Headquartered in Camp Hill, Pennsylvania, and incorporated in Delaware, Rite Aid is the third-largest retail drugstore chain in the USA based on both revenue and number of stores. Rite Aid operates 4,623 stores in 31 states and the District of Columbia and has 89,000 associates, of which 13 percent were pharmacists, 43 percent were part-time, and 26 percent were members of a union. Rite Aid’s fiscal 2013 year ended on March 2, 2013.
Rite Aid stores sell prescription drugs and other merchandise, dubbed “front-end products” such as over-the-counter medications, beauty products, cosmetics, household items, beverages, snack foods, greeting cards, seasonal merchandise, and much more. Currently prescription drugs account for 67.6 percent of revenue, whereas front-end products account for 32.4 percent of revenue. The average size Rite Aid store is 12,600 square feet with 61 percent of the stores free standing and 40 percent built into another building such as a strip mall. Approximately 52 percent of stores include a drive through, 24 percent include a one-hour photo and 47 percent include a General Nutrition Corporation (GNC) store inside.
Although performing poorly and in financial trouble, Rite Aid tries to distinguish itself from other drugstores with its wellness + loyalty program, plus their private brands that account for 18.3 percent of front-end sales, and a strategic alliance with GNC, the leading retailer of vitamin and mineral supplements. In the prior fiscal year that ended March 1, 2012, Rite Aid private brands comprised 17 percent of sales. However, CVS and Walgreens, as well as pharmacies in mass discounters such as Walmart and Target, are crushing Rite Aid, which needs a clear strategic plan and turnaround strategy to survive the next few years.
Copyright by Fred David Books LLC. (Written by Forest R. David)
Rite Aid opened its first store in 1962 as Thrift D Discount Center in Scranton, Pennsylvania. Thrift D Discount Center grew rapidly and in 1968 changed its name to Rite Aid Corporation and was listed on the American Stock Exchange only to switch to the New York Stock Exchange in 1970. The company grew rapidly and by 1972 operated 267 stores in 10 different states, and by 1981, was, and remains to this day, the third-largest drugstore chain in the USA. When Rite Aid celebrated its twenty-fifth year in operation in 1987, the company continued its acquisition and market penetration strategy by acquiring 420 stores in 10 different states plus the District of Columbia, bringing the total number of Rite Aid stores to 2,000, at that time the nation’s largest drugstore chain based on total stores.
In 1995, Rite Aid acquired Perry Drug Stores in Michigan and a year later acquired Thrifty PayLess Holdings, the largest drugstore chain in the western USA. Also in 1996, Rite Aid entered the Gulf Coast market with the acquisition of Harco, based in Alabama and then acquired K&B Inc. based in New Orleans. Rite Aid formed a strategic partnership with GNC whereby the two companies have cobranded a line of vitamins and nutritional supplements called PharmAssure that are sold in both Rite Aid and GNC stores nationwide.
In 2007, Rite Aid acquired (for more than $4 billion from Canadian drugstore chain Jean Coutu), the U.S. drugstore chain named Brooks and Eckerd. This acquisition established Rite Aid as the largest drugstore chain on the East coast, and all 1,850 Brooks and Eckerd stores were renamed and rebranded as Rite Aid; but the acquisition left Rite Aid heavily in debt and with redundant stores in some areas.
Today, Rite Aid is clinging to its position as a distant third (behind CVS and Walgreens) in the U.S. retail drugstore business. Unprofitable and operating more than 4,700 drugstores in about 30 states and the District of Columbia, Rite Aids fills prescriptions (about two-thirds of sales) and sells health and beauty aids, convenience foods, greeting cards, and other items, including some 3,000 Rite Aid brand private-label products.
Vision and Mission
According to its website, Rite Aid’s mission statement is:
· “To be a successful chain of friendly, neighborhood drugstores. Our knowledgeable, caring associates work together to provide a superior pharmacy experience, and offer everyday products and services that help our valued customers lead healthier, happier lives.”
The company has no stated vision statement.
