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Standley guides impressive turnaround at Rite Aid
April 22nd, 2013
CAMP HILL, Pa. – No one has been more closely involved in the revitalization of Rite Aid Corp. than John Standley.
Arriving at the company in December 1999 as part of an executive team called in after previous management pushed the drug chain to the verge of bankruptcy, Standley, who is now chairman, president and chief executive officer, has helped bring about a remarkable turnaround, one that in recent years has once again made Rite Aid a central part of the conversation about the future of community pharmacy.
“Our vision is to know our customers so well that they confidently turn to us as their first choice for solutions for their everyday health and wellness needs. That’s the direction we’re heading in,” says Standley, who became Rite Aid’s CEO in June 2010. “To make that happen, we consider a lot of different ideas coming from different places, work together to sort them out, and put the necessary resources behind the best ones. We have some really great people here; empowering them and giving them the tools they need to be successful is what’s making our business work.”
The culture of continuous improvement that Standley, chief operating officer Ken Martindale, chief financial officer Frank Vitrano and their teams have developed is producing tangible results. Earlier this month Rite Aid reported the strongest adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) in its history and its first full-year net profit since fiscal 2007.
The company’s current momentum took years to develop. When Standley — an accountant by training whose first professional exposure to retailing came when he handled a number of chains at Arthur Andersen, then one of the big eight public accounting firms, and subsequently worked for several supermarket chains owned by Yucaipa Cos. — joined Rite Aid, the drug chain was teetering on the brink.
“It didn’t take long to figure out that we were in trouble,” recalls Standley, who at the time was CFO. “The books weren’t in good shape, and there wasn’t much cash rolling around, even though Leonard Green [& Partners] had just made a $300 million investment in the company.”
He credits Bob Miller, who was recruited to lead Rite Aid after building Fred Meyer Inc. into the nation’s fourth-largest supermarket chain prior to its sale to Kroger Co., with giving the executives he brought with him (Standley, president and COO Mary Sammons, and chief administrative officer Dave Jessick) with the confidence they needed to tackle seemingly insurmountable challenges.
“We had the accounting problems, we had the liquidity issue and we had the operating issues, and that’s how we spread out,” says Standley, who spent the next six months guiding Rite Aid’s in-house team and 150 outside accountants to make sense of the company’s tangled finances. At the end of the restatement process, during which the publicly traded company did not report financial results, it was finally clear where things stood and what needed to be done.
"It would have been pretty easy to throw in the towel a few times along the way."
— Standley on his first tour
of duty at Rite Aid
“On the liquidity side, we had the issues with trying to get some cash into the business,” he notes. “There was a lot of effort around short-term financing needs and how they could be met under the existing capital structure, which was fairly complicated.
“So we divided up the tasks. Bob and Dave worked with the existing capital structure, trying to get the amendments and waivers needed to give us the flexibility to raise money. I went out and secured a new billion-dollar asset-backed facility. They carved out the capital structure where I could put that in place. Their job — convincing existing lenders that we could put the company back on track if we could get the liquidity we needed to execute our plan — was a lot harder than mine.”
With Rite Aid’s finances stabilized, attention shifted to how the business functioned. “Mary really led the charge operationally and got us headed in the right direction,” says Standley. “She did a great job getting the team organized and focused on the important issues that affect what goes on in the stores — things like staffing, inventory levels, merchandising and marketing.”
Those efforts brought steady improvement. Adjusted EBITDA, which was $473 million in 2001, grew to nearly $726 million in 2005, when Standley left Rite Aid to become CEO of Pathmark, a regional supermarket chain in which Yucaipa had recently acquired a 40% stake.
“It would have been pretty easy to throw in the towel a few times along the way,” Standley says of his first tour of duty at Rite Aid, “but Bob would not give up. No matter how bad things were, he kept pounding, pounding, pounding, and somehow we would come up with a way to take another step forward. We muscled through it, and we all worked pretty hard. The whole company did.”
Standley’s tenure at Pathmark was notable for several reasons. In short order he justified the confidence that Yucaipa founder Ron Burkle showed in him by effecting an operational turnaround, reinventing the loyalty program, developing a new store prototype and strengthening the management team.
One immediate challenge at Pathmark was to make the ongoing reconfiguration of the perishables business financially viable. The assignment took Standley; Ken Martindale, who was then Pathmark’s chief marketing and merchandising officer; and Pathmark CFO Frank Vitrano (who now holds the same post at Rite Aid) to the front lines.
Standley with executive VP of pharmacy Robert Thompson (left) and COO Ken Martindale (right) at the opening of the Lemoyne, Pa., wellness store.
