William F. Glueck
The Leitch Quality Drug Company operates three
drugstores in Orlando, Florida. Orlando is a central
Florida city having a population of about 100,000.
The stores are owned by a partnership of two brothers, Carl and Richard Leitch, Walter Neds, and
Norman Henry. All partners except Mr. Henry are
The company is an old and well-established firm,
having started as the Quality Drug Company in
1926. Carl Leitch began working for the company's
store as an assistant pharmacist in 1934. Later,
Richard Leitch attended pharmacy school and
joined the firm in 1938.
In the early 19408,the store experienced difficulties because of declining profits. The two Leitch
brothers were convinced that they could improve
the store's performance and made an offerto buy the
store and go into businessfor themselves. The owners said that they would sell the business, but the
price they set was too highfor the brothers to afford.
They therefore convinced two other men, Keith
Steider and Martin Rhodes,to join the partnership.
The sale was completed in late 1944, and the Quality
Drug Company became known as the Leitch Quality Drug Company. Mr. Steider died in 1953, and
his share of the business wassold to Mr. Henry. Mr.
Rhodes retired in 1965 and sold his share to Mr.
Neds, another registered pharmacist. All partners
share equally in the ownership of the firm.
The city of Orlando grew rapidly during the
19505.In response to this growth Leitch bought out
another drug company in 1958 and took over its
store, which was only 2 years old at the time. An
opportunity for further expansion occurred in 1961,
when the owner of a smalldrugstore in the southern
part of the town died. TheLeitch Company acquired
this store. Currently Leitch owns three stores. No
further expansion has beenconsidered. The existing
stores have been remodeledfrom time to time, and
in one instance greatly expanded. Two stores, the
number one downtown store and the number three
"southside" store are rather old-fashioned in design
and appearance. All three facilities are .leased.
This is a disguised case. That is, the facts in it are based on a real
organization. But the names of the persons involved, the location.
and the quantitative data have been changed because the organization requested it. It serves no useful purpose to try to determine
which organization is the "real" organization.
LEITCH QUALITY DRUG COMPANY BALANCE SHEET
STATEMENTS AS OF DECEMBER 31
Cash on hand
Total current assets
Less accumulated depreciation
Net fixed assets
Other assets: stock
Liabilities and net worth
Total current liabilities
Balance at June 1
Add net profit for period
Balance at end of period
Total liabilities and net worth
In 1964the Leitch Quality Drug Company entered into an agreement with
Rexall, the national drug manufacturer, to sell Rexall products. The agreement gives Leitch exclusive rights to sell Rexall products within a 25-milearea.
In exchange for. this privilege, the partners were obligated to buy a small
amount of Rexall stock.
For a while after the Rexall agreement, business grew and profits rose. The
high point was reached in 1967, when sales exceeded $3 million. Since that
time, however, sales have leveled off somewhat. In a conversation with the
case writer, Carl Leitch explained why he thought the business was not growing as it should: "It's those new 'supers'-the large discount stores-that have
cut into our business," he stated. "Why, I don't even consider them as drugstores. They sell everything--even groceries. Drugs are only a sideline. I can't
really understand why people would want to fill their prescriptions at these
stores, service is so impersonal. But they're growing and we're not. That's a
fact that we have to face."
To illustrate the trend in sales, Mr. Leitch showed the case writer some of
his firm's financial statements for the past few years. (See Tables 1, 2, and 3.)
The Leitch Quality Drug Company
Cost of sales
LEITCHQUALITYDRUG COMPANYPROFITAND'lOSS STATEMENT
FOR STORES. 1971
Cost of sales
Gross profit on sales
Taxes ar.c insurance
Other ana miscellaneous
Total ooerating expenses
Organization and management
Carl Leitch, Richard Leitch, and Walter Neds work as pharmacist-managers
at the three stores. Richard Leitch is manager of store 1, the original store;
his brother has the responsibility for store 3, and Mr. Neds manages store 2.
Mr. Henry is a local factory owner. As a "not-so-silent" financial partner, he
frequently offers his advice and helps make major policy or planning decisions.
Carl Leitch explained that each store is managed almost independently of
the others. For example, each store orders its own stock and sets its own prices.
Nearly all major decisions, including decisions to buy major equipment or
redecorate the stores, are made by each store manager. Decisions involving
a large capital outlay, such as store expansion, require the joint approval of
all three working partners. Also, the stores do join together in some of their
promotional efforts. Bookkeeping procedures are standardized, with one ac438
Choice of strategy and strategic planning
counting firm serving all three stores. "Really, just about the only reason we
even have a formal partnership is so we can trade under the Leitch name,"
Mr. Leitch said. "People know and trust that name."