Rite Aid appears to use a divisional-by-geographic region organizational structure as portrayed in Exhibit 1 . Doing business only in the USA, Rite Aid has five divisions: Southern, Northeast, Mid-Atlantic, Western, and New York City Metro. Note in Exhibit 1 that the division heads are lower levels of top management, which may be a problem. For example, do the executive vice-president’s noted in the chart have authority and responsibility over the division senior vice-president head persons. Note also that there are only three women among the top 31 executives.
Statement of Ethics
Rite Aid has two separate Codes of Ethic posted on its website. One code reinforces the overall commitment of Rite Aid and its associates, board of directors, and the companies that do business with Rite Aid, whereas the second code is principally targeted for the chief executive officer (CEO) and senior officers within the company. Rite Aid’s Codes of Ethics provide guidelines for many workplace issues including but not limited to: associate privacy, equal employment and discrimination, sexual and other forms of harassment, environmental policies, safety in the work place, drugs and alcohol, weapons in the work place, and much more. The Code of Ethics also establishes conditions of ethical behavior for the company as a whole. Some examples discussed in the code are: dealing with suppliers, dealing with conflicts of interest, receiving and giving gifts, confidential information and trade secrets, document records, and insider trading. The code also describes in detail how to function with integrity in respect to honest advertising, fair billing of prescription drugs, and product safety. Finally the Code of Ethics discusses interaction with local, state, and the national government, mainly focusing on gifts to politicians, political contributions, and lobbying activities.
Rite Aid provides data for four unique business segments. As indicated in Exhibit 2 , prescription drugs account for approximately 68 percent of sales. It is interesting that titles of the company executives do not indicate a divisional-by-product structure so apparently there is none. Front-end products (all products that are not prescription drugs) account for the balance of 32 percent of revenue. Approximately 17 percent of the company’s front-end sales can be attributed to private branded products; Rite Aid plans to increase the offerings of Rite Aid branded products in 2013–2015.
Rite Aid does no business outside the USA. Rite Aid’s store size varies depending on location with stores in the East averaging 11,100 square feet per store and stores in the West averaging 19,500 square feet for an overall average of 12,600 square feet. Exhibit 3 provides a breakdown of the store count for the top 10 states in which Rite Aid operates. Note that the only western state in the top 10 in store count is California. Note also that no state added stores in fiscal 2013. Exhibit 4 reveals further attributes about Rite Aid stores.
More than 4,400 of Rite Aid stores, or approximately 94 percent are under noncancelable leases with terms of 10 to 22 years. Rental payments are set at comparable fair market rates and certain leases also require additional payments based on sales volumes, reimbursement for taxes, maintenance, and building insurance. Rite Aid outright owns 259 stores and also owns its corporate headquarters a 205,000-square-foot building in Camp Hill, Pennsylvania, and leases another building more than 366,000 square feet in neighboring Harrisburg. Rite Aid in addition owns or leases 17 distribution centers across the USA that average approximately 425,000 square feet, and, for some reason, owns a 55,800-square-foot ice cream manufacturing facility in California.
EXHIBIT 1 Rite Aid’s Organizational Structure
Source: Chart constructed based on company documents.
EXHIBIT 2 Rite Aid’s Revenue Breakdown
|Product Class||Sales (%)|
|Over-the-counter medications and personal care||9.9|
|Health and beauty aids||5.2|
|General merchandise and other||17.3|
Source: Company documents.
EXHIBIT 3 Rite Aid Locations
|Fiscal 2012||Fiscal 2013|
|State||Store Count||Store Count|
Source: Company documents.
EXHIBIT 4 A Profile of Rite Aid Stores (March 2012)
|Fiscal 2012||Fiscal 2013||2012||2013|
|GNC Stores Inside Rite Aid||2,138||2,186||45.8||47.3|
Source: Company documents.
