Organizational Skills

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ffWalgreens - A Strategic Analysis Table of Contents TABLE OF CONTENTS 1 TABLE OF FIGURES 2 THE RETAIL DRUGSTORE INDUSTRY 3 BUSINESS ACTIVITIES 7 INDUSTRY OVERVIEW 7 BACKGROUND 8 MODERN DRUGSTORES 8 CURRENT ORGANIZATION AND STRUCTURE 9 CURRENT CONDITIONS 10 FUTURE INDUSTRY PERFORMANCE 13 HISTORY OF WALGREENS 16 COMPETITIVE ANALYSIS 20 RITE AID CORPORATION 20 CVS CORPORATION 25 DRUGSTORE.COM 29 CUSTOMER PROFILE 32 EXTERNAL OPPORTUNITY ANALYSIS 34 EXTERNAL THREAT ANALYSIS 39 SUMMARY OF EXTERNAL OPPORTUNITIES AND THREATS 41 OPPORTUNITIES 41 THREATS 42 INTERNAL STRENGTH ANALYSIS 42 FINANCIAL STRENGTH 43 PRODUCT INNOVATION 44 HISTORY 45 GROWTH RATE OF STORES 46 MANAGEMENT TEAM 48 INTERNAL WEAKNESS ANALYSIS 48 SUPPLY OF PHARMACISTS 48 LACK OF EMPLOYEES 48 LEGAL LIABILITY 49 SUMMARY OF INTERNAL STRENGTHS AND WEAKNESSES 49 STRENGTHS 49 WEAKNESSES 50 FINANCIAL ANALYSIS 50 LIQUIDITY 51 Inventory Turnover 51 Current Ratio 53 LONG-TERM DEBT-PAYING ABILITY 54 Debt / Equity Ratio 55 PROFITABILITY 56 Net Profit Margin 56 Return on Assets 57 ANALYSIS OF THE MISSION STATEMENT 58 ANALYSIS OF WALGREENS OBJECTIVES 61 STRATEGIC ALTERNATIVES 64 GROWTH 65 Advantages (growth concentration): 65 Disadvantages (growth concentration): 66 Advantages (growth diversification): 67 Disadvantages (growth diversification): 68 RETRENCHMENT 69 STABILITY STRATEGY 70 COMPETITIVE STRATEGIES 70 DIFFERENTIATION 71 FOCUS 71 IMPLEMENTATION 72 CONCLUSIONS 75 BIBLIOGRAPHY 77 APPENDIX 82 Table of Figures FIGURE 1 - INVENTORY TURNOVER 52 FIGURE 2 - CURRENT RATIO 53 FIGURE 3 - DEBT / EQUITY RATIO 55 FIGURE 4 - NET PROFIT MARGIN 57 FIGURE 5 - RETURN ON ASSETS 58 The Retail Drugstore Industry Introduction Knowing the importance of a strategic vision, every company undertakes a complete analysis periodically. In order to create a strategic plan the parties involved must know every aspect of the industry and the company at hand. The purpose of this paper is to describe and analyze the retail drugstore industry and then focus on Walgreens, the industry leader in terms of sales. As part of the in-depth analysis of Walgreens, its major competitors will also be described and analyzed. The retail drugstore industry consists of all those stores that contain a pharmacy and sell prescription drugs. It also includes businesses that sell prescription drugs online and through the mail. Most retail drugstores also offer other consumer goods and services to augment the low margin earned on prescription sales. To be considered a member of the retail drugstore industry requires sales of prescription pharmaceuticals to the end consumer. Many convenience, food and discount stores sell over-the-counter medicines, but these stores would not be considered retail drugstores because they do not also sell prescription medicines. Relevant Environment Competition: The relevant environment, which consists or interactions between the task environment and task environment, has been changing over the past 25 years. As competition has increased among grocery, discount and mass merchandising chains, blurring of channels has occurred. This is due to stores selling an increasing variety of goods to try to broaden their customer base and provide one-stop shopping. Many of these stores have added pharmacies as a source of convenience for their customers, and to increase store traffic, usually positioning the pharmacy in the back of the store. In response to this pressure, both independent and chain drugstores have greatly increased the variety of their retail product offerings. The sale of cosmetics, along with health and beauty aids, has become an important profit generator for retail drugstores. Many are now also positioning themselves to compete with convenience stores by offering snack food items, beverages, and staple items. The move to stand-alone stores located on major roads with ample, close-in parking has been an important factor contributing to convenience. Customers: As indicated by the type of competition seen in the retail drugstore industry, the target market is very broad. The target market for prescription drugs includes almost nearly all peoples. Currently, the most frequent users are children under 10 and seniors over the age of 65. The buyers of health and beauty aids also consist of a wide range of users. Younger users tend to buy hair care and hygiene products initially, then add cosmetics and skin care items as they mature. The addition of a wide range of household items, including kitchenware, toys, pet care items, and lawn care items has enhanced the appeal of the drugstore as a one-stop shopping destination, where frequently used items can be picked up while a prescription is being filled. The development of a strategy that focuses on convenience items will further broaden the target market. The sale of pharmaceuticals is considered to be a recession-proof industry, as medications are a necessity. However, drugstores are impacted by factors such as payment rates offered by third-party providers, prices charged by drug manufacturers, and legislation impacting the extension of drug patents. Obviously, the sale of non-drug items is not recession-proof. Suppliers: Drugstores obtain their prescription drug products from the drug manufacturers. Drug manufacturers have been accused of discriminatory pricing due to a practice of selling products to HMOs and mail-order houses at prices 40% to 60% under the price charged to community drugstores. The community drugstores have filed a class-action lawsuit in response to this practice. Many drugstores use large wholesalers as suppliers, obtaining everything from prescription drugs to health and beauty aids from the same supplier. Another supply source includes wholesalers who supply convenience and grocery stores. Employees: The central employee in the pharmacy is the pharmacist. In 1996, pharmacists made up 17 percent of the 605,000 people employed in the drugstore industry. The other 83 percent of the employees worked as store managers, inventory specialists, stock clerks, and cashiers. The industry also employs buyers, merchandising managers, and inventory replenishers at store headquarters. Political/Societal Forces: There are a number of political and societal forces impacting the retail drugstore industry. Lobbying by drug manufacturers for