In 1968 Mr. Henry and Mr. Neds presented a plan to incorporate the
business. Convinced of the possibility of tax savings and of the advantages of
limited liability, Mr. Henry tried to persuade his partners to follow the plan.
The two Leitch brothers strongly opposed such a move, saying that they
believed that the four men would lose all control of the company if outside
shareholders were brought in. The matter was dropped from any further
discussion. Richard Leitch told the case writer that "our present arrangement
keeps us out of each other's hair. I'm not sure that we could maintain our
present excellent relationship if we incorporated."
The market and competition
The three stores serve separate market areas within the city. Store 1, located
in the downtown area, caters mainly to persons working downtown and to
downtown shoppers from other parts of town. Business in the downtown area
has tapered off in recent years, partly because of a parking problem and also
because of the growth of shopping centers in the outlying districts. Store 2
is in a shopping center at the fringe of a well-to-do residentialarea. The largest
of the three stores, it accounts for 60 percent of total sales. The third store
is located directly across the street from one of the city's hospitals. It is in
a predominantly low-income area.
All three stores offer basically the same types of products and services. The
three main categories are prescription service, fountain service,and sundries.
Rexall products are promoted the most vigorously. This is because, according
to one of the partners; they have a lower unit cost and higher markup. Other
pharmaceutical products are used to supplement the Rexall line, however.
Drinks, dairy products, sandwiches, and other snack items are served at the
fountain bars. Sundry products include tobacco products, magazines, some
cosmetic products, small household items, etc.
Leitch's competition comes from both the small neighborhood-type pharmacies and the large "super" drug discount stores. The servicesand products
offered by the neighborhood pharmacies are usually limited to prescriptions
and drugs; few sundry items are carried. There is little price competition from
the smaller stores, since they buy in smaller volume and have higher overhead
Leitch's competition mainly comes from four large stores.Two such stores,
owned by the O'Shea Drug Company, are located very close to the Leitch
stores 1 and 2. Both O'Shea stores, which are operated as franchises for a
major retail drug firm, are larger than the Leitch stores. Recently, the O'Shea
stores broadened their product lines to include such things as small appliances,
school supplies, toys, etc., and began offering discount priceson some proprietary drugs and other items.
Within the past 3 years, two large discount drugstores have been built at
suburban shopping center locations in Orlando. One is located three blocks
from Leitch store 2. These stores carry a full line of merchandise, including
appliances. clothing, a full assortment of household goods, hardware items,
The Leitch Quality Drug Company
and other goods. They do a high-volume discount drug business, with drugs
and cosmetics sold at substantially lower prices than those of Leitch's or most
of the other drug firms,
The two new discount stores are typical of the new breed of giant discount
stores. These stores carry a broad line of merchandise, including many highmargin items (electric hair dryers, etc.), as well as household goods, paper
goods, soft goods, toys, photographic equipment, small appliances, records,
hardware, and some automotive supplies. The growth of such stores may be
explained in several ways. They are usually able to get better sites in the large
shopping centers. Also they can price more competitively with supermarkets
and other competitors. They generally have more merchandising experience,
and enjoy economies in buying.
Another type of competitor is the smaller discount drugstore, averaging
2000 to 3000 square feet in size and featuring fast-moving health and beauty
aid products. Markups for such stores are modest, with turnover rapid. At
present, there is one such store in "Orlando.
In a brief conversation with the case writer, Mr. Neds stated that he was
very much concerned about the impact of the new discount stores. He explained that before the new stores were even opened, he told his partners that
Leitch would lose sales. At that time, he suggested that they examine their
profit margins item by item to see if some prices could be cut to meet the
competition. This idea was immediately rejected by the two brothers, who did
not want to lose their profit margins. When Leitch sales actually did begin
to decline, the Leitches still resisted any move to lower prices. At that time
Carl Leitch remarked, "Our main selling point is the personal service we offer.
We can't continue to offer this service if margins are cut."
For the most part, advertising is done independently by the three stores.
Newspaper ads are run on the average of once a month for each store. Because
the stores rarely offer special prices on goods, most of the advertisements
mainly promote the store name. A typical ad is headlined: "Thirty Years of
Service: You Can Depend on Us."
The Rexall Company furnishes the materials for newspaper insertions and,
in addition, pays one-half of the a(tY~rtisingcosts. Rexall also runs nationwide
ads in many leading magazines, at no cost to the Leitch stores. These advertisements are meant to promote the Rexall name and do not name individual
Generally speaking, Rexall offers no discounts on its products to druggists.
