Blurring borders, 36.6 marries U.S., Euro retail concepts

MOSCOW -- Since the collapse of the Soviet Union, the overall health of Russia's population has taken a downturn as life expectancy declines and infectious diseases spread. However, pharmacy chain 36.6, a major Russian health and beauty retailer, is working aggressively to make a change and help Russians lead healthier lives.

Named after the ideal body temperature in Centigrade for healthy adults and children, 36.6 broke the mold when it introduced the Western-style, open-format pharmacy in Russia in 1997. During the Soviet era, pharmacists operated from behind glass, and no beauty products were sold in pharmacies.

After six years of building the brand, the company, whose roots technically date back to 1991 when it was a small pharmaceutical wholesale company, made headlines in 2003 when it became the first Russian retail company to do an initial public offering. The IPO raised $14.4 million, money that enabled 36.6 to expand its store base and fund new initiatives.

Today, the Moscow-based company has more than 230 pharmacies in seven Russian regions. Over the next five years, 36.6 plans to operate more than 1,000 stores throughout Russia, which, according to 36.6, currently is home to about 18,000 pharmacies, including rival Natur Produkt. The company, which employs about 6,000 associates, plans to fuel its growth by organic development of existing units, new openings and acquisitions in rapidly developing regions.

The company, which was named by a 2003 Gallup poll as the most recognizable brand in Russia, uses very little paid advertising and no media. Most of its brand-building comes from prime real estate on busy streets, bags bearing its logo and word-of-mouth.

As more Russians look to improve their lives, the pharmacy business in Russia is growing and consolidation within the industry is beginning to take hold. For example, in 2003, 36.6 added 73 stores to its portfolio when it acquired the pharmacy chain Leko in Bashkortostan. In June, 36.6 made its second acquisition, the 41-store pharmacy Nizhegorodsky Aptechny Dom in Nizhny Novgorod. The first Leko and NAD pharmacies are expected to be rebranded as 36.6 later this year--another first move for 36.6.

Much like U.S. pharmacies, prescription drugs are the foundation of 36.6's business; the company considers itself a pharmacy first and a health and beauty aid retailer second. However, there still are many differences from U.S. operations.

"The focus is more on pharmaceuticals. If you look at pharmacy in the United States, it is more like a convenience store plus pharmaceuticals," Artem Bektemirov, chief executive officer and cofounder of 36.6, told Drug Store News during a recent visit to Manhattan.

When it comes to the front end, 36.6--which has been described as a cross between the United Kingdora's Boots Plc and Superdrug--has taken a European approach, as well, offering a vast, assortment of skin and hair care products and the expertise of a consultant to help consumers. This model just now is emerging in the United States with Brooks' Derma Skincare Centers, CVS' Healthy Skin Care Centers and, most recently, Duane Reade's Skin Fitness Centres.

While the 15,000 SKUs of health and beauty products at 36.6 do not include color cosmetics that could quickly change in fast-growing cities like Moscow.

"Big cities in Russia are developing quite quickly, and customers need access to a much wider range of products," Bektemirov said.

Total sales from retail operations in 2003 were $76.3 million, up 29.5-percent from 2002. According to Bektemirov, pharmacy and over-the-counter medications account for 50 percent of sales, and beauty products account for the remaining half of sales.

In terms of pharmacy and Russia's health care system, there remains much work to be done by country's government and regional authorities.

"Pricing and payment policies for prescription drugs are oblique. Federal and regional authorities set retail and wholesale prices, in some cases resulting in inflated costs to consumers, and in other cases resulting in net losses for retailers," stated Sergey Krivosheev, chairman and 36.6 co-founder, in the company's 2003 annual report--its first such report.

Krivosheev added that "funding for health care is also inadequate in many regions of the country. The government's plans for introducing mandatory health insurance legislation now appear set for 2005."

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