favorable legislation regarding patent extensions has an impact on the profit margins of drugstores by restricting the availability of the more profitable generic drugs. Currently, the state of Maine is attempting to pass legislation to impose price controls on drugs at community pharmacies (Drug Store News, 5/12/2000). Technology is a factor that will be critical to competition and cost control in the drugstore industry. The continual upgrading of technology that contributes to efficiency will be necessary to remain competitive. Systems are being developed that will enable physicians to send prescriptions on-line to a pharmacy, and software has been developed to manage everything from inventory control to insurance filing. Pharmacies are also impacted by a number of socio-cultural forces, as indicated by the attempted legislation in Maine. Another emerging issue is the use of drugs for practices that have moral implications, such as pregnancy prevention or termination, and assisted suicide. Wal-Mart has refused to carry the new emergency contraceptive called Preven, because it fears boycotts by right-to-life groups. Some pharmacists may refuse to fill certain prescriptions, such as ones for contraceptives, because of moral beliefs. K-Mart s policy is to fire any pharmacist who refuses to dispense any FDA-approved drug (P. Miller, Betty The industry analysis will describe the background of the industry, the major business activities, economic forces that impact the drugstore industry and the organization and structure of the industry. There is also a discussion of current conditions that affect the drugstore industry as well as a discussion of factors which will influence future industry performance. Business Activities Companies in the retail drugstore industry are engaged in the retail sale of prescription drugs, proprietary drugs, and nonprescription medications. Most also sell medical devices, as well as a variety of cosmetics, toiletries, tobacco, novelty items, and snack foods and beverages (Encyclopedia of American Industry). As competition increases, many businesses in this industry are adding more goods and services to the basic activity of filling prescriptions. Some of these services include photo processing, drive-through prescription windows, and 24-hour service. Drugstores are now offering more snack-food and impulse-buy items as well. Industry Overview The drugstore industry has moved from being a fragmented industry, prior to the mid-eighties, to one undergoing rapid consolidation driven by several factors. The sales volume of the drugstore industry more than doubled from approximately $40 billion in 1983 to over $93.6 billion in 1995. This growth led large supermarkets and mass-merchandisers to enter the drugstore market, putting more competitive pressure on the smaller independent stores. Profit margins are narrowing, due to attempts to reduce health care costs. In response to these pressures, there has been a wave of consolidation, with regional chains buying out one another out. Other responses to the pressure of competition and decreasing profit margins include: an effort by drugstores to concentrate on customer service, expansion into niche markets, forming partnerships with suppliers and health-care providers, and the use of technology to increase cost-efficiency (Encyclopedia of American Industry). The drugstore industry is considered to be a recession-resistant growth industry, due to the increasing number of aging baby boomers (Fool on the Hill, 5/18/99). Background The drugstore industry had its beginning in the mid-1800s. At that time, Americans began using more patent medicines , reducing dependence on home remedies. Early pharmacists worked in village apothecaries, purchasing chemicals in bulk and mixing them on the premises to fill prescriptions. After the Great Depression, the science of pharmacology developed and pharmaceutical companies grew rapidly, opening sophisticated research facilities. Drug patent issues grew from fewer than 100 before 1940, to over 4,000 by the 1950s. Medications began to be distributed under the manufacturer s brand name in a final-dosage form, instead of in bulk as generic ingredients that were then combined by the pharmacist. The number of drugstores increased and pharmacists took a more service-oriented role when dispensing prescriptions (Encyclopedia of American Industry). Modern Drugstores The early drugstore tended to be a small store, from 1,000 to 2,000 square feet, located near grocery stores and other high-traffic areas. The bulk of the stores sales were from pharmacy items. Many of these small stores had a variety of sundries and notions available in the front of the store, where shoppers could browse while waiting for their prescription to be filled. The addition of the soda fountain came about early on when bottled soda water, and charged water were originally considered to be a health items (Walgreen ). Up until the advent of fast food restaurants in the late 50 s and early 60 s, the soda fountains were significant generators of revenue, expanding their offerings to meals as well as beverages. Current Organization and Structure Competitive forces caused the drugstore industry to vary their store formats in order to differentiate themselves from competitors and strengthen their image as health care providers. This has resulted in the emergence of five main store formats: independents, chain drugstores, mass merchandisers, supermarkets, and mail order. A decline in use of conventional drugstores began as early as the late eighties as other competitors, especially the supermarket drugstore, were developed. In 1988, 69 percent of prescription purchases were made in conventional drugstores. This dropped to 57 percent in 1990. In 1992, sales of over-the-counter (OTC) medications were $9.45 billion, or 16.8 percent of drugstore sales. By 1995, sales of OTCs were only 13.8 percent of sales at drugstores, due to increased competition from discount retailers and supermarkets. In 1994, there were 53,216 drugstores in the five categories. Of these, 24,862 (46%) were independently owned, 17,270 (32%) were chain drugstores, 4,837 (9%) were mass merchandisers, and 6,247 (12%) were supermarkets. The mass merchandisers were the fastest growing segment. In 1995, independents made 34 percent of all prescription and OTC drug sales, chain stores made 