Rite Aid has managed to lose more than $600 million during the pandemic while its pharmacy competitors have boomed. In the CEO's high-stakes turnaround plan (2023)

But expand the picture and that facade of similarity crumbles. Rite Aid, once the largest pharmacy chain in the country, is now just a minnow in the great pharmacy pond. The company lost more than $539 million last year and is struggling to maintain a market cap of about $350 million (on par with comparatively small, struggling consumer goods maker The Honest Co). CVS has since grown to become the fourth-largest US company by revenue on the Fortune 500, posting $8 billion in profit last year with sales of $292 billion (nearly 12 times that of Rite Aid). CVS market cap: nearly $122 billion. While not quite as massive, Walgreens still dwarfs Rite Aid, with nearly $150 billion in 2021 sales and $2.5 billion in profit.

Rite Aid's financial troubles run much deeper and more dangerous than just looking paltry compared to its peers. The company is also lugging around $3 billion in debt -- one reason for an AprilDeutsche Bank Research Note warned the companywas in danger of hitting a "dramatically negative tipping point" where it no longer has the funds to invest in the business. What happens when it reaches that point? A down Spiral that could potentially end in bankruptcy by taking shares down from their current roughly $6 to zero.

Avoiding such doomsday scenarios is the first task of CEO Heyward Donigan, who has headed the chain since 2019. But it's not enough to simply keep the company running, she says. Restoring Rite Aid to a growing, sustainable business means leaving the rivalry for national dominance to CVS and Walgreens. Donigan's turnaround plan focuses on expanding and strengthening dominance in markets where Rite Aid remains a strong competitor -- including New York City, Los Angeles and its hometown of Philadelphia. The CEO also wants Rite Aid to make much more use of its 6,400 pharmacists to provide immunizations, treatment advice and healthcare services.In healthcare, too, she hopes to leverage the company's small pharmacy benefits business to go after mid-tier employers ignored by the industry's bigger players.

The execution of that plan didn't go quite as Donigan had hoped — in part because the turnaround she envisioned, unveiled with fanfare on March 16, 2020 in New York, had to take second place to the pandemic. The provision of vaccinations and nasal swabs brought in about $500 million in revenue last year, but it also meant some aspects of Donigan's strategy were put on hold.

"We were so excited to just get down to business -- rebranding the company and launching our 'Better for You' merchandise, redesigning the exterior and giving our pharmacists time to do all these clinical procedures," Donigan recalls . "Then poof [the pandemic hits], suddenly the pharmacy volumes are through the roof and we can't time off our pharmacists to do other clinical procedures because they've been so busy doing the COVID testing and doing the COVID injections administer. " She sayswealthin a recent interview aboutZoom.

Despite the myriad challenges, Rite Aid is showing signs of life. A few days after this April note from Deutsche Bank, the company announced better-than-expected fourth-quarter results. Donigan has also pushed back Rite Aid's debt payments due from 2022 to 2025, taking the prospect of imminent bankruptcy off the table. She predicts that the company will be back in profit within three years, or at least stop the bleeding if her plan works.

Donigan has a message for the Deutsche Bank analyst who penned this doomsday note and anyone else who doubts the company's comeback plan: "We were the underdog, I love being the underdog."

Missed the connection to the transformation of the healthcare system

Rite Aid, which began life in 1962 as the Thrift D Discount Center in Scranton, wasn't always a follower. Briefly in 1987, it was the nation's largest drugstore chain by store count and remained a viable competitor in a three-way arms race with CVS and Walgreens for the next two decades. During this time, the history of the industry has been one of size and consolidation, with all the big players hungrily devouring small chains and independent pharmacies. In 2006, Rite Aid took a pivotal step in its growth bid, spending $3 billion to acquire the Eckerd and Brooks chains. The deal, which forced the company to take on significant debt, might have been a less serious mistake if the industry hadn't embarked on dramatic change almost immediately.

Up until the mid-'80s, the drugstore business consisted primarily of: companies competing as retailers with the goal of selling most lotions, candy bars, prescription and over-the-counter drugs to the most people. But in 2006, CVS changed the paradigm with its $21 billion purchase of pharmacy benefits manager Caremark. Pharmacy benefit managers -- or PBMs -- act as a kind of middleman, negotiating how patients pay for drugs, what insurers owe drugmakers, and how much pharmacies are reimbursed. Owning Caremark, the largest PBM in the US, automatically made CVS a major player in healthcare and spurred millions of Americans to get their scripts filled at its stores.

Since then, both CVS and Walgreens have made it their goal to go deeper into healthcare. They invested billions in branded clinics; CVS now operates 1,100 MinuteClinics, while Walgreens says it will have 1,000 VillageMD locations by 2027. And 2018 CVS, which has been renamed toCVS Healthfour years earlier merged with insurance giant Aetna to become one of the most powerful healthcare companies in the US. "If you look at that pivot, Walgreens and CVS have been much more focused on turning their businesses and businesses into health havens," says Neil Saunders, chief executive of research firm GlobalData.

