Delancey and Ludlow on the Lower East Side, a thick white guy in dusty construction boots ruminates on a display of Ben-Gay and its generic counterparts. “Didn’t know how much they cost,” he mutters as he puts one down and picks up another. “You gotta be kidding me!” he says finally, and stalks out past the dozen other shoppers reading product labels with the quiet deliberation of people considering books from an unknown author. The store looks disheveled and lived-in, as if it had grown organically through years of trial and error, not through anything as prosaic as a retail “planogram.” In the front window display, food is haphazardly stacked next to diapers and window cleaner, and, in a fit of absurdity, only one item has its price tagged: Johnson & Johnson baby powder, $2.99.


Duane Reade ought not to be successful. The prices aren’t particularly low and the staff isn’t particularly helpful. And the often cramped and disorganized stores offend the boutique sensibilities of New Yorkers. “I just happened to be in a Duane Reade, and the entire time I contemplated how poorly planned the shops are,” says Karim Rashid, the industrial designer whose clients range from Acme supermarkets to Armani. “How bromide and miserable and vacuous the place is, how completely unaesthetic. What a poor experience.”

Yet over the past decade, Duane Reade has completed a voracious expansion campaign and achieved a ubiquity once limited to cabs and pigeons. How did a chain that’s neither the cheapest (a gallon of milk goes for $3.39 at Duane Reade and $3.19 at CVS) nor the nicest become New York shorthand for drugstore?

The company understands two important things: New Yorkers are uniquely harried shoppers, and the whole ball game comes down to real estate. Duane Reade has used its skill at that quintessential New York blood sport to cut rents by shoehorning its stores into bizarre locations other chains wouldn’t touch. And it’s kept New Yorkers coming back by knowing us better than we’d like to think: For all our bluster about good design, organic foods, and attentive service, we’ll take our Band-Aids and trash bags where we can get them.

Founded in 1960 by the brothers Abraham, Eli, and Jack Cohen, Duane Reade started as a three-store health-and-beauty chain that took the name of the two streets that bounded its lower-Broadway warehouse. The company grew in fits and starts over the next three decades. But it didn’t really begin to take off until 1996, when then-owner Bain Capital brought in the president of Pathmark, Anthony Cuti, as CEO.

A Rome-born, Manhattan–raised 59-year-old with a swoosh of gray hair and the air of someone used to getting his way, Cuti gave the chain an ambitious new energy. In 1998, the company raised $102 million by going public and used the cash to buy stores from Rock Bottom, Love’s, and Value Drug and open plenty of its own. Since Cuti took over, Duane Reade has grown from 59 to 249 stores, the most of any drugstore chain in the city.

The massive expansion hasn’t always been friendly. An estranged union of Duane Reade employees runs DwayneGreed.com, and a string of steamrolled residents has called the company a bad neighbor. In one dispute, Cuti refused to compromise on a huge store-top billboard that irritated neighbors in Rockaway, and even sued an artist who took out a negative ad in the local paper. “It seems like he had a bit too much testosterone for his own good,” says Congressman (and mayoral candidate) Anthony Weiner of the hard-charging CEO, who eventually had to modify the sign and lost the suit. “It ended up the way it would have if he hadn’t been a dick.”

Cuti’s aggressive style has served him better in the real-estate game. The central conundrum of New York retail is that you pay gobs of money for space but you can mark up a bottle of soda only so much. To compete against 5,000-store giants in an unsentimental real-estate market where the highest bidder, not the local kid, gets the lease, Cuti has to be smart enough to pick the right locations but flexible enough to use whatever spaces he can get.

Satisfying the first part of that formula is easy in theory. According to Cory Zelnik of Winick Realty Group, Duane Reade’s real-estate broker, it means staying on the avenues and major crosstown streets (like 14th and 23rd) and opening stores near mass-transit stops. Generally, a store needs 25,000 people who will use it as their primary source of pharmacy and beauty products, Cuti says. Entities like Equifax and the city comptroller’s office provide population-density maps, which help to some degree, but because so much of New York is vertical—meaning that placing a store on the right or wrong side of an apartment tower can make or break it—and so much is office space, picking spots means spending a lot of time counting pedestrians. When the company considers a location, the marketing department sets up electronic beams or hand counters to tally the number of people who pass by at various times and in different weather conditions.

