Revco D.S., Inc.
Revco D.S., Inc.
1925 Enterprise Parkway
Twinsburg, Ohio 44087
Fax: (216) 425-3432
Sales: $1.90 billion
The rapid growth and fall in number of stores of Reveo D.S., Inc., once the United States’s largest drugstore chain, offers a cautionary tale from the 1980s. Through 30 years of innovative marketing, aggressive acquisition, and perpetual expansion, Reveo had grown from a single drugstore in Detroit to a 2,000-store nationwide chain with sales in the billions. In the mid-1980s, however, Reveo collapsed under the weight of its own expansion. An ill-fated acquisition and the ensuing executive infighting led Revco’s top managers to engineer a leveraged buyout in 1986. Saddled with a burdensome debt, and further crippled by stagnant sales and shrinking profits, Reveo was forced into Chapter 11 bankruptcy in 1988. Reveo subsequently reorganized, retrenched, and downsized as part of an ongoing effort to regain fiscal viability. In 1991 Reveo operated 1,100 drugstores, primarily in the Southeast and mid-Atlantic states.
In 1945 Detroit druggist Bernard Shulman hired a 33-year-old accountant to balance the books for his store, Regal Drugs. Shulman could hardly have known that the accountant, Sidney Dworkin, would become, as a trade paper labeled him, “the architect of modern drugstoring.” 20 years later, Dworkin would take the reins of Shulman’s drug business, and lead Reveo to impressive growth through the 1980s.
In 1956 Shulman decided to transform his single store into a discount chain. At that time Regal Drugs had a subsidiary, the Registered Vitamin Company, which sold vitamins door-to-door. Shulman shortened the subsidiary’s name to Reveo and added the initials D.S., signifying drugstore.
The guiding philosophy behind discounting was to turn over a high volume of low-profit merchandise in a self-service, consumer-oriented environment. To implement this philosophy, Reveo used a computer to determine the fast-moving items, and advertised comparative prices for similar products. These early innovations helped transform Reveo from a single store into a large chain. Revco’s innovative marketing tactics, however, encountered some resistance from established producers. In 1963, for example, the pharmaceutical giant Eli Lilly successfully sued Reveo for selling its products at a discount. Within four years of its incorporation, Reveo had grown to 20 stores in Michigan, Ohio, and West Virginia.
Shulman’s firm took a giant leap in 1961 when it acquired Cleveland-based Standard Drug Co., a traditional chain that owned 41 stores in Ohio, for $2 million. Reveo rapidly transformed the Standard stores into its discount format, folding the entire chain into its prefabricated system. Reveo repeated this process time and again in the next several years, growing by leaps and bounds.
In 1964 when Reveo reaped $29 million of sales from its 63 stores, Shulman decided to take his company public; in October 1964 Reveo issued its first stock offering. Fortified by this influx of capital, Reveo was prepared to expand. In 1965 Reveo opened six new stores, and purchased Gallaher Drug Co., a 52-store chain. The same year, Reveo introduced a new wrinkle into its marketing strategy, and began displaying perunit prices for competing brands of merchandise, a practice that soon became prevalent in most sectors of retailing.
Despite the company’s success and promising future, Bernard Shulman had decided to extricate himself from the company he had founded and nurtured. When he resigned in 1966, Reveo owned 117 stores in five states. Shulman was replaced as president and director by Sidney Amster, who had been president of Lane Drug. Amster lasted only four months at these top posts, and was quickly replaced by Sidney Dworkin, who had been an executive vice president. In 1966 sales topped $50 million, spurred in part by the acquisition of Waco Scaffolding Co.
Growth in both profits and number of stores continued apace for the rest of the decade. In 1967 Reveo acquired Patterson Drug Co., and in 1968 Reveo moved into the Southwest by acquiring Ryan-Evans, a 47-store chain based in Arizona. Sales in 1968 topped $70 million, and in 1969, fueled by the acquisitions, jumped to $98 million.
Consumers and investors alike flocked to Reveo. A stock offering issued in 1970 was immediately oversubscribed. That year Reveo acquired Cole Drug Co., a 28-store chain operating in Alabama and Georgia. The acquisitions helped the corporation reap profits of $4.3 million from sales of $131 million in 1970. By 1971 Reveo was operating 294 stores.