Rite Aid’s strategy is to become the neighborhood destination for health and wellness for all Americans. The company in fiscal 2013 converted 500 more stores to their wellness format. Rite Aid’s Wellness and Loyalty Program, established in April 2010, allows customers to accumulate points on purchases in both front-end products and prescription drugs by achieving Bronze, Silver, and Gold levels. Rite Aid has more than 25 million members enrolled in the program. Currently 74 percent of front-end sales and 68 percent of prescriptions are filled by members of the program. Members also tend to do more business with Rite Aid on both front-end items and prescription drugs.
In addition to the new Wellness and Loyalty Program, Rite Aid has increased the number of immunizing pharmacists to 11,000 to cover all Rite Aid stores and in fiscal 2013 administered 2.4 million flu shots. The 2.4 million was up 60 percent from 1.5 million the prior year. Rite Aid also actively promotes its private brands and currently has more than 3,000 different Rite Aid brands, many that Rite Aid considers its “price fighter” or best value for the money.
Also helping to increase same-store sales is Rite Aid’s partnership with GNC. Rite Aid has more than 2,100 GNC stores located within Rite Aid stores and a commitment to open additional stores by December 2014.
Rite Aid’s information system allows customers to fill or refill prescriptions at any Rite Aid in the country. The system provides pharmacists with warnings of possible drug interactions. Customers can order its prescriptions over the Internet or telephone through Rite Aid’s automated-response system. Efficiency derived from the use of technology allows Rite Aid’s pharmacists to spend more time consulting and advising customers on supplementary products that the customers may find useful and creating a friendly atmosphere leading to more customer loyalty. Customers may also place orders on both the iPhone and Android platforms.
Rite Aid is currently under a contract with McKesson Corporation to deliver both brand-name and generic pharmaceuticals. About 91 percent of all prescription drugs are purchased through McKesson, leaving Rite Aid dependent on McKesson for timely supplying drugs. Rite Aid’s contract with McKesson expires in March 2016. About 80 percent of all generic drugs are purchased directly from the manufacturer. Front-end products are purchased through numerous other manufacturers.
In fiscal 2013, Rite Aid’s marketing and advertising expense was $336 million, down from $369 million the prior year, mostly as a result of weekly circular advertising flyers focusing on price promotions to drive customers to stores. The ads also promote the firm’s Wellness and Loyalty Program, market the Rite Aid private-branded products, and try to convince consumers that Rite Aid should be its first choice for health and wellness products.
Rite Aid is highly leveraged with more than $5.9 billion in long-term debt, so debt financing is not a good option for the company going forward. A large portion of the company’s cash flow is dedicated to servicing debt. Even with all of its acquisitions over the years, Rite Aid’s goodwill remains $0 so that is good, but Rite Aid’s stock price has been less than $3 per share for five years and is still $3 as of 8-15-13, so equity financing is also not an attractive financing option. The low stock price could also make the company vulnerable to a hostile takeover, but the large debt and negative stockholders’ equity may reduce this concern. If a firm’s stock value drops below the minimum New York Stock Exchange listing price, then the security could be delisted from the exchange.
Rite Aid’s relationship with Canadian pharmacy chain Jean Coutu Group (through the acquisition of Brooks Eckerd), which controls 25 percent of the voting power, also hinders Rite Aid’s financial position. Based in Longueuil, Quebec, Canada, Jean Coutu owned Eckerd when Rite Aid made that acquisition. Jean Coutu today operates about 400 franchised stores in Quebec, New Brunswick, and Ontario. In April 2012, Jean Coutu sold on the open market 56 million shares of Rite Aid. That sell was part of Jean Coutu’s initial $234.4 million stake in Rite Aid. Jean Coutu would be a rival if Rite Aid expanded to Canada. What is there to prevent even a firm such as CVS from buying Jean Coutu’s bulk amount of Rite Aid common stock?
There are more than 44,000 drugstores in the USA with slightly more than half of these stores belonging to chains and the rest being independent mom-and-pop operations. Mail-order drug companies such as www.drugstore.com , as well as large discount firms such as Walmart, significantly erode potential sales for Rite Aid. Prescription drug sales, where around 60 percent of drugstore sales originate from, total about $150 billion annually and are expected to increase as the economy improves, baby boomers age, a strong drug pipeline, and the introduction of healthcare reform.
