Can Kermit Crawford fix Rite Aid?

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Can Kermit Crawford fix Rite Aid?

By Mike Troy - 09/30/2017
What's left of Rite Aid: Retailer's footprint now consists of 806 stores and three distribution centers in six western states and 1,769 stores and three distribution centers in 12 northeastern and mid-Atlantic states.

Rite Aid improved its financial situation by selling nearly 2,000 stores to Walgreens, but major structural and competitive challenges remain, something newly hired COO Kermit Crawford knows better than anyone.

Kermit Crawford spent 31 years at Walgreens before retiring at the end of 2014 as President of Walgreen’s pharmacy, health and wellness division. Now, through an improbable turn of events he finds himself in the role of President and COO of Rite Aid following the chain’s sale of 1,932 stores to Crawford’s former employer.

Walgreens plan to acquire Rite Aid was announced October 2015 but as the regulatory review drug on the deal was abandoned and Walgreens agreed to a smaller acquisition. On Sept. 19, regulatory approval was granted for Walgreens to purchase 1,932 stores for $4.4 billion. Rite Aid also received a $325 million merger termination fee. Nine days later on Sept. 28, Rite Aid announced Crawford’s appointment in conjunction with the release of second quarter results that illustrate the challenge ahead of Crawford and his new boss Chairman and CEO John Standley.

"While our performance for the quarter reflects a challenging reimbursement rate environment and the effects of an extended merger and asset sale process, securing regulatory clearance for the amended asset sale agreement with Walgreens Boots Alliance gives us a clear path forward to realize the benefits of the transaction and implement our plans to deliver improved results,” Standley said.

One of the biggest benefits will be to reduce the company’s $7 billion debt load to free capital for other purposes. Even so, Rite Aid will remain at a disadvantage relative to rivals Walgreens and CVS. Once the deal is completed, Walgreens will have roughly 10,000 U.S. stores compared almost that many CVS locations spread throughout the U.S. Meanwhile, Rite Aid’s footprint will consist of 806 stores (576 in California) and three distribution centers spread across six western states and 1,769 stores and three distribution centers in 12 northeastern and mid-Atlantic states. That leaves a large swath of the interior of the country devoid of Rite Aid stores which makes its network less valuable to national health plans. In the markets where it does have a presence it lacks the scale of Walgreens and CVS, putting it at a convenience disadvantage and less able to leverage marketing expenses or operate its supply chain as efficiently.

Another major disadvantage is the company’s share price, which at less than $2 is near a 52-week and fell on the day Crawford’s hiring was announced. Oftentimes a key executive hire can move the market, but in Crawford’s case his hiring was revealed the day the company reported weak results and suspended earnings guidance. Whatever the source of investors’ lack of enthusiasm it doesn’t help recruiting efforts when a company’s valuation is at a level which shows investors lack confidence in the company’s prospects.

It is an issue because, according to Standley, building a management team for the future is one of six keys for future success. Others include redefining and enhancing customer and patient experience; engaging payer partners to create a sustainable business model; evaluating pharmacy purchasing options to ensure competitive drug costs; Streamlining operations and growing the EnvisionRX pharmacy benefits manager.

Crawford played a role in executing all of those strategies while at Walgreens and was quite successful. The only problem is he’s not at Walgreens. At Rite Aid he won’t have the same support structure, premier store locations, leadership talent and leverage to deliver superior results.