Phar-Mor’s demise was inevitable, analysts say

By GEORGE NELSON | METRO MONTHLY ASSOCIATE EDITOR

The collapse of Phar-Mor may have been inevitable, the seeds of its collapse having been planted a decade ago in the midst of a fraud and embezzlement scheme that has echoes in the corporate scandals that dominate the headlines today.

Established in 1982 and opening its first store in the Great East Plaza in Niles, Phar-Mor filed for Chapter 11 bankruptcy in 1992, following the disclosure in August of a fraud and embezzlement scheme for which founder Michael I. Monus was later convicted. The deep-discount retail chain emerged from Chapter 11 far smaller than the 300-plus stores it operated at its 1992 peak.

The troubled chain filed for bankruptcy again in 2001, but the U.S. bankruptcy court in Youngstown last month approved the sale and liquidation of the chain’s assets, including the closing of its remaining 73 stores, Tamco distribution center and the downtown Youngstown corporate headquarters.

“I didn’t think they were going to come through the first go-around, frankly. I was a little surprised that they got through the whole mess of the fraud and all of that,” observed George Whalin, a Chicago retail analyst.

Whalin attributed Phar-Mor’s demise to a couple of factors.

“The first thing is you can’t have as many management changes as they’ve had over the years and expect to have any continuity with the company,” he said. “It’s almost impossible to build any kind of a sustainable business.”

In addition, he said that prospects for regional drug chains like Phar-Mor has been bleak for the past decade.

“You’ve got these giant drug companies that literally dominate the landscape these days, and between the drug chains themselves and the grocery stores getting into the drug store business and the discounters getting into the drug store business, there’s just not much future for small and regional drug chains,” he said.

Dr. David Burns, marketing professor at Youngstown State University, agreed that the collapse of Phar-Mor came as no real surprise.

“We’ve really known for years it was just a matter of time,” Burns said.

“Phar-Mor, under Mickey Monus, was a certain type of store,” he explained. “After Mickey Monus, what you really have is a large drug store. You had a chain that was much smaller than, say, Wal-Mart or Target, and hence they are really unable to directly compete on price against those outlets. On the other hand, the stores themselves are very large, making it difficult to compete against conventional drug stores, the Walgreens and the CVSs and the Rite Aids. Their primary appeal is convenience. Phar-Mors, with large stores, are going to have to draw people from a much larger area, so hence we have a store that is not as convenient as the regular drug stores and whose prices overall are not as cheap as, say, Wal-Mart.”

At one point, Phar-Mor was the No. 2 seller of Coca-Cola products, behind only McDonald’s, Burns said, and that Wal-Mart founder Sam Walton once said that Phar-Mor was the competitor that most concerned him.

In some respects, the scandals currently besetting corporate America are similar to the ones which drove Phar-Mor into bankruptcy in the 1990s.

“Phar-Mor certainly stands in a class of its own for creative bookkeeping used to fuel its growth,” remarked Reid Dulberger, senior vice president of the Youngstown/Warren Regional Chamber. In 1992, when the Phar-Mor scandal erupted, Dulberger was director of the Regional Growth Alliance, the economic development arm of the Youngstown Area Chamber of Commerce.

“Phar-Mor, we might say tongue in cheek, was ahead of their time,” he added. “Certainly they were not the first by any stretch of the imagination, certainly not the first company who used who used creative and dishonest methods to inflate the apparent value of their entity, their company, in order to secure financial advantage. While we don’t know today how common that was 10 years ago, we do know today that over the last few years too many entities have decided to use those kinds of creative accounting machinations to make themselves appear to be larger, stronger and more profitable than they really are. And while it’s still just a minute fraction of the number of businesses out there, the size and the sheer nerve of some of these entities I think has shocked many folks.”

Dulberger said that it is important to remember 10 years ago how the hopes of the community were tied – both directly and indirectly – to Phar-Mor’s success. “Directly through what they might accomplish and how much bigger they might become, how much more important they might become, but also the model – it was done once, we could do it again,” Dulberger explained. “The entrepreneurship that built this Valley 100 years ago seemed to find a new renaissance, a new hope, with the growth of Phar-Mor. We as a community could see other Phar-Mors growing here, becoming prominent nationally and then playing a major role in our community. And so there was a sense of optimism that was tied to Phar-Mor and what we thought they would achieve.”

The success of Phar-Mor was a point of pride for the city of Youngstown, where the chain had established its corporate headquarters in 1987 in the former Strouss department store building.

“The city was probably at a low at that time because a lot of the steel jobs and fabricating jobs outside that were related to steel all started closing down a little bit at a time,” recalled former Youngstown Mayor Patrick J. Ungaro.

“It was a big boost. They just did nothing but grow from there,” said Ungaro, now Liberty Township administrator. “They had a lot of jobs downtown, and then they took the Erie Terminal Building.” In addition to participating in the developing the two downtown buildings for Phar-Mor, the city also loaned Phar-Mor funds for the Tamco distribution center.

“Generally speaking, what’s happening today is on a large scale what happened to Phar-Mor, I think,” Ungaro agreed. “I’m waiting to see what actually happens to some of these CEOs because they punished Mickey Monus pretty good, almost an overreaction.” Monus received a 20-year prison term in 1995.

Now the community has to cope with yet another setback in a series that has included the convictions of several public officials and closings of local businesses.

“Hopefully, somewhere along the line we sort of get on track again, but we really have a lot to overcome,” Ungaro said.