Walgreens, CVS Caremark, and Rite Aid are the three-largest drugstore chains in the USA by store number and revenues, respectively. These top three chains represent 47 percent of total retail drugstore sales and 63 percent of the retail chain drugstore sales. With 37 percent of the retail chain drugstore sales not coming from the big three, there remains room for acquisitions for the big players if they chose that strategy. Historically, Rite Aid has been the acquirer, but its weak financial condition now makes it more likely that they would be acquired.
Note in Exhibit 7 that Rite Aid generates more revenue per employee than Walgreens but less than CVS. The key statistic in Exhibit 7 however is that Rite Aid’s two major rivals are financially stable.
EXHIBIT 5 Rite Aid’s Income Statement (All amounts in thousands except per share amounts)
|March 2, 2013 (52 Weeks)||March 3, 2012 (52 Weeks)||February 26, 2011 (52 Weeks)|
|Revenues||$ 25,392,263||$ 26,121,222||$ 25,214,907|
|Costs and expenses:|
|Cost of goods sold||18,073,987||19,327,887||18,522,403|
|Selling, general and administrative expenses||6,600,765||6,531,411||6,457,833|
|Lease termination and impairment charges||70,859||100,053||210,893|
|Loss on debt retirements, net||140,502||33,576||44,003|
|Gain on sale of assets, net||(16,776)||(8,703)||(22,224)|
|Income (loss) before income taxes||7,505||(392,257)||(545,582)|
|Income tax (benefit) expense||(110,600)||(23,686)||9,842|
|Net income (loss)||$ 118,105||$ (368,571)||$ (555,424)|
|Computation of income (loss) applicable to common stockholders:|
|Net income (loss)||$ 118,105||$ (368,571)||$ (555,424)|
|Accretion of redeemable preferred stock||(102)||(102)||(102)|
|Cumulative preferred stock dividends||(10,528)||(9,919)||(9,346)|
|Income (loss) attributable to common stockholders—basic and diluted||$ 107,475||$ (378,592)||$ (564,872)|
|Basic and diluted income (loss) per share||$ 0.12||$ (0.43)||$ (0.64)|
EPS, earnings per share.
Source: 2013 Form 10K, page 63 .
EXHIBIT 6 Rite Aid’s Balance Sheet (All amounts in thousands except per share amounts)
|March 2, 2013||March 3, 2012|
|Cash and cash equivalents||$ 129,452||$ 162,285|
|Accounts receivable, net||929,476||1,013,233|
|Prepaid expenses and other current assets||195,377||190,613|
|Total current assets||4,409,047||4,504,586|
|Property, plant and equipment, net||1,895,650||1,902,021|
|Other intangibles, net||464,404||528,775|
|Total assets||$ 7,078,719||$ 7,364,291|
|LIABILITIES AND STOCKHOLDERS’ DEFICIT|
|Current maturities of long-term debt and lease financing obligations||$ 37,311||$ 79,421|
|Accrued salaries, wages and other current liabilities||1,156,315||1,064,507|
|Total current liabilities||2,578,270||2,570,319|
|Long-term debt, less current maturities||5,904,370||6,141,773|
|Lease financing obligations, less current maturities||91,850||107,007|
|Other noncurrent liabilities||963,663||1,131,948|
|Commitments and contingencies||—||—|
|Preferred stock—series G, par value $1 per share; liquidation value $100 per share; 2,000 shares authorized; shares issued .007 and .006||1||1|
|Preferred stock—series H, par value $1 per share; liquidation value $100 per share; 2,000 shares authorized; shares issued 1,821 and 1,715||182,097||171,569|
|Common stock, par value $1 per share; 1,500,000 shares authorized; shares issued and outstanding 904,268 and 898,687||904,268||898,687|
|Additional paid-in capital||4,280,831||4,278,988|
|Accumulated other comprehensive loss||(61,369)||(52,634)|
|Total stockholders’ deficit||(2,459,434)||(2,586,756)|
|Total liabilities and stockholders’ deficit||$ 7,078,719||$ 7,364,291|
Source: 2013 Form 10K, p. 62.
