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Effort to build ‘new Rite Aid’ under way

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COO Kermit Crawford cites "strong foundation" for health care, retail

CAMP HILL, Pa. — There’s a “new Rite Aid” taking shape that executives say will emerge as a smaller but stronger company.

Rite Aid Corp. president and chief operating officer Kermit Crawford said he’s confident the company “will succeed in building the new Rite Aid” following its $4.375 billion asset sale to Walgreens Boots Alliance (WBA).

Under the deal, announced in September, Rite Aid is selling 1,932 stores, three distribution centers and related assets to WBA. The transaction also gives Rite Aid the option to source generic drugs from WBA’s group purchasing organization for 10 years, which would enable Rite Aid to buy generics at a cost similar to that of Walgreens.

As of Dec. 2, the end of Rite Aid’s fiscal 2018 third quarter, ownership of 357 stores had been transferred to WBA. The sales, slated to be completed by this spring, will cut Rite Aid’s store base by more than 40%.

Rite Aid has received about $715 million in proceeds from the transfer of the 357 stores, which has been used to pay down debt, according to chairman and chief executive officer John Standley.

“I’d like to thank the entire Rite Aid team for their hard work and dedication in making this significant milestone a reality for our company and our shareholders. We expect to continue transferring ownership of the stores in phases over the coming months with the goal of completing the process in spring of 2018,” Standley said in a third quarter conference call with analysts. “As we continue transferring ownership of stores to WBA, we will also continue to focus on our most significant business-building opportunities heading forward.”

Crawford, who joined Rite Aid on Oct. 5, noted in the conference call that the company brings a number of strengths to the table as it moves forward.

Kermit Crawford_Rite Aid_president_COO

Kermit Crawford

The “new Rite Aid” will be a $22 billion company that generates more than 180 million prescriptions annually and has 2,569 drug stores in key state markets, served by six distribution centers, he said in the call. It also boasts strong health care assets on top of expanded clinical pharmacy services, including retail clinic operator RediClinic, health care management specialist Health Dialog and pharmacy benefit manager EnvisionRxOptions, which manages over 4 million lives.

“These assets become more important when you consider how the transaction with WBA will benefit our organization. The new Rite Aid will be financially stronger with lower debt and more financial flexibility to invest in strategic initiatives that drive our business,” Crawford explained.

“We will have a more profitable store network with a higher percentage of Wellness stores. We’ll also have a strong store count presence in our eight key states of California, Pennsylvania, Michigan, Ohio, New York, New Jersey, Washington and Oregon, which gives us the opportunity to improve market share in these states,” he said. “And, finally, we have an attractive option to help manage our pharmacy purchasing costs through a generic purchasing option with WBA.”

At presstime, 2,505 of Rite Aid’s 4,404 stores — or 57% — were Wellness stores. Company executives have previously said that, compared with other Rite Aid locations, Wellness stores have shown an approximately 1% higher script count and more than 3% higher front-end sales on a comparable-store ­basis.

“Our Wellness store format continues to drive innovation through enhanced layout and design, a stronger emphasis on health and wellness products and services, and enhancements that make key categories much easier to shop. These stores continued to outperform the rest of the chain and, going forward, Wellness stores will account for nearly two-thirds of our overall retail footprint,” Crawford said. “We will continue to enhance our product selection, traffic flow and services based upon learnings and a better understanding of our local customer needs. We’re excited to be in a position to further leverage this popular store format in delivering an even better customer ­experience.”

In the front end, that will include the rollout of more targeted merchandising strategy with offerings tailored to each local market, according to Crawford. Rite Aid, too, aims to boost its private brand lineup and, leveraging customer data, step up personalization of promotions. “We’ll also be highly focused on further developing our omnichannel experience,” he said.

On the health care side, RediClinic walk-in medical clinics will complement the Wellness stores’ enhanced clinical services — including medication and disease state management and more immunizations — to make Rite Aid a convenient care destination. Meanwhile, EnvisionRx and Health Dialog will help spur pharmacy business and boost the company’s presence in the specialty pharmacy and Medicare Part D markets.

“Heading forward, Envision will serve as a growth engine for the entire enterprise,” Crawford told analysts. He also highlighted the synergies with Health Dialog. “With strong predictive modeling, Health Dialog can also serve as the analytical engine to differentiate Envision’s offerings and help retail pharmacists better understand and care for patients, especially those with diabetes, high cholesterol and ­hypertension.”

Crawford noted that Rite Aid’s biggest health care and retail strengths are also its biggest opportunities. “I believe we have a strong foundation from which to build the new Rite Aid and are well on our way to identifying the steps we must take to create a winning strategy in each market that enhances our customer experience and builds a winning value proposition for our payers and key ­stakeholders.”

According to Standley, the addition of Crawford has provided a boost to Rite Aid. The former Walgreens executive, most recently corporate executive vice president and president of pharmacy health and wellness at the company, has brought to Rite Aid decades of experience in a wide range of store operations and senior management positions, including pharmacy services and pharmacy benefit management.

“A critical priority for us has been to build our management team for the future to ensure that we have the right leaders in place,” Standley told analysts in the call. “In just a few months, Kermit’s knowledge, passion and commitment to innovation are having a positive impact on our team as we work together to deliver against our strategic priorities.”

Darren Karst, senior executive vice president and chief financial and administrative officer, summed up the positive outlook for Rite Aid as it moves forward with its strategy.

“As Kermit said, when this transaction is complete, the new Rite Aid will be a stronger and more profitable enterprise with a 2,569-store network located in key states on both the West Coast and in the East,” Karst said in the call. “We will also be able to continue to leverage our other key health and wellness assets, including EnvisionRx, RediClinic and Health Dialog. This gives us a business model that is more diversified with less exposure to pharmacy reimbursement rates because a higher percentage of our operating income will come from our PBM business.”


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