Reveo began the 1970s with a spurt of growth. In 1972 the firm acquired vitamin manufacturer Private Formulations Inc., and yet another chain of drugstores. In a stock trade valued at $81 million, Reveo acquired the 163-store White Cross chain, and imposed on the stores the parent’s name and format. The same year, Reveo made another public offering of 675,000 common shares.
Every time Reveo acquired a new chain, it instantly converted the new stores to the Reveo format. Structure was a key component of Revco’s success. Revco’s stores were generally smaller than drugstores run by other chains. The size helped maintain a more secure, customer-oriented environment, in which the main products remained drugs and cosmetics. This formula clearly worked. By 1973 Reveo, with 527 stores, ranked second only to Walgreen in number of stores, and ranked third in sales volume, behind only the Walgreen and Thrifty chains. Bolstered by the acquisitions, Revco’s net income soared in 1973 to $10 million on sales of $300 million.
In the 1970s Reveo expanded into different service areas. In 1974 the firm opened the first Reveo Optical Center, which was run independently within a drugstore. By 1978, the company operated 48 optical centers.
Reveo continued to expand traditional stores in the 1970s. In 1974 Reveo purchased Jacobs, a 25-store chain from Read’s Inc. In 1976 when Reveo tried to buy 11 drugstores from Cook United, a Cleveland-based chain, the federal government tried to block the sale on antitrust grounds because Reveo already owned 48 discount drugstores in the Cleveland area. A court ultimately allowed the sale, but only after Reveo had revised the terms of the purchase to ensure continued competition.
The following year, Reveo encountered more serious difficulties with the law. State and local officials investigated Reveo for fraudulent billings of Medicaid prescriptions. Two company officials were ultimately convicted of instituting a false billing scheme. Reveo paid a $50,000 fine and was forced to make restitution for more than $500,000 in false billings.
Despite the legal difficulties, Reveo continued to grow. In 1975 Reveo tallied $461 million in sales. In 1977 Revco’s 900 stores sold about $650 million of products. That year Reveo initiated a drive to further solidify its image as a discounter by comprehensively introducing generic drugs. Reveo was again on the leading edge of a profitable trend, for generic drugs soon became a staple throughout the industry. Revco’s expansion was abetted by the acquisition of the 16-unit Elliot’s drug chain, which operated in Georgia.
In 1978 when the firm opened a new store on Madison Avenue in Cleveland, Reveo became the first drug chain in the United States to operate 1,000 stores. Because it maintained smaller stores, however, Reveo lagged behind Walgreen and Eckerd in sales. To produce larger sales, Reveo increased the average size of its stores in the late 1970s, from 6,000 square feet to 8,000 square feet.
Sidney Dworkin was not satisfied with 1,000 stores. In 1977 Reveo announced that it planned to open a new store every four days for the next several years. In 1978, Reveo began developing freestanding film processing centers called FotoStops, 14 of which were in operation by the end of the year. In 1978 Reveo reaped profits of $29 million on sales of $792 million—both figures were company records. Sidney Dworkin was not satisfied with these impressive figures either. In April 1979 Dworkin predicted that Reveo would compound net sales and net earnings at an annual rate of 15%.
The high sales and profit figures greatly enhanced Revco’s financial and industrial standing; so much so that in 1979, retailing giant Woolworth, in an effort to stave off a hostile takeover bid, engaged Reveo in talks about a possible acquisition. Woolworth was prepared to offer more than $40 a share, three times the chain’s book value, for Revco’s 1,083 stores.
Although the discussions ended without action, they presaged the events of the coming decade. The 1980s brought with them a whirlwind of mergers, buyouts, and acquisitions that would engulf and ultimately cripple Reveo. In 1980, however, Reveo was still going strong and seeking to maintain its projected 15% growth rate. With 1,200 drugstores, sales in 1979 had hit $928 million. Although one-quarter of the drugstores’ sales came from prescriptions, Reveo had diversified and expanded. Alone among the major chains, Reveo produced its own generic drugs, vitamins, and health products. In all Reveo stocked some 385 private-label brands on its shelves.