One exception to this policy is the annual summer "one-cent sale." During
this sale of Rexall products, the stores offer "two for the price of one plus a
penny." The Rexall wholesaler offers sale goods to the individual stores at a
reduced price for this sale. Mr. Neds said that this sale is usually successful,
but it has not produced the results in recent years that it did in the past.
Although not as low as the prices in discount stores, the prices on Rexall
products are, by and large, lower than those for the more famous name brands.
Choice of strategy and strategic planning
Rexall aspirin, for example, may sell for 15 to 20 cents cheaper per 100 than
a better-known brand. Prescription drugs vary less from brand to brand.
The partners proudly point to one aspect of the traditional neighborhood
store which remains in their stores: the fountain bar. "This is almost an
institution in this country," said Richard Leitch, "but I'm afraid it's dying
out. Although we don't realize much in the way of a profit from these bars,
we still feel they give our stores a warmer atmosphere. Besides,when the kids
come in to get a sundae, their parents often have them buy something else
while they're here."
Another aspect of the firm's "personal touch" is the credit given to customers. Most customers, in fact, do business at Leitch stores on credit. Carl Leitch
said that the stores did not profit directly from carrying customers on credit
(no interest or service fee is charged), but the availability of credit was popular
among the "old-timers." Credit applications are rarely checked, since most
persons applying for credit are known by the employees. Delivery service is
also offered by all three stores.
Each store manager is responsible for the purchase and control of all inventory. The department heads assist the managers in buying the goods needed
for their own departments. Most purchases are made through salesmen who
visit the stores up to twice a week.
Inventories are not kept at fixed levels. Instead, a "short list" is kept in all
departments. Thus, when a clerk or department head notices that an item is
low or depleted, an entry is made on the list. Whenever a salesman appears,
any items that he carries and that are on the short list are ordered. The person
doing the ordering decides the quantity. Conceivably, anyone working in the
store can order when a salesman visits. Buying trips are made by the three
partners about three times per year. At these times, merchandise is selected
for the Christmas, summer, and back-to-school seasons.
A physical count of inventory is made for all stores once each year. This
occurs between Christmas and the first of the year, before preparation of the
financial statements. The permanent records kept on inventory consist of order
slips, shipping invoices, and ending inventory listings.
Pricing is done on a cost-plus basis. Three classes of items are marked up
by different percentages of costs. All tobacco products are marked up by 25
percent above invoice price. Magazines, books, and periodicals carry a 20
percent markup, and most other items are marked up by one-third of the
invoice price. This does not apply to Rexall brand items, whichcarry a markup
of 50 percent above cost. The partners follow "fair trade" practices and do
not use price cutting as a tool to increase sales volume. The partners believe
that this policy allows them adequate profits and at the same time makes
An accounting firm keeps track of credit sales records. A bookkeeper comes
to each of the three stores to record credit slips three times per week. It is
possible for an individual to have a separate credit account at all three stores
The Leitch Quality Drug Company
and at the end of the month receive a statement from each. Credit at one store
guarantees a person that he may receive credit at the other two.
Deciding the future
The Leitch brothers, who are both in their mid-sixties, have been thinking
about retirement for some time. They were therefore quite receptive to a recent
offer by a national food store chain to buy the Leitch Company drugstores.
Presently, the food chain operates a chain of discount drugstores, and is
anxious to become established in the Orlando area. If it buys the Leitch stores,
it plans to remodelthem completely and convert them to high-volume discount
According to the terms of the merger proposal, the grocery finn would offer
common stock having a book value equivalent to twice the partners' capital
accounts in exchange for the Leitch Company's assets. The market value of
the stock is presently close to book value. There is no offerfor the three Leitch
partners to continue in their present capacities, although it was mentioned that
"they could probably work as pharmacists at other stores in the chain, if they
The offer has drawn mixed reactions from the partners. Carl and Richard
Leitch both think that it "looks like a good deal," but neither one says that
he is quite ready to retire. Mr. Neds, who at 35 is much younger, is bitterly
opposed to the sale. Mr. Henry has not expressed his feelings, but it is felt
that he would go along with the sale.
In a private conversation, Mr. Neds told the case writer why he opposed
the sale of the business: "To begin with, I think we have a lot of potential,"
he said. "We've already got some of the best locations in town. It's just a
matter of tapping into a market that is already there. Oh sure, the new discount
stores have hurt us a little, but only because we've let them. We've got to
change our image-perhaps do some remodeling. But above all, we must
become more competitive price-wise. I'm hoping that you can convince my
partners to stick with it a while longer, and perhaps help us lay down some
guidelines for the future."
Choice of strategy and strategic
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