41 percent of prescription and OTC sales, mass marketers made 11 percent of the prescription and OTC sales, and 4percent of these sales were made through mail order outlets. By 1996 there were 58,333 drugstores in the United States. Of these, 35,000 (60%) were independently owned. The deep discounting outlets, a segment of the mass merchandisers, had begun to lose market share due to other stores adaptation of their low price strategy (Encyclopedia of American Industry). By 1998, sales of prescription drugs through all channels rose to $103 billion. Drug chains and independents made 66percent of those sales, down from 75percent in 1995. Mail order outlet sales rose to 13percent, supermarkets sold 11percent, and mass merchandisers sold 10percent (Standard & Poors Industry Survey). Current Conditions The sales of prescription drugs jumped 7.95 percent in 1998, for an increase of $2.73 billion. The average prescription price rose by 8 percent from $35.72 in 1997 to $38.43 in 1998. The drugstore industry as a whole had a 3.3 percent increase in sales in 1998, for a total of $134.4 billion. Due to a 15 percent increase in pharmacy volume, chain drugstores did better than the average. Their sales grew 8.2 percent to $96.7 billion, which was 72 percent of the industry total. Chain drugstores filled 60percent of all prescriptions. Sales at independent stores dropped by 7.6 percent, for a total of $37.7 billion. Much of this is due to the chain drugstores receiving a greater share of business from third-party payment plans. The strong growth seen in the drugstore industry is due to several factors. The two demographic groups using the greatest amount of medication are adults over 65 and children under 10. These two groups are the fastest growing segment of the American population. The 65-and-older age group uses an average of 12 prescriptions per person, at any given time. The increased availability of generic substitutes for expensive, brand name drugs has increased the overall market for pharmaceutical products. Another important factor is the trend toward self-medication, which is increasing purchases of OTC medications (Encyclopedia of American Industry). Other factors that had an impact on prescription sales are drug price inflation, the introduction of new drugs, and an increase in the number of individuals participating in third-party insurance programs. The increased traffic in drugstores has also resulted in increased sales of higher margin products such as OTC medications and non-pharmacy items (front-end merchandise)(Standard & Poors Industry Survey). An increasingly important contributor to the profit margin of chain and independent drugstores is the sale of front-end items. These items are non-pharmacy goods ranging from snacks to hardware to gift items and greeting cards. The margins on this merchandise run at least ten percent higher than those carried on third-party prescription sales (Standard & Poors). As increased drug prices and the emphasis on lowering health care costs continue to cut into profit margins on prescription sales (currently averaging 2 percent), sales of front-end items will be an increasingly important contributor to drugstore profits. Accordingly, many drugstores, especially those occupying their own building with convenient parking, are positioning themselves to compete with convenience stores. The convenient parking and easy-in, easy-out features, when compared to a typical grocery store, provide a shopping experience almost as hassle-free as stopping at a corner convenience store. The larger store size allows the drugstore to carry a wider variety of convenience products and many plan to add more easy-to-prepare food items to allow a quick, easy one-stop shopping experience for people on their way home from work (Drug Store News, 8/2/99). A significant event in the drugstore industry has been the move toward consolidation which took place throughout the 1990s. In order to generate economies of scale in distribution, buying power, corporate overhead, and the technology needed to compete for third-party prescription drug business, it has been necessary for chain drugstores to increase their numbers. This is achieved by rapidly building new stores or by buying smaller independent stores or regional chains. Their increased size results in greater bargaining power with suppliers and the ability to negotiate for better prices with third-party providers (US Business Reporter). In 1998, the top four drugstore chains, ranked by sales, were Walgreens, CVS, Rite Aid, and Eckerds. All but Walgreens significantly increased their presence by acquiring other chains during the 1990s. Walgreens accomplished this through an aggressive program of store building. These four chains account for over 50 percent of the total market share. In 1998, the ten largest drugstore chains made about 75 percent of all chain store sales and nearly 50 percent of all drugstore sales, while independent drugstores made 28 percent of all drugstore sales. The drugstore industry is facing several other problems that may have a negative impact on earnings. A shortage of pharmacists, combined with efforts to cut costs, have increased the number of hours pharmacists must work. This, combined with an increasing paperwork load has led to dissatisfaction among pharmacists. One result of this has been increased salary and benefit demands to offset the increased workload. This situation is also perceived to the cause of increased errors in filling prescriptions. The state of North Carolina has recently passed legislation to hold drugstores liable if overworked pharmacists make mistakes (The News & Observer, 8/3/97). Another significant issue under legislation is a consideration that would extend the life of the patents on some very popular drugs, whose patents are due to expire in the year 2000. The pharmacy industry has been anticipating increased profits that will become available when the generic versions of these patented drugs hit the market. This situation highlights the vulnerability of the drugstore industry when their interests conflict with those of the much more powerful drug manufacturers (Drug Store News, 8/30/99). Future Industry Performance The prospects for continued industry growth are strong due to a number of factors. These include: h An increased interest in health and personal care h An aging