Rite Aid has also made some advances in healthcare, albeit more modest ones, including buying its own PBM, now called Elixir, for $2 billion in 2015 and short-lived efforts to run its own line of clinics. (This company, called RediClinic, lost money and shut down early in the pandemic.) But putting anything into the space -- or making big investments of any kind -- was off the table, in large part due to Rite Aid's unmanageable debt was , which peaked at $7 billion in 2008. The company suffered from numerous liquidity squeezes and was repeatedly threatened with delisting from the NYSE in the early 2010s when its shares fell below $1.

An M&A exit hatch seemed like the most likely way out of the mess the company had created, and in 2015 Walgreens made its move with a $9.4 billion takeover bid. The deal wasultimately thwartedby antitrust authorities, butWalgreens was allowed to buy 2,000 Rite Aid locations. That gave Rite Aid a much-needed $4.8 billion cash injection, but it reduced the number of stores by 40% and blew a large gaping hole in its store map, causing Rite Aid to lose its status as a national chain. A decade ago, Rite Aid was in 38 states; today there are only 17, with concentrations in California, New York, and Pennsylvania, and total absence in large states like Texas, Illinois, and Florida.

When another takeover attempt was blocked by Rite Aid investors in 2018 - this time by then-privately held grocer Albertsons - the company was left with only one option for survival: fix its core business and go it alone.

Where does Rite Aid go from here?

Donigan's background gives an indication of the company's current priorities. She joined Rite Aid in 2019 with no significant retail experience, a somewhat unusual situation for a CEO who has recently overseen around 2,400 stores. But she knew how to deal with debt; In particular, she served on the board of specialty hospital operator Kindred Healthcare, where she helped oversee a successful refinancing. And she had spent 25 years in and around healthcare, most recently as Managing Director of Sapphire Digital, a website that enables consumers to compare and choose healthcare plans.

Part of her vision for the future of Rite Aid is to be more committed to customer health—albeit in a more modest way than CVS and Walgreens are. As the biggest chains open standalone clinics and hire physician assistants to morph into primary care, Donigan wants to double the number of white coats it already employs: pharmacists. Pharmacy services make up 74% of Rite Aid's revenue (up from just 33% at CVS), and Donigan wants to grow that slice of the pie and expand healthcare services by encouraging its pharmacists to do more clinical consultations and step up from behind the counter to do one, for example To advise clients on the treatment of a skin condition.

For Donigan, the fact that its competitors are focused on hospital-based care rather than pharmacy opens up an opportunity. "We are the only company in America that is a full service pharmacy that is focused on being a full service pharmacy and has the assets to be a full service pharmacy," she says.The pandemic prompted regulators to expand the types of services pharmacists can provide, including administering vaccines to children as young as three years old. Donigan hopes to capitalize on the new rules and says she wants Rite Aid pharmacists to transition to spending 80% of their time interacting with customers. (Right now it's closer to 20%, she says.) Getting there won't be easy, she concedes, and will likely require some technology investment to free pharmacists from the many administrative tasks they hide behind the scenes, not to mention a major change in the way she and her clients view their role.

Some analysts see potential in this strategy, noting that consumers tend to stick with existing habits -- such as going to the pharmacy rather than a health clinic -- and may already have a long-standing relationship with their pharmacist. A well-established connection "leads to a better customer experience and increases retention," says David Silverman, senior director of Fitch Ratings.

Another pillar of Donigan's health-centric plan is Rite Aid's PBM, Elixir. Compared to its competitors, Elixir is tiny: Caremark, Express Scripts, and OptumRxtogether control 80% of the PBM market, leaving Elixir and dozens of others scrapping the remaining 20%. But PBM has carved its own niche by focusing on mid-market employers with fewer than 1,000 employees, a market that larger players feel is too small to delve into. And Elixir isn't just a PBM; Other services include a mail-order pharmacy, an insurance offering for seniors, and a fertility drug discount program. Across the board, Donigan hints at using any growth she can glean from these programs to pay down more of Rite Aid's debt, either via partnerships or even a possible sale."Someone will be interested in investing in one of these companies," she says.

And though, like all big pharma companies, Rite Aid is moving away from retail -- a low-margin business that companies likeGoalAndWalmartare eating up market share thanks to more attractive deals and better prices, says GlobalData's Saunders - she sees the benefits of growing into new markets. To that end, she's on the lookout for smaller, independent pharmacies that are struggling to operate in an industry where economies of scale are a factor. One such example: Bartell, a 67-store Seattle chain that Rite Aid acquired in 2020. (Rite Aid, like CVS and Walgreens, closes dozens of stores in its top markets when locations become too run-down or too saturated.)

Not everyone on Wall Street is as skeptical about the company's turnaround plans as Deutsche Bank, but even those who believe Donigan can get Rite Aid back on track, like Lisa Gill, expect the process will do so , Managing Director of J.P. As Morgan put it in a recent report, "Take your time and you'll probably get bumpy." Donigan is unimpressed. "It's very motivating for us to show the world that we can do this and that we do it."