EXHIBIT 7 A Financial Comparison of Rite Aid, Walgreens, and CVS
|Number of Employees||89,000||176,000||202,000|
|Net Income ($)||118M||2.57B||3.56B|
|EPS Ratio ($)||0.12||2.91||2.64|
EPS, earnings per share.
Founded in 1901 and based in Deerfield, Illinois, Walgreens operates 7,900 drugstores in all 50 states, the District of Columbia, and Puerto Rico. With more than 176,000 full-time employees and sales of more than $72 billion, Walgreens is the largest drugstore in both sales and number of stores in the USA. The company is a full-fledge brick-and-mortar drugstore offering a full pharmacy and front-end products as well as one-hour photo services.
In 2011, Walgreens was involved in an ongoing dispute with Express Scripts, its pharmacy benefit manager (PBM), over contractual renewal terms. Walgreens had informed its customers that it is no longer part of the Express Scripts network. However in July 2012, the companies resolved their dispute, so Express Scripts now continues to supply Walgreens with the necessary prescriptions. During the lag though, Walgreens was not able to service customers whose prescription plans are managed by Express, thus costing Walgreens many of its Express-reliant customers and losing not only prescription sales to these customers but also front-end sales. Despite the July agreement, Walgreens still fears Express possibly merging with Express’ largest competitor, Medco Health Solutions, which could severely hurt Walgreens’ position in obtaining the necessary prescriptions depending on the terms of the new agreement, which are not made public.
Walgreens recently expanded into Europe through its $6.7 billion acquisition of 45 percent of Alliance Boots GmbH in Germany. This acquisition could have large potential benefits for Walgreens in the months ahead. Some analysts, however, contend that Walgreens paid too much for Alliance and should not move to acquire the remaining 55 percent of that company. The acquisition supposedly brings cross benefits to both companies whereby Walgreens gains exposure to an international market, helping it create a network of stores globally, and the deal allows Alliance Boots to enter the U.S. market, which it was eying for the past 10 years. The combined entity is supposed to be one of the biggest drugstore businesses with about 11,600 stores across 12 countries with more than 170,000 pharmacies, hospitals, and health centers.
Founded in 1892 in Woonsocket, Rhode Island, CVS operates 7,352 retail drugstores, 570 MinuteClinics, 31 retail specialty pharmacy stores, 12 specialty mail-order pharmacies, and 4 mail-order pharmacies. CVS offers many of the same products chief competitors Walgreens and Rite Aid offers, including prescription drugs, over-the-counter drugs, food, snacks, beauty products, and one-hour photo services.
In 2007, CVS acquired Caremark RX, (a PBM), in a backward integration strategy, although many experts questioned the synergy and benefits of such an alliance. One of the main concerns was that PMBs aim is to reduce costs for the consumers whereas a retail store aim is to maximize sales. Within the first two years of the merger, CVS experienced a loss of more than $4 billion in PBM business to competitors. However, starting in 2010, CVS began to experience a profit from the merger, picking up a $575 million contract with a retirement system in California, a $9 billion annual contract with Aetna Inc., and a $3 billion in sales from federal employees’ plans.
Mail-order drugstores and pharmacies are the fastest-growing format in the drugstore industry. They vary from simply providing vitamins and supplements to providing over-the-counter drugs cheaper, to providing full prescription needs. Its main customer is people with an ongoing condition such as diabetes that have ongoing treatment needs. Typically, mail-order stores will fill prescriptions in up to a 90-day supply instead of the typical 30- to 60-day supply drugstores use. Brick-and-mortar drugstores offer lower duration supplies hoping to entice customers to purchase other front-end products while in its stores, but the convenience of online shopping with products mailed to the customer’s house, the reduction of copays from receiving fewer prescriptions per year, and often overall lower prices because overhead of mail-order stores is considerably less, is expected on balance to hurt brick-and-mortar stores. Some stores such as CVS have expanded into the mail-order business, but CVS maintains more than 7,000 retail stores.