population and longer life span h A high number of popular drugs coming off of patent protection to the generic drug and over-the-counter market h An increasing use of drug therapies versus hospitalization There are issues that will continue to keep profit margins low. More retail segments are recognizing the customer draw of pharmacy services, therefore increasing competition. Price-cutting, lower drug price inflation, and restrictive third-party payment plans will also reduce profit margins. Furthermore, supermarkets and discount retailers have increased their offerings of the health and beauty aids that generated front-end revenue for drugstores (Standard & Poors Monthly Investment Review). There are a number of strategies contributing to the success in the competitive drugstore market. Differentiation and service are strategies critical to the success of independent drugstores. Many independent stores emphasize personal service and counseling provided by a familiar pharmacist. They also strive to provide a product range that reflects the preferences of the demographics in their location. Being small allows the flexibility to needed to rapidly adapt to the changes in consumer demands. Smaller stores exploit the niches and business areas that don t meet the criteria of the larger chains (Drug Store News, 2/17/97). Use of technology to streamline inventory management, ordering, insurance claims and many other processes is critical to the survival for all stores, large or small. The use of point-of-sale systems, merchandise and accounting software, and sophisticated systems, which predict precise inventory levels needed at any given time, all reduce operating costs. This technology allows pharmacists to provide more time for personal service with customers (Drug Store News, 4/24/2000). Drugstore design has changed to provide greater convenience and accessibility. The aging of the population has caused storeowners to design stores with easy access, and no large, crowded parking lots and long lines at the checkout. This is part of the reason many stores are relocating to their own individual property with their own parking spaces (Las Vegas Review-Journal, 9/8/98). Convenience and a good selection of frequently purchased necessities will allow the drugstore to compete with convenience stores. Efficient management of the front-end offerings and auxiliary services will provide a higher profit margin than that of the pharmacy alone. There are numerous cosmetic and beauty fads throughout a year that require constant changing of products and displays to remain up-to-date. The total performance of each stock-keeping unit is critical and should be assessed using activity-based costing, with low performing items being eliminated (Retailing 2005). There currently exists an under-served market for ethnic cosmetics in many parts of the US. Prominent displays providing a variety of products meeting those of the surrounding demographics have the potential to draw customers to a store, boosting sales in all categories (Women s Wear Daily, 4/2000) The large chains stand to benefit from their size by creating virtual vertical integration partnerships with their suppliers. Joint planning, product development, and demand forecasting will benefit both suppliers and retailers. Functions can be shared according to who can perform them at the lowest cost. As partners change their business processes, organizational structures, and information systems for the benefit of the partnership, barriers to exit will be created. Barriers to other companies who have not made such investments will also be created. This will lead to more exclusive supply chain relationships (Retailing 2005). The chain drugstores will depend a great deal on the sale of private label items. The private label can provide differentiation based on both quality and price. They provide the retailer with a greater markup as well. Discount programs which encourage purchase of private label items provide value to both the customer and the retailer. Another critical means for gaining market share will be the utilization of the Internet to supplement sales from existing stores. CVS purchased in order to take advantage of its existing structure and expertise to enter the online market. Walgreens has created its own site. Rite Aid bought into and will provide the fulfillment of s retail prescriptions. The online drugstores that are not affiliated in any way with an existing store are not viewed as major threat (Community Practice, 5/5/2000) History Of Walgreens Walgreen Company prides itself on being consumer friendly. This large drugstore chain has made its mark on the map by following a simple strategy Xfocus on convenience. By convenience they include: how fast people get into the store or are served in the drive-through pharmacy, how fast they get out, how easily they find what they came to buy, and how well they are reminded of what they are forgetting to buy ( This kind of company is not just formed overnight- it takes many years of hard work. The following section details the beginning of Walgreen Company and how it became the number one drugstore chain it is today. In the small town of Dixon, Illinois a man by the name of Charles R. Walgreen Sr. began a dream that soon turned into a reality. Charles R. Walgreen Sr. was born near Galesburg, Illinois and relocated to Dixon when he was a young boy. At the age of sixteen, he was in an accident and cut off the top joint of his middle finger. This unfortunate incident caused Walgreen to quit athletics and begin working. He worked in a local pharmacy where he began his dream to become a pharmacist. If not for the accident, there may never have been the Walgreens that we know today ( Charles R. Walgreen Sr. knew that this dream would only be realized in a larger city, therefore he moved to Chicago. In 1893 he began to study the ways of a pharmacist, and was not satisfied with what he found. The old fashioned way of running a drugstore left Walgreen with many unanswered questions. Where was the desire to provide superb customer service? Where were the innovations in merchandising and store displays? Where was the selection of goods that customers really wanted and could afford? Where was the sense of trying to understand, please and serve the many needs of drugstore customers? And, most of all, where was the commitment to