Since filing for bankruptcy last week, pharmaceutical retail chain Rite Aid has received interim approval to access up to US$3.45 billion in debtor-in-possession financing and continue delivering healthcare products and services and to continue paying its vendors, employees, and suppliers. However, the company has raised concerns about its ability to remain in business after it said in a regulatory filing on Wednesday that its ability to continue is dependent on successfully emerging from its Ch
Chapter 11 cases and generating sufficient liquidity after restructuring its business, Reuters reported.
Rite Aid stock has fallen by 80 per cent so far this year, and its long-term debt, which was US$3.3 billion in June, exceeds the value of the company’s assets by approximately US$1 billion. The retailer currently operates 2,100 retail pharmacy locations across 17 states, but will be closing underperforming stores part of the restructuring process.
To help move the company forward, Rite Aid recently appointed Jeff Stein as chief executive officer, chief restructuring officer, and a member of the board of directors, effective immediately.
In a company statement, Stein explained, “With the support of our lenders, we look forward to strengthening our financial foundation, advancing our transformation initiatives and accelerating the execution of our turnaround strategy. In doing so, we will be even better able to deliver the healthcare products and services our customers and their families rely on -— now and into the future.”
Stein succeeds Elizabeth Burr, who became interim CEO for Rite Aid in January 2023. Burr will continue in her role as a director on Rite Aid’s board.
The fall of the pharmaceutical retail chain
Rite Aid isn’t the only pharmaceutical retailer in the US that is facing financial challenges.
CVS closed 244 stores between 2018 and 2020 and announced that it would close 900 stores by 2024. In 2019, Walgreens said it would close 200 stores, and in June of this year, it announced an additional 150 closures.
According to global management consulting firm McKinsey and Company, the number of independent pharmacies decreased by about 50 per cent between 1980 and 2022, largely due to being pushed out by larger pharmaceutical chains.
But, as Neil Saunders, managing director and retail analyst at GlobalData Retail told Inside Retail, “a distinction needs to be drawn between what has happened to Rite Aid and some of the wider issues affecting the drugstore market.”
“Rite Aid’s problems are, primarily, financial and of its own making. Rite Aid has been loss-making for six years and has been burdened by high debt levels for an even longer time. These are the primary causes of its bankruptcy.”
Saunders identified three main issues at play in the drugstore space: the competition in the convenience sector, the failure to invest in the retail offer, and the rise of online shopping.
“It used to be the case that drugstores were the destination for quick shops, top-up missions, and everyday essentials,” Saunders said. “With the rise of online and other retailers like Dollar General in rural areas, this is no longer the case… This has become even worse in the current environment where fewer people are willing to pay the more expensive prices drugstores often charge.”
At the same time, drugstores have failed to invest in their retail proposition, and so they have lost out on high-growth segments like premium and prestige beauty.
“While this category has been growing rapidly and fueling the results of retailers like Ulta, Sephora, and Target, drugstores have slipped further behind. Some of this extends beyond beauty because the whole retail offer is mundane and often down-at-heel. The drugstore chains do too little to attract customers and persuade them to spend,” Saunders said.
He also noted that various legal settlements related to the opioid crisis issued against companies like Rite Aid, Walgreens, and CVS have cost these chains billions of dollars, drastically affecting their ability to operate at a financial gain.
In March, the Department of Justice filed a lawsuit against Rite Aid, claiming that the business knowingly processed “unlawful prescriptions for controlled substances”, which stands in violation of the False Claims Act and Controlled Substances Act, and Rite Aid of missing “obvious red flags” when it filled the prescriptions for addictive pain killers.
Where to next?
Moving forward, Saunders theorised that larger pharmaceutical chains would be seeking out outside opportunities for growth, but should remain cautious in their approach.
“Drugstores are also looking to healthcare to provide new growth opportunities. This includes primary care, which they see as a very lucrative segment. That’s arguably a sensible move, but if it leads to further neglect of the retail business it may cause further damage to market share,” Saunders warned.
The current situation leaves the door open for big-box chain retailers like Amazon, Walmart, Target, and Costco to step in and serve communities that are experiencing a “pharmacy desert” and for independent medicinal companies to serve specific consumer needs.
At the same time, a growing number of direct-to-consumer brands like Wonderbelly, an antacid brand that differentiates itself through sustainable packaging its “clean” formulation, are benefiting greatly from the shift toward over-the-counter products, a market valued at US$36.96 billion in 2022 and growing via e-commerce and mass retail chains such as the ones listed above.