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Tops Markets' profits hurt? by availability of generic drugs

The availability of less expensive generic versions of some popular prescription drugs, coupled with a slip in the profitability of its growing gasoline sales, caused Tops Markets' third-quarter profits to slide by 27 percent, the Amherst-based supermarket chain said.

Tops said its profits fell to $4.7 million from $6.4 million a year earlier as overall sales held steady at $538 million.

Despite Tops' ongoing efforts to reduce its costs, the grocery store chain was hurt by a 1.3 percent decline in sales at stores that have been open for at least a year, with a little more than half of the reduction in revenues coming from a number of popular name-brand drugs now having less costly generic alternatives available.

That switch to generics led to a $3.7 million drop in sales at the company's in-store pharmacies.

In addition, the company's earnings were hurt by the declining profitability of its gasoline sales, which have become a bigger portion of Tops' overall business as it has steadily added fueling stations at its stores. Same-store gasoline sales were down slightly, Tops executives said.

While gasoline sales jumped by 7 percent during the quarter to $51 million as consumers purchased 5 percent more gallons and the price of that gas rose by almost 2 percent, those sales were less lucrative because of the costs associated with Tops' gasoline rewards program, which gives customers a discount of 10 cents per gallon for every $100 they spend on groceries. Tops has opened six fueling stations at its stores since August 2011 and expects to add one more this year.

Frank Curci, Tops' president and chief executive officer, said the chain's gas rewards program had a "measurable increase" in enrollment by its customers.

"We use the fuel program to drive in-store sales and promote customer loyalty," said Rick Mills, Tops' chief financial officer, on Tuesday.

Tops, which took over 21 former Grand Union supermarkets in the Adirondacks region and Vermont during the final week of the third quarter, said those sites contributed $2 million to its sales during the latest quarter. The stores, which include 11 supermarkets that Tops ran while it was owned by Dutch grocery giant Ahold NV, have about $100 million in annual sales.

"It creates opportunities for a new customer base while adding minimal administrative expenses," Curci said. "They're one-store towns."

Excluding gasoline sales, revenues from inside Tops' stores slipped by less than 1 percent to $487.5 million, compared with $490.9 million a year ago. The decline also reflects the shutdown during the second half of 2011 and January 2012 of five stores, with $3.5 million in third-quarter 2011 sales, that Tops acquired from Penn Traffic.

Curci said Tops is pleased with the performance of the smaller stores it has added through acquisitions, such as the Grand Union deal, as well as its own program to open smaller-format stores. "These stores are just as profitable as our other big boxes," he said.

Curci said Tops isn't actively hunting for significant acquisitions, although it is interested in small deals to fill in gaps within its existing markets. "What really excites us is the fill-in opportunities, especially with the independents," he said. Tops, for instance, purchased the 10,000-square-foot North Boston Marketplace store on Boston State Road this summer and rebranded it as a Tops Market.?