Of course, that a store on a busy corner next to a subway exit is likely to get good foot traffic isn’t exactly a secret. That’s why these locations tend to fetch premium lease prices. Finding affordable spaces in these prime areas requires Cuti to be a bit more creative. While most pharmacy chains run in fear from multi-floor, non-box layouts, he embraces them. Forty-nine of his stores have two floors, and they come as small as a studio apartment (under 500 square feet) and as large as a suburban supermarket (a 17,200-square-foot box in Flatlands, Brooklyn). Odder spaces include a store at 62nd Street and Broadway with a basement described as “kind of a triangle with a leg on it,” and an old theater on East 86th Street with 1,300 square feet on the ground floor and 12,000 upstairs.

The payoff for flexibility is significantly lower rent. Take 4 Times Square, where in mid-2000 Duane Reade signed a lease for 3,000 square feet on the street and 9,000 below. With a subterranean location, less-than-hot neighborhood (the jury was still out on Times Square), and a lease shorter than the usual fifteen years, it was the kind of ugly duckling only Cuti could love. At the time, Times Square real estate was going for about $250 a square foot on street level, but a mere third of that—about $85 a square foot—in the basement, says Tom Bow, senior vice-president for the Durst Organization, which leased the space. “Most tenants wouldn’t be able to take that space, but they could,” says Bow. “They understood that Times Square was a 24/7 location. They just knew the local market.”

Defying retailing guru Paco Underhill’s fatwa on “butt-brush,” Duane Reade found that New Yorkers don’t mind being bumped from behind.

One of Duane Reade’s newest finds is a dilapidated two-story building a few blocks west of Rockefeller Center. Walking through the gutted husk, Udo Steudtner, Duane Reade’s director of construction, is pleased. “This is probably one of the premier corners in New York,” he beams. It doesn’t look like much. On the first floor are the cracked red tiles of a former fast-food restaurant, and in the basement—a dank box that lets out into a subway station—bathroom graffiti memorializes a commuter dive bar that gave up the ghost. It’s the classic Duane Reade gambit: Take an odd, unlovable, but well-located hole that would repel other chains and adapt it into successful—and cheap—retail space. If the marketing team has calculated correctly that the store is on the commuting route of some 25,000 office workers, it won’t matter that the surroundings are less than pristine. New Yorkers will shop there anyway.

If you’ve ever run into a Duane Reade to pick up some basic supplies—say, soda and toilet paper—only to find yourself wandering aimlessly in the apparently random aisles, it will come as some surprise to learn that someone actually designs the stores. As senior vice-president of sales and marketing, Gary Charboneau has been choosing locations and designing Duane Reades since 1993.

In a store near his office, as a rainy weekday lunch crowd swirls around us and Hall and Oates’s “Out of Touch” segues into Phil Collins’s “Sussudio” on the Muzak, Charboneau explains how he has split the basic Duane Reade layout into four blocks that can be moved around like the colors on a Rubik’s Cube. The first block is the chain’s bread and butter: beauty and cosmetics, which is most often on the first level near the door. “We try to keep those categories next to each other so that the shopper, usually a female shopper, is in close proximity to that stuff,” he says. Next is the pharmacy, which is always in the least accessible part of the store, because people don’t browse for prescriptions. The last two sections, seasonal (cards and candy) and household and grocery, can be split and moved to fit the space. Most stores carry between 18,000 and 20,000 different items.

With 300,000 people making a purchase at Duane Reade every weekday, a study of exactly what the stores sell gives a pointillist portrait of the New York consumer. Unlike most drugstores, where prescriptions make up the majority of sales, half of Duane Reade’s sales come from food, cosmetics, and the like. That runs from insoles and corn pads—because New Yorkers walk so much, Duane Reade sells twice the industry average—to foods for the society-X-ray palate. “We have four-foot-long sections of rice cakes. Put those in a suburban store and they all go stale,” says Charboneau. “And we have these soy crisps, which are not the best-tasting things. But they fly off the shelf.”


Selling makeup—a huge business for drugstores—proves a challenge to convention: New Yorkers come in darker shades than most Americans. “Cover Girl cosmetics, the No. 1 line in the U.S., is nowhere near No. 1 in Duane Reade. Why?” asks Charboneau. “They think their customer is blonde-haired and blue-eyed. And there ain’t that many true blonde-haired, blue-eyed people in New York.” So in 2002, Charboneau and Duane Reade’s recently retired head of cosmetics, Karen Durham, created a Duane Reade offering, apt. 5 (“The Color for the City”). Even its name evokes city life: Apartment for obvious reasons and 5 because it has what Charboneau calls a “prestigious” association, Fifth Avenue. Not to mention the reference to Chanel No. 5. The line is now the chain’s top beauty seller—industry analysts say annual sales approach $2 million.