“We rolled up our sleeves and worked through all of this merchandise, trying to understand exactly what was happening,” says Standley. “We talked with the produce manager and the seafood manager and the deli manager and the meat manager, going through orders, looking at what’s moving and what’s motivating the customer. It took a couple of months, but we were able to reconfigure that whole strategy and reimplement it.”
Sales picked up, EBITDA improved, and Pathmark found itself the target of a $1.3 billion acquisition by A&P. At Pathmark Standley got a chance to show what he could do as a CEO and take a first run at many of the retailing challenges that he would later address at Rite Aid.
After the Pathmark sale, Standley was quickly called on by Sammons to serve as a consultant. During his absence Rite Aid had made a major acquisition, buying 1,858 Brooks and Eckerd drug stores from the Jean Coutu Group for $3.4 billion in cash and stock. The deal was designed to give Rite Aid the scale it needed to compete against Walgreen Co. and CVS Caremark Corp., but its impact was limited, at least initially, by a lengthy regulatory review and snags in the integration process. Sammons asked Standley to assess the situation and suggest how problems could be addressed.
“Trying to understand what was happening with the pharmacy in the wake of the acquisition was a key part of getting the company on the right track,” he says. “And we needed to address SG&A [selling, general and administrative] expenses. There was a lot of basic blocking and tackling that we had to get right across a chain that was suddenly much larger than it had been.”
His previous experience and contributions as a consultant quickly led Sammons and the board to ask him to rejoin Rite Aid as president and COO, which he did in September 2008. The financial crises that gripped the world economy several months later plunged the drug chain into familiar, if unwelcome, territory.
“We had debt coming due during the middle of the recession, and that caused another liquidity scramble,” Standley recalls. “Things were very tight — the stock actually traded down to about 20 cents before we got the refinancing done — but we were able to convince investors because of our historical performance. I’ve been at a lot of highly leveraged companies, and we’ve made them all work and paid back every nickel so far.”
After Standley succeeded Sammons, he wasted no time in building on the foundation that he and his colleagues had painstakingly laid over the preceding decade. As befits a drug store operator, health care was the focal point. “A small percentage of pharmacy customers makes up the vast majority of our script count,” he says, “and we wanted to find ways to reward that behavior.”
"Wellness+ changed the trajectory of the whole company."
The Rite Aid Rx Savings Program, where individuals who sign up can save 15% on thousands of branded and generic medications, was the first product of that thinking. Encouraged by its success, the company followed up in April 2010 with wellness+, a full-blown loyalty plan focused on pharmacy and health care that gives participants points toward in-store savings when they buy prescriptions and other products, and provides them with discounts, special prices and wellness benefits.
“The launch of wellness+ coincided pretty tightly with our turnaround in sales,” notes Standley. “We came up with a creative way to wrap the pharmacy into wellness+, which is a loyalty program that also offers a temporary price reduction through the UP+ feature. There’s a pretty dramatic difference between what we do and what other retailers offer. Wellness+ changed the trajectory of the whole company.”
The program not only cements Rite Aid’s ties with existing shoppers and attracts new ones; it also generates actionable insights at a time of unprecedented change in the chain drug store business model. “We now have greater visibility into what customers want, which will enable us to continue to build strong relationships with them.”
The retailer’s determination to engage the consumer is embodied in its wellness store concept, which was introduced in 2011 and updated last October with the debut of a remodeled outlet in Lemoyne, Pa. The wellness format, which has thus far been rolled out to 800 of Rite Aid’s 4,600 stores, is centered on empowering health care consumers with information and expert advice as well as products and services.
“Our new format is a true well-being store,” asserts Standley, who characterizes the concept as a key tenet of the retailer’s strategy. “The merchandise mix, for example, is evolving to include more organic and gluten-free products, and displays are more interactive. Shoppers can touch and feel and work with a product to make sure that’s what they need. It’s as much about information, education and the experience inside the store as it is about product.”
Enhanced service is another essential element in Rite Aid’s wellness stores. “We’re making a very significant investment by bringing the wellness ambassador into the mix,” says Standley. “That’s the person who connects with our customers and helps them bridge the front end and the pharmacy. The wellness ambassador is facilitating that process and having a huge impact on these stores.”
Rite Aid has reason to be confident that it’s headed in the right direction, but it still carries a heavy debt load that complicates efforts to complete the transformation of its business in an intensely competitive retail environment.
“When we make an investment, it takes a fair amount of thought. We have to make sure we’re getting the right return,” notes Standley. “We need to invest in such areas as our store base and technology and, at the same time, pay down our debt. It’s a real balancing act.
“But we continue to work on some very exciting things that we believe are going to be real game changers for us. When you combine that with a rational plan that we can execute, a good communications flow and a management team that’s trying to engage all stakeholders, you can see where we’re headed.”