In 1980 Reveo purchased three companies: the 20-store May’s chain; the 8-store Sav-Rite chain, and the 145-store Skillern Drug chain. The U.S. Justice Department resisted the acquisition of the huge Texas-based Skillern chain, which itself had tallied sales of $142.2 million in fiscal 1980. Reveo and the Justice Department reached an agreement, however, under which the firm would sell a number of existing Reveo stores in Texas. These acquisitions raised Revco’s store total to nearly 1,300 in 26 states. In 1980 Reveo finally topped the $1 billion sales mark, with sales of $1.09 billion.
Reveo was generally untouched by the recession of the early 1980s, the firm’s wide range of basic goods and general merchandise having rendered it recession-resistant. As the economy contracted, Reveo continued to experience significant growth. By the end of 1981 Reveo had 1,514 stores in operation. In December 1981 Reveo unveiled a five-year growth program, under which the number of stores was slated to rise to 2,300 and sales would rise to $3 billion.
At the end of 1981, then, Reveo was a healthy company, sporting high sales, high profit margins, low prices, and longstanding family management; Both of Sidney Dworkin’s sons, Marc and Elliot, were Reveo executives. In 1981 alone, Reveo increased its store count by 21%, raised its sales by nearly 20%, and hiked its earnings by 16%. In 1983 Sidney Dworkin consolidated his hold on the company, assuming the post of chairman. Sales for 1983 totaled $1.8 billion, and they rose to $2.2 billion in 1984.
Behind the veneer of growths and profits, however, developments in 1983 and 1984 would ultimately help push the company into bankruptcy. In 1984 the U.S. Food and Drug Administration investigated the unauthorized distribution of a vitamin supplement called E-Ferol, which was manufactured by Carter-Glogau Laboratories, a Reveo unit, and had been linked to 38 infant deaths. In 1988 Reveo settled major lawsuits stemming from the ensuing claims. Reveo stock slumped in the wake of the initial disclosures in 1984, and Dworkin feared rumblings of an executive coup.
Dworkin and his sons owned only 2% of Revco’s stock. In 1984 Dworkin thought he could place more stock in friendly hands by acquiring the Odd Lot Trading Company, a 66-store supplier of close-out consumer products that was run by Chairman Bernard Marden and President Isaac Perlmutter, two longtime business associates and friends. In May 1984 Reveo purchased Odd Lot for $113 million in stock, so Perlmutter and Marden held 12% of Revco’s stock.
Soon after the acquisition, however, Marden and Perlmutter charged that Revco’s purchasing department, which was run by Elliot Dworkin, had overpaid for merchandise. Reveo quickly relieved the younger Dworkin of his responsibilities and formed a special committee to investigate the charges. The committee of outside directors later reported that none of the business decisions that Marden and Perlmutter had questioned had a significant financial impact on the company. The dissident shareholders also began talking about engineering a proxy takeover of the company, and demanded six seats on Revco’s board.
Sidney Dworkin could no longer tolerate the presence of Marden and Perlmutter in the Reveo family; they had accused his son of incompetence and threatened to take over the firm he had run for nearly 20 years. To make matters worse, Odd Lot itself had been a consistent drag on Reveo’s earnings. In September 1984 Reveo dismissed the two dissident shareholders from their posts at Odd Lot. In 1985 Reveo bought back their large stake for the hefty price of $98 million. Reveo further suffered in 1985 when it took a write-down of $35 million for obsolete Odd Lot inventory. Because of Revco’s higher debt, greater operating risks, and general difficulties, Standard & Poor’s lowered Revco’s commercial paper credit rating to A-2 from A-l in 1985. Under the financial pressure, Sidney Dworkin stepped down from his posts of president and chief executive officer, although he remained chairman. William Edwards, a former CEO at F&M Distributors, moved into the posts that Dworkin vacated.
Despite these difficulties, Reveo continued to grow. In 1985 Reveo acquired Carls Drug Co., a 42-store drug chain operating in New Hampshire, Vermont, and upstate New York. Reveo added a total of 185 new stores in the year, increasing its total to 2,041. That year, sales totaled $2.4 billion, although net profits slumped from $93 million to $39 million.
Traumatized by the threat of a takeover from within and the dictations of outside directors, Dworkin tried to eliminate threats to his control by taking the company private. In early 1986, Dworkin and several other Reveo executives, with the help of Wall Street firm Salomon Brothers, offered Reveo’s shareholders a $1.16 billion buyout. In August 1986, Revco’s board accepted an offer or $38.50 per share, or $1.25 billion. A few months later, the company’s shareholders approved the deal.