When New Yorkers make their way to the pharmacy counter, their selections are heavy on sex and therapy and ambivalent about kids. The top-selling sedative, ranked nineteenth nationally, is one of the top five drugs sold at Duane Reade. Also popular here is Viagra, and a couple of anti-AIDS drugs are in the top twenty. But what New Yorkers really specialize in is birth control: Three contraceptives rank in the top 25 of Duane Reade sellers, while no contraceptive breaks the top 50 nationally. “There is no birth-control pill that’s No. 1 in any market except here,” Cuti explains. “It’s the nature of the city. It’s where the action is.”

Duane Reade also takes advantage of its intimate knowledge of New Yorkers to cram the stores with as much product as possible. Charboneau’s designs typically use four-foot-wide aisles instead of the five-foot highways in the ’burbs. “New York is one of the only places you’ll ever shop where people are tolerant of being bumped from behind,” he says, defying retailing guru Paco Underhill’s fatwa on “butt-brush.” The other thing we don’t seem worried about, according to Charboneau, is cleanliness: “New Yorkers are less sensitive to it.”

The one thing we are sensitive to is long lines, so Duane Reade doesn’t starve its stores of employees. To keep rushed shoppers moving, most stores have six cashiers at the front, compared with three at suburban stores, and between 10 and 30 employees working at one time. (The company offsets its heavy staffing with paltry pay: Duane Reade’s largely foreign-born employees start at minimum wage, and the company fights for every penny.) “When I’m catching somebody out of Penn Station moving 100 miles per hour, they want service and they want it quick,” says Cuti. “It’s, ‘I’m carrying my bag, I’m ten minutes late, the dumb train was late, I got to get the Tylenol and my bottle of water as quickly as I can.’ ”

Neil Stern, a drugstore analyst at retail-consulting firm McMillan Doolittle, describes the Duane Reade model as blunt sales: “It’s how much more can you sell out of the space, not how clean you were or whether all your products were marked.” This attitude helped the stores move $816 per square foot in 2004, according to McMillan Doolittle, compared with the industry average of $575. Still, in 2004, the company’s profit margin hovered around 1 percent, about a third of what national chains take home. “It falls into the ‘only in New York’ category,” says Stern. “You shake your head and marvel, but you don’t exactly rush to copy it.”

When you operate with such a small margin, events that don’t break in your favor can wreak havoc on the bottom line. The 9/11 attacks destroyed Duane Reade’s most profitable store, a local recession compounded its problems, and a battle with its largest union forced it to set aside about $17 million for a possible payout. And while its sales grew from $1.17 billion in 2001 to $1.47 billion in 2003, its profits plummeted 80 percent. So the company has hit the brakes, opening only 17 stores in 2003 and 16 in 2004, down from more than 30 each year in 2001 and 2002.

Besieged by an army of larger and richer suburban rivals—there are now 100 CVS stores in the five boroughs and two Home Depots in Manhattan (not to mention the specter of Wal-Mart’s looking for a way into the New York market)—Cuti decided to take the company private. In July 2004, he coordinated a sale to Oak Hill Capital Partners, an investment firm run by Texas oil billionaire Robert Bass, for $748 million. Though the deal was opposed by some shareholders, Cuti believes it will allow him to concentrate on a long-term reimagining of Duane Reade. Unable to continue his expansion model because of a runaway real-estate market, Cuti plans to search for more sales inside each store. He hopes to transform Duane Reade from a convenience store where New Yorkers pick up essentials to a “full-service” store where New Yorkers shop for everything. And that means making Duane Reade a little more . . . chichi.

The store at 34th Street and Eighth Avenue gives an idea of the Duane Reade of the future. There’s a high-end European SkinFitness Centre staffed by “skin-care advisors” near the front door, and the company’s first Chock full o’ Nuts kiosk is selling ten-ounce coffees for 99 cents in a bid to undercut Starbucks’ $1.49 cups. The chain has also just opened thirty Moviebank machines, ATM-like gadgets that rent DVDs for $2.49 a day (about $2 less than Blockbuster). Next, Cuti is looking into prescription-eyeglass kiosks and teeth-whitening booths.

Whether New Yorkers will actually go to Duane Reade for their skin-care and teeth-whitening needs remains to be seen. But what the company does in its stores may be beside the point. In the end, it really does come down to real estate, and the blazing commercial market may be a boon to the savvy Cuti after all. With banks bidding up prime spaces by 50 percent or more, Duane Reade’s cheap leases have become the jewel of the company. Some 200 of them are locked in past 2008, taking the rents progressively below-market with each passing day. Jeffrey Roseman, a Newmark commercial-real-estate agent who’s leased spaces to Duane Reade, says that the company doesn’t really have to sell another toothbrush. “If the drugstore business were to collapse today,” he says, “they’d probably have one of the more successful real-estate businesses subleasing their stores.”