providing genuine value to the customer? ( Because of these questions, Walgreen decided to open his own drugstore and implement all of his new ideas. In 1901, Walgreen created a neighborhood drugstore measuring just 50 feet by 20 feet. Little did he know that his strategic plan for this small business would become Walgreens, the number one drugstore chain. Walgreen began this great venture by a purchasing local drugstore for $6,000. He soon added bright lights to create a cheerful, warm ambiance in the store. The aisles were widened for convenience, and the selection of merchandise was improved and broadened. Walgreen always kept prices fair and reasonable, and offered a service that was like no other drugstore around. ( One of the many additions to the new and improved drugstore was the addition of the Two Minute Drill. This strategy worked by keeping the call-in customer on the phone with casual conversation, while the prescription was filled. The merchandise was then delivered to the home of the customer while they were still on the phone with Walgreen. The customer was amazed at the fast and friendly service. This became the Two Minute Drill. This drill created customer loyalty and a positive image. ( By the year 1910, Walgreens had expanded to two stores. Walgreen continued to take advantage of new opportunities and enhance a growing customer base. With this in mind, Walgreen decided to add hot food to the wide variety of items available in the stores. This was the addition of the soda fountain. ( In 1913, Walgreens had four stores in the Chicago area. By 1919, there were 20 stores XWalgreens was growing fast. The customer friendly chain store was continually looking for new and innovative ways to please the consumer. Noting this, in 1920 a man by the name of Coulson added ice cream to a popular milk mixture. This was the beginning of the milk shake. ( Walgreen was so impressed with this new sweet drink that he added it to the menu of all of his stores. The wonderful creation was written about in newspapers and talked about in every city that housed a Walgreens store. Customers were suddenly standing in line for this cool new drink. Walgreens was becoming popular. By 1930, the fast growing chain had well over 500 stores. With this newfound fame, Charles Walgreen incorporated philanthropy in the corporate mission. After leading a full life and accomplishing so much, Charles R. Walgreen Sr. died in the year 1939. The Walgreen Company was left to his son Charles Walgreen Jr. With a disciplined management team, Walgreen Jr. would lead the company that has continued to exponential growth. ( Walgreens continued to prosper through the years, even during the depression. By 1975, Walgreens had 633 stores and employed over 1500 pharmacists. Moving through the century the growing chain store now had a third Charles Walgreen continuing the family tradition. With the help of Charles Walgreen III, Walgreen Company hit a milestone when they opened the 1,000th store in 1984. ( As Walgreen Company proceeds into the future, great things are expected to happen. In the year 2000, Walgreens opened its 3,000th store. Walgreens is currently in 43 states and Puerto Rico. The strong, solid drugstore chain plans to open 450 stores in 2000, one new store every 19 hours. Their goal is to have 6000 stores by the year 2010. With all the growth and advancement in technology, Walgreen Company plans to hold the market as the number one drugstore chain indefinitely. ( Competitive Analysis When evaluating any business, it is important to look not only at the company, but at other companies in the market to determine their market position, their strengths, and their weaknesses. The more information you have on your competitors, the more likely you are able to succeed in creating a successful strategy against them. Knowing this, the following paragraphs will analyze Walgreens competitors, Rite Aid, CVS, and Rite Aid Corporation Rite Aid, America s Neighborhood Drugstore, is the number one pharmacy leader and for the first time was named one of the 1998 Business Week s 50 - the magazine's annual ranking of the nation s best performing companies. Rite-Aid was ranked 48th, and the only drugstore chain to make a list topped by Microsoft and dominated by financial and high-tech firms. Rite Aid s success according the Mr. Grass, chairman and CEO, was due to a combination of factors including an ongoing expansion/acquisition strategy, development of state-of-the art technology, marketing and brand differentiating initiatives and the creation of a top-notch senior management team. Between 1996 and 1998, Rite Aid acquired three of the country s leading regional drug chains: Thrifty Payless, the largest drugstore chain on the West Coast with 1,007 stores and $4.4 billion in sales, and Harco and K&B in the South. Capitalizing on these acquisitions, Rite Aid continued to develop hundreds of new freestanding prototype stores in the targeted markets already served by these chains. Currently, Rite Aid operates approximately 4,000 stores in 31 states and the District of Columbia, pushing this corporation up the ladder to becoming one of the nation s largest drugstore chains. The brisk pace with which Rite Aid has and continues to proceed in its expansion and acquisitions is not taking place without some setbacks and inherently large complications. In 1999, Rite Aid experienced a tough year with lawsuits, investigations and falling stock prices. Rite Aid was faced with the worst performing stocks on the S&P 500, because an auditing firm that has been with Rite Aid since 1968 resigned their account with them in 1999 due to a lack in trust in Rite Aid s management. Since January 2000, Rite Aid s shares have lost more than 45percent of their market value. Adding to this, in October of 1999, Rite Aid announced the completion of its extension and restructuring of its $2.7 billion outstanding banking debt, and its consummated sale of $300 million of its 8 percent convertible pay-in-kind preferred stock to an affiliate of Leonard Green and Partners. As a result of the reorganization of debt, two things have occurred: 1.) The $1.3 billion bank debt which was scheduled to mature and the $300 million which was due on demand at the time of maturity on October 29,1999, has been extended to November 1, 2000 2.) Rite Aid will be free of almost all loan payments