Those whose greenbacks feature George and Abe rather than Andrew and Ulysses may very well shop at Fred's. Generally serving customers with modest or fixed incomes, Fred's operates more than 650 discount stores in some 15 states, primarily in small- to medium-sized towns in the Southeast. The stores carry more than 12,000 brand-name, off-brand, and private-label products, including pharmaceuticals, household goods, clothing and linens, food and tobacco items, health and beauty aids, and paper and cleaning supplies. Nearly 60% of its stores have full-service pharmacies. The company also provides goods and services to some 20 franchised Fred's stores. Founded in 1947, Fred's is exploring strategic alternatives. In late 2016 the retailer agreed to acquire 865 Rite Aid stores for $950 million in cash.
In addition to its main chain, Fred's opened a specialty pharmacy facility, EIRIS Health Services in 2013. It also operates two smaller retail chains: Getwell Drug & Dollar, with 5 locations across Alabama, Tennessee, Georgia and Mississippi; and Yazoo Trading Co., a new store concept with five locations in Alabama that sell hardware, auto, and pet and animal supplies.
Pharmaceuticals accounted for more than 40% of fiscal 2015 (ended January) revenue.
Memphis-based Fred's operates discount general merchandise stores in 15 states, primarily located in the Southeast. More than a third of the stores are in Mississippi and Georgia. The retailer has distribution centers in Memphis, Tennessee, and Dublin, Georgia.
Sales and Marketing
Fred's primarily targets low-, middle-, and fixed-income families in small and midsized towns (some 85% of stores are located in areas with populations of 15,000 or less).
Advertising and promotion costs have averaged about 1% of net sales over the past five years. Fred's relies on direct mail, newspaper ads, email, and social media to get its value message out.
Fred's revenue has been generally flat over the past few years, rising just more than 1% in fiscal 2015 (ended January) to $1.97 billion. The minimal increase was powered by pharmacy sales as the company continues to add pharmacy departments in existing locations and purchase prescription files from independent pharmacies. Net income that year fell substantially, from $26 million to a loss of nearly $30 million, driven by inventory markdowns as the company worked to clear inventory and close underperforming stores in hopes of longer-term profitability.
To reverse the slide in sales and profits and regain momentum, Fred's has launched a three-year configuration plan aimed at achieving its goal of a 4% operating margin by aggressively adding pharmacy departments and improving the stores' general merchandise space efficiency and productivity. Fred's stores with pharmacy departments have an operating margin of 4.5% to 5% (above the 4% goal), while the chain's overall operating margin is less than 3%. To support rapid growth of its pharmacy operation, in August 2014 Fred's signed a multi-year agreement with Cardinal Health to be its new supplier of branded and generic drugs to all of Fred's 380-plus in-store pharmacies and EIRIS Health Services. The new supply agreement unseated drug wholesaler AmerisourceBergen, which had provided substantially all of the chain's prescription drugs.
In January 2014 the company announced that it's reviewing strategic alternatives, including a merger or sale of the company, and in October named a new CEO following the resignation of its former chief. In August 2014, Fred's closed 60 stores that did not have pharmacies as it puts more of an emphasis on its higher-margin pharmacy offerings. The company is looking to pharmacy acquisitions to reach its goal ot 65% to 70% of its stores having pharmacies (up from about 60% at present).
Historically, Fred's has looked to combine the appeal of a dollar store, drugstore, and mass merchant, all under one relatively-small roof. (Its full-size stores average about 15,000 square feet.) However, amid intense competition in its core general merchandise category, the company is deemphasizing the mass merchant part of the equation and upping its exposure to pharmacy. To differentiate itself from other small-box discount retailers, including its fast-growing dollar store competition, Fred's looks to five merchandise categories: home, celebration, pet, pharmacy, and paper and chemical. Key among them is pharmacy, a proven driver of customer trips and loyalty for Fred's. Indeed, pharmacy sales accounted for 42% of the chain's total sales in fiscal 2015 (ended January). Pharmacy department sales (up 13% in fiscal 2015) have outperformed overall sales growth in recent years. To grow its pharmacy business, Fred's has been acquiring independent pharmacies and prescription files in markets where it already does business. (It also followed Wal-Mart's lead by lowering prices on generic drugs to $4 a prescription.)
Mergers and Acquisitions
In late 2016 Fred's agreed to acquire 865 Rite Aid stores for $950 million in cash. Related to Walgreens Boots Alliance's planned acquisition of Rite Aid, Fred's proposed acquisition of some of Rite Aid's 4,600 stores satisfies FTC regulatory requirements and, consequently, facilitates government approval of the Walgreens Boots Alliance and Rite Aid merger. Upon closing of the deal, Fred's will become the third-largest drug store chain in the US.