Wells Fargo's Rx for Extra Income From Branches: Install Drugstores

By now, everyone has heard of bank branches in stores. But stores in bank branches?

Thrifty PayLess Inc. and Wells Fargo & Co. are giving it a whirl. The regional drugstore chain has struck a deal to set up shop in five of the giant banking company's California offices by early next year.

If all goes according to prescription, the pilot program will be expanded to between 30 and 50 Wells Fargo branches throughout the West.

Wells officials describe the plan as a way to draw customers to branches more frequently and, in the process, make better use of office space.

People will be able to come to Wells Fargo to "take care of three things - pick up a prescription, buy a magazine, and get some cash," said James K. Ketcham, Wells' executive vice president for strategic planning.

He added: "When someone is shopping two or three times a month, as many of Thrifty's customers do, that offers a tremendous incentive for them to change their banking relationship to Wells Fargo."

The plan is a twist on the "in-store branching" craze - which is seeing banks across the country set up branches in supermarkets and other retail stores.

Think of the Wells-Thrifty plan as in-branch storing.

"I think it's pretty exciting, and another example of Wells blazing the trail for the alternative delivery of financial services," said Alex. Brown & Sons Inc. analyst Joseph K. Morford, in San Francisco.

Drugstore items may be only the beginning for Wells' in-branch storing. Bank executives are hoping to interest other retailers in selling their wares through bank branches. In fact, the bank wants to find retail partners to sell products through most of its 1,500 traditional branches in 11 states.

"If our hypothesis is right, I think you'll see this expanding fairly rapidly through Wells Fargo's traditional branch network," Mr. Ketcham said.

Financial terms for the Thrifty deal were not disclosed. But Thrifty PayLess senior vice president James Gaube said that the drugstore will rent branch space at or near "market rates," and that Wells and Thrifty will share remodeling costs.

Mr. Ketcham said the two companies will also share customer data bases and engage in joint marketing.

He said the alliance, and others like it, will help the bank get the most of unused branch space. Wells has more than three times as much space in its traditional locations as it needs.

The average Wells branch, excluding its 515 slimmed-down outlets in grocery stores, is 6,000 to 7,000 square feet, he said.

By employing modern design techniques and taking into account the migration of customer transactions to automated teller machines and telephones, Wells could get by with only 2,000 square feet, he said.

Of course, another way to shed excess capacity is to close branches. And Wells has also been at the forefront of that trend, with plans now under way to close hundreds of traditional branches in order to make way for hundreds more supermarket outlets.

The bank also plans to shutter 85% of the California branch network of First Interstate Bancorp in a merger-related consolidation. Wells bought First Interstate on April 1.

Thrifty has an exclusive arrangement with Wells, meaning that it will be the only drugstore with which the bank works. But Wells is approaching unnamed retailers in other industries, Mr. Ketcham said.

The in-bank drugstores will be slimmed-down versions of Thrifty's typical 17,000 square foot outlet. By teaming with Wells, Thrifty will enter neighborhoods it couldn't otherwise get into, Mr. Gaube said. The Wilsonville, Ore.-based retailer has 1,048 stores in 10 western states.

Alex. Brown's Mr. Morford estimated that annual savings in California alone could total $50 million to $70 million if Wells leased out all its excess branch space.

But the drugstore venture will clearly face some marketing challenges.

"I don't think a person would think or be educated easily to say, 'I can go to the bank and get my prescription filled,'" said Gene Galloway, executive vice president of retail banking at Sanwa Bank, Los Angeles.

At least one Wells Fargo customer seems to agree. After completing a transaction at a Wells automated teller machine in San Francisco's financial district, Suzanne Weiner said she didn't see much to recommend the partnership.

"It seems like a waste of money," she said. "Why not just walk around the corner and go to the drugstore?"

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