- High barriers to entry due to large amounts of stores required to gain volumes.
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List of Rite-Aid’s current (at time of the case) product offerings.
Pharmacy benefits managers - integrated into reimbursement cycle as a ways to reduce prescription drug costs-Financed by manufacturers and 3rd party payers->70% of prescription benefits are managed by PBMs-To make up difference of the discounts provided to 3rd-party payers PBMs provide pharmacies with lower reimbursements, the difference between these two values being the spread –significant revenue stream for PBMs
Ranking by Rx Sales (Retail Pharmacy Annual Report)http://www.drugstorenews.com/retail-pharmacy-annual-report-2010 Comparisons:http://www.nasdaq.com/symbol/cvs/financials http://www.nasdaq.com/symbol/wag/financialshttp://www.nasdaq.com/symbol/rad/financials
Total Retail Sales for Prescription Drugs Filled at Pharmacies
-Zone pricing: Setting prices for goods or services based on the location where they will be sold, Usually increase prices in zones farther away from manufacturing facilities to account for higher transport costsPatient counseling services-Estimated to be 6000 of these clinics by 2012-Serve as convenient and affordable alternative to a doctor’s office or hospital visit (on average about $60/visit, 47 million uninsured in the US)-Dominated by CVS and Walgreens-CVS is the leader – 500 in-store MinuteClinics; Walgreens – 350 Take Care clinics.Mail-order pharmacies-More efficient and have more economies of scale than the traditional brick-and-mortar pharmacy-Lower overheard – Less staff, rely heavily on automation and computers to enhance their daily fill capabilities-Are able to buy and dispense medications in bulk for patients who have ongoing meds requirements (Providers can offer discounts to patients because of this)-Big challenge to the traditional pharmacy-More and more companies are mandating that maintenance medications be filled through mail-order (Maintenance meds are currently 50-60% of volume filled by retail pharmacies) Grocery store/Pharmacy model-Testing a new grocery store/pharmacy concept with 10 stores in South Carolina (licensing agreement with Sav-A-Lot stores).Customer loyalty programs-Wellness +-Gift of Savings at holidays
Rite Aid Case Analysis
Recommendations • Focus on same store sales growth, not market share • Private Label BrandsIntegrated • New services Strategy • Customer -focused loyalty programs • Narrow footprint through the divestment of unprofitable stores • Invest in image upgrades of new store baseRestructure • Reduce management overhead • Create scholarship programs for pharmacists • Implement new training & retention program • Implement employee incentives programs Culture • Invest in employee facilities and wellness
Mission “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.” – Riteaid.com Wellness+, Employee loyalty, Investments in online tie into the Superior Pharmacy Experience. Investments into on-site healthcare clinics ties into healthier, happier lives.
Core Values Passion for customers. Encouragement for employees. Winning through teamwork. Commitment to diversity and respect for the individual. Accountability for actions and results. Integrity in all Rite Aid does. Value for shareholders. Caring neighbors.
Business Model Growth Through acquisition of other pharmacy retailers. Diversified growth Purchasing of PCS Health System. Create strategic partnerships Increase market presence and reach across various distribution channels. Ex: GNC & drugstore.com partnerships. Strong focus on customer loyalty.
Strategy: The Pharmaceutical Retail Industry. High bargaining power for wholesalers (Control 85% of all drugs sold). High bargaining power for buyers due to Pharmacy Benefit Managers and legislation. Strong rivalries between existing three major players. Substitutes to high margin brand names by generics.
Analysis / Assessment – Industry Types of pharmacies: independent, chain, mass merchants, supermarkets, and mail-order. Key Players: Walgreens, CVS, Medco, and Rite-Aid. Large customer base and opportunity for growth. Growing population of older consumers. Health care laws (40M previously uninsured). Highly competitive. Average profit margin for pharmacy-related sales is 2-4%. Over $4.5B prescriptions were filled in US, accounting for $300B in total sales. Average # of prescriptions filled per person = 12.6.
Overall Strategy - Past Competition based on low cost. Create economies of scale through acquisitions of other chains. Smallest of three major retailers (Rite-Aid, Walgreens, CVS). Cannot sustain strategy – over–leveraged.
Strategic Shifts & Future Strategies Differentiate – cannot compete on economies of scale. Create products and services that offer an advantage over competitors. Provide higher levels of service and a better customer experience. Move from store - key to customer-centric approach
Industry Trends Consumers search for low-cost alternatives. Internet-based. Mail-order. Economies of scale, lower overhead discounts. Automated. Generic drugs (80% of FDA-approved drugs have generic equivalent). Increased demand for: Prescription drugs. Pharmacists to spend more time on patient counseling. Walk-in clinics.
Portfolio Analysis Retail pharmacy services. Over-the-counter drugs. Household and personal care items. Convenience foods. Nutritional supplements. Photofinishing services.
SWOT AnalysisStrengths Weaknesses3rd largest pharmaceutical chain Overly aggressive acquisitionOnline website (convenience) strategyImplemented front-end Substantial amount of debtmerchandising to ↑ profits Employee unions issues(pharmacy, foods, supplements) Poor credibility (Medicare fraud,Loyalty programs (Wellness+) executive malfeasance)Opportunities ThreatsMail-order sales Competitors’ position and plansWalk-in clinics Prices dictated by US pharmacyTest marketing new grocery distribution & reimbursement systemstore/pharmacy concept in SC PBMs provide pharmacies with Full scale implementation of lower reimbursementsprivate brand (Simplify) Economic downturns (↑ # of unfilled prescriptions)
FinancialsFinancial Ratios Comparison (NASDAQ) Rite-Aid Walgreen Co CVS (as of 2/27/10) (as of 8/31/09) (as of 12/31/09)Current Ratio 207% 178% 143%Quick Ratio 58% 78% 58%Cash Ratio 5% 38% 9%Gross Margin 27% 28% 21%Oper. Margin 0% 5% 7%Pre-Tax Margin 2% 5% 6%Profit Margin 2% 3% 4%Pre-Tax ROE 29% 22% 16%After-Tax ROE 30% 14% 10%Gross Profit $6,824,090 $17,613,000 $20,358,000NI Applicable to ($515,585) $2,006,000 $3,696,000Common S/H
FinancialsRanking by Rx Sales(Retail Pharmacy Annual Report: 2010)
Conclusion • Focus on same store sales growth not market share • Private Label BrandsIntegrated • New services Strategy • Customer- Focused Loyalty Programs • Narrow footprint through the divestment of unprofitable Stores • Invest in image upgrades of new store baseRestructure • Reduce management overhead • Create scholarship programs for pharmacists • Implement new training & retention program • Implement employee incentives programs Culture • Invest in employee facilities and wellness