People globally are getting older, so the consumption of prescription and nonprescription drugs is expected to increase quite dramatically in the years ahead, benefiting drugstore companies such as Rite Aid. The Affordable Care Act was recently upheld in the USA, benefiting drugstores. Although Rite Aid competes only in the USA, emerging economies globally are also purchasing more and more prescription and nonprescription drugs because those societies strive to become healthier. As Rite Aid’s rivals such as Walgreens gain economies of scale doing business outside the USA, that trend hurts Rite Aid. Increasing penetration of cell phones and wireless devices globally also is spurring consumers to purchase more medicines and vitamins.
There is a general trend in the USA and elsewhere toward greater awareness of healthiness as well as information on how to stay healthy. This trend helps drugstores. Corporate wellness programs are gaining widespread acceptance in the business world and this too helps drugstores. But competition is exceptionally intense, so a clear strategic plan is essential to gain and sustain competitive advantage in a growing industry with growing numbers of consumers.
Hundreds of prescription drugs have recently become generic or even over-the-counter after their patents have expired. The Food and Drug Administration provides patent protection to drug companies so those firms can recover research and development costs and eventually make a profit without the risk of competition. However, when the patents expire, generic companies can market the same chemical drug at fractions of the cost to the consumer. Despite their lower sales prices, generics now account for about 78 percent of all prescriptions filled and yield a much higher gross margin for pharmacies than brand-named drugs. The average generic drug price is less than $40 whereas the average brand-name drug is about $155. About $98 billion in prescription sales will lose patent protection by 2015, resulting in an estimated $26 billion in sales from generic drugs and greatly benefiting drugstores such as Rite Aid, but of course the task is to best attract and keep customers who have many choices and thus great bargaining power.
To compete with mail-order stores, traditional drugstores are increasing the number of freestanding stores with drive-through pharmacies and investing in technology that fills prescriptions. Many drugstores are now open 24 hours a day, but the pharmacy and 1-hour photo aspects are generally only open during normal business hours.
To provide customers greater convenience, Walgreens recently added a line of grocery items. This strategy appears to be working well for Walgreens, so analysts expect Rite Aid and CVS to follow suit in the coming months or years, perhaps sooner than later.
Focusing on low cost-minded customers, many drugstores now have developed their own store-branded products and even offer deep discounts through their rewards programs for customers who purchase their respective brands. CVS for example has recently launched “Just the Basics” brand with more than 100 items targeted at value-minded customers. This product line currently makes up more than 17 percent of CVS front-end sales. CVS plans to further increase its private-branded products. In addition to CVS, Rite Aid has its “price fighter” store brands that total to more than 3,000 individual products. Much like generic drugs, these products are cheaper for the consumer but offer larger margins for the corporation. Store branding is expected to be a main strategy of all players in the drugstore industry.
New Healthcare Laws
In 2008, approximately 46 million Americans lacked health insurance. With the passage of the Affordable Care Act, an additional 32 million formally uninsured Americans will now be covered. It is estimated that the Affordable Care Act will cost more than $938 billion over the next 10 years, leaving many opportunities for retail drugstore operations. By 2019, it is expected that health insurance will be available for 95 percent of all Americans, up from 85 percent in 2012.
Rite Aid’s big problem is high indebtedness, which stifles the firm’s ability to make strategic moves and creates high interest expenses. Rumors are beginning to surface that Walgreens may be interested in acquiring Rite Aid to compete better against CVS. Although a deal would help Walgreens grow, it would also saddle the company with Rite Aid’s debt.
Even if Rite Aid would consider a friendly takeover by Walgreens, a clear strategic plan would be essential for Rite Aid’s shareholders to recoup its investment in the firm. Even in a hostile takeover attempt, a clear strategic plan would be vital for Rite Aid shareholders.