In the following year, however, Revco’s financial health worsened. Sales declined in 1986 to $2.2 billion, and the firm tallied a loss of nearly $60 million that year. In 1986, less than a year after the buyout, Sidney Dworkin and his son, Marc, who together owned 11.6% of the company’s stock, severed their connection to Reveo. The Dworkins were apparently pushed out by Salomon Brothers and TSG Holdings, the key lenders in the takeover, after Dworkin had resisted their recommendations and policies. The elder Dworkin was replaced by Boake Sells, a former president of the Dayton Hudson Corporation.
In 1988 Reveo, saddled with $1.3 billion in long-term debt from the takeover, paid the price for its expensive buyout. In June 1988 the company failed to make a $46 million interest payment on a set of junk bonds, which had provided the bulk of the financing for the buyout. In July 1988, when the firm filed for Chapter 11 bankruptcy, Reveo earned the ignominious distinction of becoming the largest leveraged buyout ever to fail. Soon after the filing, Reveo abandoned Salomon Brothers, which still owned one-tenth of Revco’s stock, and hired Wall Street firm Drexel Burnham Lambert to help restructure its debt.
Reveo had been a victim of its own expansion and had scheduled its debt payments based on rosy expectations. In 1986, for example, Reveo had estimated that sales for fiscal 1988 would reach $3.37 billion, but they turned out to total only $2.44 billion. Moreover, in 1987, when interest payments alone were to top $150 million, the firm showed a loss of $60 million; thus no cash was available to make the payments. Burdensome debts, a brief recession, and mismanagement of inventory and products had combined to bring Reveo to its knees. In 1987 Reveo enacted an inventory-reduction program, which cleared $100 million of products from Revco’s shelves. Somehow, however, management failed to replenish shelves for the Christmas season.
Soon after the bankruptcy filing, Boake Sells, the new chairman and CEO, began working to put Reveo, which then employed 28,000 people, back on its feet. Sells urged Reveo to return to its roots as an operator of discount drugstores and to capitalize on increased concerns about health and fitness. In addition, Reveo began to close unprofitable stores, and sold off entire units like the Insta-Care Pharmacy Services Corp. Reveo improved its cash flow by closing more than 100 unprofitable stores and selling off Odd Lot Trading.
In 1989 Reveo again gained headlines as the Securities and Exchange Commission unraveled an insider-trading scheme stemming from the Reveo buyout. Glenn Golenberg, a Cleveland investment banker who played a key role in the buyout, had tipped off several friends and associates about the impending deal. In May 1989 Golenberg was fined $470,000 for his role in the scandal. In 1990 the other seven men charged all reached civil settlements.
Reveo continued to languish in Chapter 11, all the while attempting to devise means to become viable. In late 1989 Reveo received a $925 million buyout offer from Texas industrialist Robert Bass, but Revco’s management, fearing this plan would only heap more debt on the company, refused the offer.
In January 1990 Reveo announced it would seek buyers for 712 of its 1,873 stores as part of a comprehensive reorganization plan. The cash raised from these sales would be used to cover debts and reimburse creditors. Over the year, in a process that reflected a mirror image of the means by which Reveo had grown, Reveo sold off huge chunks of its holdings. In June 1990 Reveo sold 221 stores to Reliable Drug Stores, a Texas-based group. A few months later, Reveo sold 146 stores to a Maryland company, the RDS Acquisition Corporation. Reveo also unloaded 223 stores to the Jack Eckerd chain. In addition, groups of Reveo stores in Alabama and Arkansas were sold to other holding groups, and 36 Reveo stores in the south were closed. This succession of deals completed the 712-store divestiture program. In October 1990 Revco’s creditors filed a reorganization plan, converting debt into common stock.
By 1991 Reveo had slimmed down. The firm employed about 16,000 people, and operated 1,100 stores in 10 states, mostly in Ohio, Pennsylvania, New York, and a few southern states. Sales in the fiscal year ended June 30, 1990, had shrunk to $1.9 billion. In the early 1990s the company was still operating under Chapter 11. It could be years before Reveo emerges from bankruptcy.
Chain Drug News, December 17, 1984.