John Standley: The adapterCEO, Rite Aid
If all had gone as planned, Rite Aid Corp. would be facing a tumultuous health care market as part of a larger organization.
But not everything in business goes according to plan, and the company had to call off its merger with Walgreens Boots Alliance Inc. Now, it is in the process of unloading nearly 2,000 stores to Walgreens, aka WBA, while hoping to emerge as a leaner, more profitable company.
As 2017 came to a close, Rite Aid CEO John Standley answered some questions via email about how the new, smaller Rite Aid plans to move forward in a changing health care market. The company is based in East Pennsboro Township, Cumberland County.
CPBJ: Were you surprised that the merger with Walgreens was ultimately unsuccessful? Why/Why not?
Standley: Throughout the process, we believed that pursuing the merger was the right thing to do for our investors and customers. When we received feedback that led us to believe the merger wouldn’t be approved, we became laser focused on pursuing other opportunities that would strengthen our position heading forward. Our team did a tremendous job of staying focused and we secured clearance for the asset sale, and we’re beginning to realize the important benefits of that transaction.
CPBJ: What led you to pursue the store sale only?
Standley: The discussions with the FTC had gone on for nearly two years, which is an unusually long period of time that we didn’t expect. When it became clear from the feedback from the FTC that the merger wouldn’t be approved, we took a hard look at the realities of our business environment, specifically the industry-wide decline in pharmacy reimbursement rates that have negatively impacted our performance as well as our high debt levels.
So the asset sale is a really important strategic step forward for us.
The proceeds will allow us to significantly reduce our debt and improve our balance sheet, giving us more financial flexibility and more opportunities to invest in our business. We were also able to maximize our cash proceeds from this asset by utilizing our existing net operating loss carryforward to offset a substantial portion of federal cash taxes that we otherwise would have paid on this sale.
The asset sale also gives us a network of stores that are financially stronger on a per-store basis with higher average front-end sales, script count and EBITDA. More than 60 percent of these stores feature our highly popular wellness format and many of them are located in markets where we have strong market share and are very competitive.
The asset sale also gives us an opportunity to purchase generic drugs that are sourced through an affiliate of WBA at a cost similar to that of Walgreens, providing us with an important tool to help control expenses for pharmacy purchasing.
And, we’ll also continue to operate our pharmacy benefits manager, EnvisionRxOptions, and our subsidiaries, Health Dialog and RediClinic, leveraging the capabilities of each to deliver a higher level of care to our patients.
CPBJ: Now that the merger with Walgreens is off and store sales are proceeding, what are some of the initiatives you hope to pursue at Rite Aid in 2018?
Standley: We’ve created a plan that focuses on what we believe are six important areas of our business heading forward.
Those areas are: to build our management team for the future; to redefine and enhance our customer and patient experience; to engage with our payer partners in creating a sustainable business model; to evaluate our pharmacy purchasing options to ensure we have a competitive drug cost; to streamline our operations and to grow our pharmacy benefits manager EnvisionRxOptions.
We also have an award-winning customer loyalty program, expanded clinical services like immunizations and our innovative wellness store format.
By focusing on these specific areas, and further leveraging our subsidiaries, we will position Rite Aid for future success while delivering against our commitment to providing superior service to Rite Aid customers.
CPBJ: Companies typically seek to grow in order to leverage economies of scale and become more efficient, though there are also numerous examples of companies scaling back to focus on a stronger sub-market or to shed under-performing assets. What are the economic and marketplace advantages for Rite Aid of becoming smaller?
Standley: When you factor in the key benefits of the asset sale, such as a more profitable store footprint, enhanced pharmacy purchasing capabilities, a stronger balance sheet and improved financial flexibility, we are well-positioned to implement our plan for delivering improved results.
Having a smaller network of stores also allows us to be more nimble when it comes to adapting to change in a very dynamic health care marketplace and driving innovation that can better serve our customers.
