By Leticia Miranda / Bloomberg Opinion
Retail bankruptcies typically stir nostalgia among shoppers or sighs that e-commerce has claimed another retailer. Don’t expect similar chagrin over Rite Aid Corp.’s bankruptcy filing Sunday. The indifference reflects a hard truth: Some retailers deserve to die.
The Pennsylvania-based drugstore chain has a history of financial missteps that ultimately forced it to enter Chapter 11. In the 1990s, Rite Aid loaded up on debt to expand the company’s store fleet. As the company bled cash, Martin L. Grass, the chief executive officer at the time and son of the company’s founder, famously misled shareholders about the company’s income and was sentenced to eight years in prison.
More recently, the company drew on a credit facility to cover the purchase of pharmacy benefits manager Elixir in 2015 and later took on more debt to finance the purchase of Bartell Pharmacy stores in 2020. But the borrowing didn’t pay off. Rite Aid has since reported quarterly losses at Elixir as commercial clients and members left. It also closed more than 100 unprofitable stores, some of which were perviously owned by Bartell Drugs in Snohomish and King counties.
As borrowing costs mounted — the company now has about $3.3 billion in long-term debt — it was only a matter of time before Rite Aid would take a hard fall. And at this moment in the retail pharmacy business, it’s difficult to enter into bankruptcy with hopes of coming out stronger. The market is saturated with retail locations, with little distinction between chains such as Walgreens Boots Alliance Inc. and CVS Health Corp. If one pharmacy closes, shoppers can simply jump to another one. Both independent pharmacies and national chains also are struggling with labor and drug shortages that result in higher payroll costs and longer wait times to fill prescriptions. A healthier chain or strong independent could weather the storm, but not a company as financially fragile as Rite Aid.
Rite Aid’s fumbles open up a potential avenue for incumbents and new competitors to increase their market share. Already, new players are emerging with health service offerings. Dollar General Corp., which has more than 18,000 stores, is testing mobile health services at a handful of its locations. Grocer Kroger Co., with more than 2,900 stores, including Fred Meyer locations, recently launched a co-branded Medicare Advantage plan with Select Health that offers savings on groceries and prescription medications for Medicare-eligible shoppers. If Rite Aid continues on a downward path, it won’t be long until someone fills the gap.
Rite Aid could attempt to turn things around by starting at the top. The company has a long history of awarding executives large bonuses and compensation packages even as its performance suffered. Former CEO Heyward Donigan, who left the company in January, had total compensation of about $9 million in her last year at the helm. Total shareholder returns fell by about 60 percent during the same period. The company’s interim CEO Elizabeth Burr is slated to be paid $3.6 million for the current fiscal year even as the company slips into bankruptcy protection.
The company also needs to return to basics by investing in its often-unappealing stores. Many locations are dark, with long narrow aisles and dated decor. Design is inconsistent. A store in one city might have green-themed department signs, while in another they might have blue.
Rite Aid has acknowledged that its retail locations and merchandising have been “in a deteriorating state,” as described by former CEO Donigan. She promised a big store turnaround centered around the company’s “Stores of the Future” concept that focused on alternative medicines and holistic health. That effort didn’t pan out. Donigan conceded to investors last year that the company spent too much money building several concept stores when it could have accomplished similar sales growth on a tighter renovation budget.
More recently, the company has been cutting costs and increasing cash flow however it can. Over the past two years, Rite Aid has closed more than 200 stores and rejected 168 new leases.
Rite Aid’s bankruptcy filing comes as the drugstore chain faces a lawsuit over its alleged role in illegally prescribing painkillers that helped fuel the country’s opioid crisis; the case could require billions of dollars to settle.
Through bankruptcy, those future settlements would be treated as general unsecured claims that would be paid out after Rite Aid’s secured claims are paid in full. That has worked for some companies, such as Mallinckrodt Pharmaceuticals, which managed to reduce its payout to opioid victims by about $1 billion. But it could also backfire and lead to a drawn-out litigation battle as in the case of Purdue Pharmacy, whose bankruptcy deal has been halted by courts.
Ultimately, the victims of Rite Aid’s mismanagement are the millions of shoppers who rely on Rite Aid for prescriptions, and its 47,000 employees. Consumers have little sentimentality when it comes to where they fill their prescriptions and where they buy toothpaste. To stay viable, Rite Aid will have to change how it does business up and down the company.
If Rite Aid isn’t willing to disappear, it needs to demonstrate that it has a reason to keep on living. A bankruptcy filing will help it wipe out its debt. But it should be aware that it is one retailer few people would miss.
Leticia Miranda is a Bloomberg Opinion columnist covering consumer goods and the retail industry. She was previously a business reporter at NBC News and a retail reporter at BuzzFeed News.
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