until mid-2002. Investigations have plagued Rite Aid in the areas concerning past operating practices and the reorganization and reconstructing of debt has not helped to lessen suspicion. As a result of investigations due to suspicions, Rite Aid s safety rank was lowered to a four, which is below average. In addition to the financial restructuring and the needed aid of banking facility extensions, Rite Aid will pay $2.8 million in a lawsuit settlement to 12 counties in the city of San Diego. These counties alleged that Rite Aid used misleading advertising and engaged in unfair competition. All things taken into consideration and tallied, Rite Aid is approximately $3 billion in debt. A $1 billion boost from lenders has helped ease the concern and financial straps at Rite Aid, and will be used to repay debt and fix up stores. To strengthen the company s rank, and with a new management team intact in many key departments, Rite Aid intends to debut 300 locations in the year 2000. It will take time for the new operating procedures to filter through the system, but significant parts of Rite Aid s infrastructure, including its retail stores and distribution network are up to date and should be well-positioned to produce improved operating result in time (Standard & Poors). The year 1999 opened with GNC, General Nutrition Companies, and Rite Aid announcing the construction of a significant strategic alliance in vitamins and nutritional supplements. Outside the pharmacy, nutritional supplements are Rite Aid s fastest growing category, and retail is the fastest growing channel for selling nutritional supplements. Rite Aid will open 1500 full-line GNC stores within Rite Aid locations across the country over a three-year period. GNC will manufacture the nutritional supplements and together they will market a new line of vitamins and nutritional supplements to be called "PharmAssure." In addition, GNC will become the exclusive manufacturer of Rite Aid s private label vitamins and nutritional supplements and together they will construct a co-branded Internet e-commerce and nutritional information site. This strategic alliance is another step to Rite Aid becoming a broader health services company. The ability to link nutrition with the credibility of Rite Aid s pharmacists in the growing area of e-commerce excites Rite Aid and creates an unique competitive edge that is expected to be favorably received by consumers, according to Mr. Grass, CEO. In support of this alliance, Beth Kaplan, executive vice-president of marketing at Rite Aid, says, Americans are increasingly concerned about their long-term well-being. Our exclusive PharmAssure products and GNC stores within stores will help Rite Aid differentiate itself from the competition while meeting the health needs of our customer base-the key to our success. The strategic alliance with GNC and expected future success sparked Rite Aid s expansion and reconstruction of its pharmacy division. At the beginning of the year 2000, Rite Aid announced its expansion and reconstruction of its corporate pharmacy to provide a more integrated approach to pharmacy purchasing. Mary Sammons, president and chief operating officer, said, The new structure will make a very strong part of our business even stronger. She also explains that bringing all the areas of pharmacy together under one direction will able them to develop a more focused pharmacy strategy that should improve all aspects of their pharmacy operations. To ensure success in the newly restructured pharmacy operations, Rite Aid has constructed a team of key top-notch experienced executives. These top executives, Sorkin, Wolfe, and Podguski, have a combined 79 years of experience in the field of pharmaceuticals that ranges from purchasing to managed care, marketing, human resources, and clinical services. These executives are highly educated and respected in their field of specialization and combine to form a strong and powerful team for Rite Aid s pharmacy operations. GNC was not the only supplement to Rite Aid s drugstore business. In January 1999, Rite Aid acquired PCS Health Systems, Inc. for $1.5 billion with the belief that this acquisition will enhance their ability to offer a better array of pharmaceutical services. PCS is the leader in pharmacy benefits and other managed health care systems. PCS s pharmacy benefit management services focus on the systematic management of prescription drug usage designed to foster high quality, cost-effective pharmaceutical care through the application of managed care principles and information technologies. PCS also provides pharmacy benefit management services that involve the application of clinical expertise and management information systems to provide formulary management, chronic disease management and mail order services (Standard and Poors). Another contribution to the pharmacy division is a twenty-two percent acquired interest in, the leading online retailer of health, beauty, and wellness products with an online pharmacy. Rite Aid customers are able to order their prescriptions online at with the same pharmacy benefits provided to them by their insurance management companies, as if they were doing business with Rite Aid. These prescriptions may be picked up at the nearest Rite Aid store or delivered directly to the customer s home. Both companies are planning to undertake co-promotion and co-branding activities. Despite a tough year in 1999 of financial investigations, falling stock prices and lawsuits, Rite Aid has weathered the storm and its position is on an upward course. A newly formed corporate structure combined with smart and capable leaders has guided Rite Aid up from beneath its financial, corporate and legal difficulties. First quarter sales beginning February 27, 2000 and ending May 27, 2000 revealed a 6.2 percent increase for same-store sales, consisting of 9.6 percent pharmacy same-store sales increase and a 1.4 percent increase in front-end same-store sales. CVS Corporation Ranked ninety-three in the Fortune 500 and the nation s No. 1 leader in the pharmacy market with 11.9 percent market share, CVS Corporation fills more prescriptions than any other drugstore chain and has 4,100 locations east of the Mississippi. Sixty percent of their sales come from filling prescriptions, while the rest comes from front-store sections offering additional