CPBJ: Rite Aid is selling about 1900 stores to Walgreens. What changes are you making behind the scenes at the corporate office to accommodate the smaller footprint? Will you still need as many people in the back office?
Standley: It’s important to keep in mind that, under the asset purchase agreement, Rite Aid is committed to providing specific transition services to WBA for up to three years. These services will be provided through the Transition Services Agreement, or TSA.
As a result of the TSA, some of our corporate departments will see associates taking on specific roles that exclusively support the Walgreens-owned, Rite Aid-branded stores. In addition, a few more roles are expected to split time between supporting remaining Rite Aid stores and the transitioning stores.
Once the transition of stores to WBA is complete and the TSA winds down, it will be important for us to assess the needs of the company going forward.
CPBJ: Brick-and-mortar retail has been seen as a declining economic force. What role do you see for Rite Aid stores as even health care shifts to an online/digital model?
Standley: There has definitely been a significant increase and interest in what we call a “seamlessly connected experience,” that includes all digital channels — website, mobile app and social channels like Facebook. Our patients and customers still engage and shop regularly in our stores, especially due to our offerings which include various clinical services and clinics in select stores. We very much believe the brick-and-mortar model still resonates, especially in a retail health care setting like ours. It’s important for us to continue incorporating online and digital strategies into our current business model, and we see this as a way to complement our existing services, especially those relating to the pharmacist.
According to an annual Gallup poll, pharmacists are among the most-trusted health care professionals ... . Incorporating digital strategies that support the face-to-face services we already offer can strengthen the patient-pharmacist relationship and enhance the customer experience.
So it will be very important for us to continue developing our omni-channel strategy, one that offers our customers a seamless shopping experience whether they are engaging with us in a store, online or on our mobile app. We’ve recently made enhancements to our website and our mobile app, and we’ll look to continue enhancing these channels over the course of the next fiscal year. We’ll also be looking to refresh our social strategy, as those channels offer a unique way for us to further connect with our customers, and we’ll continue to invest in digital advertising.
CPBJ: Do you envision partnerships with insurers and others in health care, or even in e-commerce, as lines blur in the industry?
Standley: Health care in our country is in the middle of a historic transformation, and we believe there are significant opportunities to better serve our customers, meet health care marketplace needs and demonstrate the value community pharmacists bring to the health care system.
Now more than ever, patients are looking for a holistic approach to health care. By offering a broader range of wellness services, we can also help drive better patient health outcomes and help to lower health care costs.
To this end, we have been working closely with health care providers to improve patient health in a variety of ways; one such example is the creation of joint ventures, like the ones in place between RediClinic and leading health systems to operate RediClinics inside select Rite Aid pharmacies. Another would include our efforts with payers and health plans to integrate clinical services like medication adherence counseling, medication therapy management, medicine reminder and synchronization services and immunizations.
To make sure we’re meeting the changing need of our patients, we’re always looking at ways to further enhance our suite of clinical services through new strategic partnerships with others in the health care industry, the expansion of existing collaborations and the integration of technology into existing services and resources.
Standley: The CVS-Aetna proposed merger is still pending, so it would be premature to comment. The proposed merger certainly demonstrates just how dynamic the marketplace is for health care.
While it’s crucial that we are aware of what’s happening across the industry, for us at Rite Aid, our focus has to remain on building and executing our own strategy — we must continue to develop and implement ways to leverage the expertise of our pharmacists in the health care continuum, solidifying our role as a retail health care company destination by offering a differentiated pharmacy experience.
CPBJ: Does Rite Aid’s smaller size make it more likely to wind up in a merger or acquisition?
Standley: As a publicly traded company, it is our responsibility to deliver long-term value to our shareholders. Just as we believe the asset purchase agreement with WBA was the right opportunity for us to pursue, we will continue to explore opportunities that are in the best interest of our shareholders.
Right now, our entire team is focused on running the very best “new” Rite Aid possible; one that is competitive in the marketplace, delivers exceptional service to our customers and a higher level of care to our patients.