Rite Aid: The incredible shrinking pharmacy chainBy exiting 12 states, D.C.; Rite Aid focuses on smaller, 'stronger' footprint
A commercial empire that once straddled 31 states has been winnowed down to disconnected bulwarks on either coast.
That looks to be Rite Aid Corp.’s future, as the Cumberland County-based pharmacy chain prepares to sell more than 1,900 stores to rival and former suitor Walgreens Boots Alliance Inc. Once the transaction is complete next spring, Rite Aid will have exited 12 states and Washington, D.C., according to company documents.
At the same time, Rite Aid officials say they expect their surviving retail network — mostly huddled at opposite ends of the nation — will be leaner but stronger, largely comprised of remodeled stores that have been fierce competitors in their respective markets.
Among those markets is Pennsylvania. Rite Aid’s store count in the state is expected to shrink by just two locations, down to 534, according to a pro forma post-sale store profile map, which was included in Rite Aid’s Sept. 19 report to the U.S. Securities and Exchange Commission about the $4.375 billion deal with Illinois-based Walgreens. Walgreens also is buying a Rite Aid distribution center in the Philadelphia area.
Neither company is revealing exactly which stores will be sold, or why. Both companies say only that the transaction will benefit their respective brands.
Rite Aid’s continued Pennsylvania presence did not surprise Bob Gorland, a midstate expert in retail site selection.
“It’s a no-brainer to maintain your footprint close to your corporate office” due to existing administrative and supply chain facilities, as well as regional brand loyalty, said Gorland, Lower Paxton Township-based vice president of Matthew P. Casey and Associates Inc.
Walgreens’ purchase of 1,932 Rite Aid stores and three distribution centers was jointly announced on Sept. 19, nearly two years after the firms unveiled a full-scale merger proposal that was dropped this summer amid long and intense scrutiny by the Federal Trade Commission. Store sales are set to begin in October.
Based in East Pennsboro Township, Rite Aid currently operates more than 4,500 stores in 31 states and the District of Columbia. After the transaction is complete, Rite Aid will continue to operate approximately 2,600 stores and six distribution centers, as well as EnvisionRx, its pharmacy benefit manager, RediClinic and Health Dialog.
Rite Aid will cease to have a presence in much of the South, as well as reducing its footprint in the Midwest, parts of New England and even New York State, according to the SEC map.
Its only subtraction in the West will be the sale of 22 stores in Utah, the map shows. The sale of 270 stores in New York will make California the company’s largest stronghold, with 576 locations.
Pennsylvania would continue to rank second, but would become Rite Aid’s most densely served state in the East.
Walgreens in Pa.?
The SEC filing also appears to signal that the deal won’t bring a significant Walgreens push into the midstate, where hometown chain Rite Aid remains a major player. There are no Walgreens stores in Dauphin or Cumberland counties, but there are locations in York and Lancaster counties.
What remains unclear is the location of the two Pennsylvania stores that Walgreens appears poised to buy. Spokespeople for both companies told the CPBJ they were not yet releasing information about individual store locations to be sold.
Rite Aid spokeswoman Ashley Flower directed questions about the chain’s future footprint to the SEC report.
Walgreens officials said only that the stores to be purchased are located primarily in the Northeast and southern U.S. Spokesman Michael Polzin declined to comment on the SEC report, and on whether Walgreens would look to expand in Pennsylvania, where the chain had 123 stores last year according to its most recent annual state-by-state count.
The purchased stores will “be converted to the Walgreens brand in carefully planned phases over time,” the company said, while transition of the distribution centers to the Walgreens brand will not begin “for at least 12 months.”
Gorland said he would not be surprised to see future store reductions and consolidations — at Rite Aid and other big-name brands — as their earnings come under pressure from years of store expansions, higher labor costs, the impact of mail-order prescription services and the rise of pharmacy operations at retail chains such as Walmart, Target and regional supermarkets.
Industry analysis from several sources reveals similar trends.
Rhode Island-based CVS Health Corp. continued to top the nation’s pharmacy industry in 2016, according to a report by pharmaceutical economics research website Drug Channels, with 14.8 percent of total nationwide prescription revenues for its retail stores ($61.1 billion) and 8.6 percent for its mail and specialty services ($35.3 billion). Walgreens came in second, Drug Channels found, with 13.8 percent of prescription revenues ($56.8 billion).
The next two highest performers weren’t chain drugstores. Mail and specialty pharmacy company Express Scripts Inc. came in third, with 10.6 percent of prescription revenues ($43.9 billion), while Walmart captured 5 percent of the market, Drug Channels found, with $20.6 billion.
Rite Aid came in fifth place with 4.6 percent of total prescription revenues ($19 billion).
No other traditional drugstore chains placed in Drug Channels’ top 15, with the balance comprised of mail-order and specialty services, discount stores and supermarket chains including Ahold USA, parent of Giant Food Stores.
On the pricing side, Rite Aid and the chains also find themselves locked in a competitive battle.
A 2016 report by searchRX, a website that provides prescription cost comparisons to consumers, found that while national average cost of a prescription was $15, costs per retailer varied. Rite Aid’s average cost was $18.86, searchRX researchers found — lower than Walgreens ($20.69) and CVS ($20.09), but higher than Target ($13.65) and Walmart ($11.57).
Pharmacy chains also operate in a tightly regulated environment with highly paid employees in critical roles. According to the U.S. Bureau of Labor Statistics, the median pay for pharmacists in 2016 was $122,230 per year, or $58.77 per hour.
“There are an awful lot of pharmacies. And you have a lot of prescriptions that are $10 or less,” Gorland said. “When you’re paying a pharmacist $57 an hour, you need to have a strong prescription base to make a profit.”
He suggested that as leases come up for renewal at older stores where there are other Rite Aid locations within a few miles, the chain is likely to start looking at closing locations and transfer as many prescription customers as possible to other Rite Aid properties.
“It also wouldn’t surprise me if Rite Aid put additional sales up for store in the future,” Gorland said, especially in areas where the chain has a marginal presence or where a strong regional operator might be interested in the sites.
Rite Aid: 'Very competitive'
Rite Aid officials have said they believe the smaller post-sale footprint will put the chain on a more competitive footing, leading to healthier pharmacy and front-end sales.
“Our remaining store base — which has a concentration of stores on the West Coast, Pennsylvania, Ohio, Michigan and New Jersey — is a financially stronger group of stores on a per-store basis than the store base today,” Rite Aid chairman and CEO John Standley told analysts this summer.
Rite Aid stated in a July SEC filing that it expected average sales per store post-transaction to be $6.106 million ($4.131 million for pharmacy, $1.975 million for the front end), up from $5.737 million ($3.923 million pharmacy, $1.814 million front end).
“We will have a higher average front-end sales, script count and EBITDA per store,” Standley said, adding: “Almost 60 percent of the stores have been remodeled to our groundbreaking Wellness format, and these stores are in cities and communities where we have strong market share and are very competitive.”
About Rite Aid Corp.
Headquarters: 30 Hunter Lane, East Pennsboro Township, Cumberland County
Chairman and CEO: John Standley
Financials: For the fiscal year ended March 4, 2017, Rite Aid posted revenues of $32.8 billion. That figure was up 7 percent year over year, with an extra week helping boost the number. At the same time, net income declined from $165 million in 2016 to $4 million over the same period. Company officials cited ongoing merger delays, as well as reimbursement rate challenges for the downturn.
Retail presence: 4,500 stores in 31 states and the District of Columbia prior to store sales to Walgreens, which are set to begin next month.
Employees: Approximately 89,000 as of 2016.