medications, cosmetics, food, film processing and other general merchandise. CVS was founded under the name Melville in 1892, selling only shoes. It was not until 1964 that the name CVS was first used and not until the early seventies that CVS bought the Clinton Drug and Discount to enter the pharmacy and drugstore industry. By 1981, CVS had acquired more than 400 drugstores and by 1985 their sales had hit $1 billion. CVS was outperforming its Melville counterparts and thus a decision was made to concentrate on the drugstore chain. By this time, Melville s holdings had grown to include the department chain store Marshalls and the furniture chain This End Up (sold in 1995), the footwear chain, Footaction (spun off in 1996), along with Linens-n-Things, Kay-Bee Toys and Bob s Stores (apparel and footwear), which were all sold or spun off by 1997. After this, Melville was renamed CVS and a major consolidation took place in the drugstore industry, merging these two entities and forming what is now the CVS Corporation. CVS was not finished with building its empire and in 1997 acquired Revco D.S., which had nearly 2600 stores in 17 states, mainly the Midwest and Southeast. The next year, bought Arbor Drugs with 200 stores in Michigan. CVS paid a combined total of $5.2 billion to acquire these stores and add them to their already 1,425 stores in operation. In acquiring Arbor Stores, CVS got nearly fifty percent of the market share in the lucrative metro Detroit market and a strategic network of store locations. This move bumped Chicago-based Walgreen Co. from the No.1 ranking in the drugstore industry and upstaged Walgreen s recent debut in the metro Detroit. The metro Detroit area spends about $2 billion a year in drugstores - the fourth highest spending level nationwide. CVS is still not in the 48 out of the 100 drugstore markets and new markets such as Chicago, Tampa, Orlando, Fort Lauderdale and Grand Rapids help to get them there (Merrill Lynch). The key to the company s continued growth has been a subsidiary called PharmaCare Management Services, which provides prescription benefit management services. In addition, CVS has recently begun the operation of CVS ProCare pharmacies that cater to customers that require complex drug therapies such as treatments for HIV and infertility. This taps into the $11 billion specialty prescription market. ProCare will establish apothecaries separate from CVS stores and staff them with qualified personnel who can dispense the prescriptions and devote time to answering questions (Trantum). CVS continues to move its core CVS stores from strip malls to the more profitable freestanding locations. Only thirty-five percent of CVS s stores are freestanding units, in comparison to Walgreens with over eighty percent. CVS is striving to catch Walgreens and has accelerated relocations as a percent of new store openings programs because the return on capital employed is more attractive as a result (Merrill Lynch). These locations are typically bought, not leased, with the store resembling the corner location proto-type of approximately 10,300 square feet. CVS has also increased their private label offerings to 1500 items, which account for 11 percent of its front store sales. Expansion plans have included the acquisition of in 1999, which was then renamed This enabled CVS to provide an on-line pharmacy where customers can order prescriptions online for delivery or pick-up. CVS uses this website to bring their store into customers homes and businesses with information available to educate customers about medicines and diseases. In addition, current expansion plans include 440 new or relocated stores nationwide and entry into two new markets by 2000. CVS has not specified which new markets, but has confirmed relationships with two developers in the Chicago area who are scouting a minimum of fifty sites. In Chicago, there are no independent drugstore chains for CVS to overtake, thus they will be building from the ground up. Overall, CVS had been producing consistent earnings for gains for its shareholders and the three to five year outlook appears just as favorable (CVS Corp. NYSE). Successful acquisitions and continued operation of, ProCare and PharmaCare Management Services have placed this corporation in a leading position with potential to overtake the market leader, Walgreens. In addition, CVS has confirmed that company sales growth should continue at ten percent or more for 2000. The leading on-line retailer of health, beauty, and wellness products, was the first on-line drugstore to earn the distinction of their one-millionth customer just thirteen months after the launch of their site. Peter Neupert, president and CEO of, comments, We have a rock solid financial base and we are growing by the minute. Supporting this notion and that of a strong customer base, announced at the end of its fourth quarter 1999 that 44 percent of its orders are for repeat purchases. This growth and the strong financial base have stemmed from s efforts to broaden its customer base and product offerings, along with the formation of partnerships with, Rite Aid, and GNC, as well as its recent acquisition of In the winter of 1999, Gomez Advisors, a provider of e-commerce research and analysis for consumers, ranked No.1 overall ranking and first in four of the eight categories including Customer Confidence, Relationship Services, First-time Buyers, and Time Saving. These high performance rankings can be attributed to the fact that, Since our inception, has focused on creating a friendly, informative, and secure Internet shopping experience for today s customers, (Neupert, Peter). In addition, Forrester PowerRankings, an unbiased expert analysis that provides objective rankings of the leading e-commerce sites, ranked at the top in the health category and it received top scores in Customer Service, Site Usability, and Features categories. offers thousands of brand name personal healthcare products at competitive prices, a full-service, licensed pharmacy, along with a wealth of health-related information, buying guides and other tools designed to make purchasing decisions, ( achieves one million online shoppers). Customers have the option to personalize their shopping experiences with a shopping list, e-mail reminders to replenish regularly used products, and private e-mail access to pharmacist and beauty experts for questions. The pharmacy division at has been awarded the Verified Internet Pharmacy Practice Sites (VIPPS) certification by the National Association of Boards of Pharmacy as a fully licensed facility exercising the best safe pharmacy practices in compliance with federal and state laws. The RxML program, which enables participating Physician Connectivity Companies (PCCs) to transmit electronic prescriptions securely on-line to pharmacies via their electric prescribing applications, was completed by in May 2000. Incorporating the RxML standard provides physicians and other health care providers the capability to transmit accurate electronic prescriptions securely, thereby reducing the potential for prescribing errors, increasing overall efficiencies, and helping physicians better help their patients. Lee Ann C. Stember, NCPDP president, states, The adoption standard will unify a rapidly-changing industry and deliver more efficient and effective communication between physicians and pharmacies Xand ultimately their mutual patients. The acquisition of, a leading on-line retailer of prestige beauty products including specialty lines exclusive to the site, has expanded s product base and provides the benefits of an ongoing relationship with a team of industry experts. In addition, a strategic alliance with Rite Aid in 1999 allows customers to order prescription drugs on-line for same day pick-up at a conveniently located Rite Aid drugstore. Potential benefits perceived from this alliance include increased traffic at the website with Rite Aid customers using their services, pharmacy benefits coverage provided by the insurance companies and management companies with which Rite Aid has relationships, and the co-promotion and co-branding activities that both companies plan to undertake. The relationship with GNC includes the exclusive right to sell and be the online provider of GNC-branded products and the reciprocal co-promotion of and GNC products in traditional and online marketing efforts. s objective is to become one of the world s leading retailers of health, beauty, wellness, personal care and pharmacy products, and they are well on their way, with the launch of a new Health and Beauty Store on the website of the leading retailer This store provides a direct gateway to When customers go to the home page they can click on the Health and Beauty tab and enter into the online storefront. Jeff Bezos, founder and CEO of, states, We are always looking for ways top improve the shopping experience. We want our customers to come to us and find anything and everything they might want to buy online. This alliance provides tremendous opportunity for to expand its customer base and continue its exceptional growth. Peter Neupert remarks that this launch of the Health and Beauty Store on is a big win for our customers. By opening our store on the site, we re making it easier and more convenient for customers to shop for health and beauty products while they re shopping at Being new to the online drugstore industry and showing a loss for 1998 and 1999 does not equate a weak or disappearing has negotiated mutually beneficial strategic alliances and capitalized on windows of opportunities. First quarter sales for 2000 are $22,738,000, following the trend of quarterly increases since its inception in 1999. Customer Profile Walgreens, unlike other retail drugstore chains, does not tailor its offerings to any specific consumer or market segment. Walgreens provides a diverse array of product lines so that each consumer and market segment may fulfill their shopping needs whether it is beauty, prescription, over the counter medications, toys, photography development, greeting cards, gifts or convenient store items at any local Walgreens. Therefore, the market segment as defined for Walgreens consists of any consumer who seeks the everyday necessities that may be found at a super store such as Wal-Mart or K-Mart, but without the hassle and inconvenience of large crowds and the challenge of a difficult search to locate desired products. Walgreen's research of customers in Chicago and San Antonio reveals two specific types of customer; browsers and lasers. Browsers are customers that come to Walgreens for the shopping experience. Lasers are customers who come to Walgreens for one or two specific items with an emphasis on time and convenience. According to the American Demographics Magazine, "customer on a constrained time budget will likely favor small shops over large ones, spend less time comparing prices, use technology to reduce transportation time, and patronize businesses that make life easier." Walgreens' strategy is directed toward the time-starved "laser" shopper. The average Walgreens' transaction time from car door open to car door close, is 13.5 minutes with the average being 3.3 items (Walgreens 1999 Annual Report). The Baby Boom generation born between 1946-1964, a time in which 3.8 million to 4.3 million babies were born annually, is an unusually large generation that started turning fifty in January 1996 (The Market for Boomers Turning 50, 1999). This generation is a large and important market segment in the area of vitamins and health, including prescription and over the counter medications. The population of America is aging and Walgreens' main focus on prescriptions, vitamins and over-the-counter medication recognizes this aging market segment as one to be served efficiently and adequately. This market segment will continue to grow and become more important as age related health problems and concerns for overall health begin to rise. The kids and teen market segments are two other important and influential market segments that require special attention. Children ages five to fourteen currently number thirty-nine million, while the teen population ages twelve to fourteen will be one of the largest and wealthiest in American History (The Teens Market, 1999). The child population has not grown substantially, but their income has grown at a steady 20 percent for at least the last half decade, with their purchasing power growing at an even more astonishing rate (The Kids Market, 1999). Capturing the loyalty of these two market segments will present difficulties due to their need for instant gratification and the rapid pace with which they change attitudes, but the percei

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