How Rite Aid went from a Pennsylvania success story to a struggling chain that declared bankruptcy
When pandemic closures ended, customers didn’t flock back, and Rite Aid has lost money almost every quarter.
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Rite Aid remains “open for business,” as the 2,000-drugstore chain — which made $24 billion in sales in the past year, but still lost money — told customers when it filed for federal bankruptcy court protection Oct. 16. But it is accelerating efforts to shut stores and shed expenses, and faces competition and changing consumer behavior that’s not going away.
The list of Rite Aid’s woes, recounted in its court filings, makes it harder to recall that long before it went bankrupt — its stock down to pennies a share, its debts to drug suppliers and other creditors topping $1 billion — Rite Aid was a Pennsylvania success story.
Rite Aid founder Alexander Grass, a Harrisburg lawyer, grew his single Scranton discount drugstore, opened in 1962, into one of the nations’ three retail drug dominant chains, which it remains, even in bankruptcy, at least for now.
In 1995, his son Martin took over and launched an ambitious, debt-fueled growth campaign that briefly boosted the share value to over $1,000 a share (split-adjusted) by late 1998. But the stock collapsed to under $50 over the next two years, wiping out more than $40 billion in value, as the company was forced to admit it had exaggerated earnings. Martin Grass was convicted of fraud and conspiracy with his top aides and sent to prison in 2004 for inflating profits and hiding losses.
The stock has never since approached its late 1990s highs. Yet Rite Aid has bounced back before: Wall Street has since fallen in and out of love with Rite Aid several times, driving shares above $100 in 2001, 2004, 2007, and 2014-17, as new managers announced new plans to boost profits. But the industry faced growing challenges; shares of CVS and Walgreens, like Rite Aid, are today worth less than they were five and 10 years ago, though Rite Aid’s fall has been more dramatic.
In the 2000s, Rite Aid continued to buy more stores to match rivals Walgreens and CVS, adding food, toys, and unregulated supplements to boost drug margins. Rite Aid bought Brooks and Eckerd in 2006, the pharmacy-benefits companies that became Rite Aid’s Elixir group in 2015, and the West Coast-based Bartell chain in 2020. But the company continued to struggle to cope with increasingly well-funded digital pharmacies that work closely with drugmakers.
When the COVID-19 pandemic emptied stores and accustomed shoppers to online delivery, the chains brought some customers back by offering in-store vaccines. With pandemic closures ended, customers didn’t flock back, and Rite Aid, losing money almost every quarter, sagged again.
Why did Rite Aid file for bankruptcy?
In its filings, the company listed these issues:
$4 billion in debt. That might not sound like a lot for a company with $24 billion in yearly sales, but just the interest payments cost Rite Aid $200 million a year, which is more than Rite Aid’s combined profits for the past four years, in each of which the company posted losses.
Tough economics. Rite Aid partly blamed factors beyond its control: record inflation, lower insurer payments, higher labor costs for executives and pharmacists, lower demand for COVID vaccines and retail merchandise, higher theft, and the loss of key corporate clients.
Long-term leases. The chain had long-term leases for stores that are no longer profitable, including $80 million a year for stores that are already closed and have no other user willing to take over the space. Rite Aid is counting on bankruptcy to enable it to walk away from those deals.
Self-fulfilling prophecy. After Rite Aid began hiring restructuring advisers in late 2022, “rumors [of bankruptcy] have swirled,” according to bankruptcy documents, and more suppliers demanded Rite Aid pay them cash up front instead of waiting for the company to sell their goods.
Deadly painkillers. Rite Aid faces more than 1,600 “opioid-related lawsuits,” says the bankruptcy documents, as well as government investigations over the prescription of addictive narcotics promoted by drugmakers and some doctors, which federal officials blame for a wave of lethal opioid addictions.
Washington gets in the way
Rite Aid’s leaders have tried to right the ship, but empire-building, shrinking retail profit margins, and industry and government efforts to get control of soaring drug and medical prices, left the company’s finances badly squeezed. In 2015, it announced its sale to Walgreens, for $9.4 billion (plus debt).
That was one merger too many for Washington. Federal Trade Commission antitrust enforcers, responding to drug industry, hospital, and insurer worries that the consolidation of drugstore chains would give the leading chains too much pricing power, declined to approve the deal. After negotiations faltered, and more than a year of reports and arguments, Rite Aid and Walgreens canceled their marriage.
Taking Rite Aid out of the market “would leave two or fewer major pharmacy chains” across big U.S. metro areas, then-FTC Commissioner Terrell McSweeney wrote in a 2017 memo. That “could lead to higher drug prices” and worse service, she wrote in opposing even a partial sale of Rite Aid stores to Walgreens.
Still, her fellow FTC commissioners approved the sale of almost half of Rite Aid’s 4,000 stores to Walgreens for $4.4 billion in cash and stock, after Rite Aid promised it would still be large enough to compete.
Just a year later, Rite Aid bosses tried to sell what was left of the company to Albertsons — owner of Acme and other supermarket and drugstore chains, and like Rite Aid, a union employer at many of its stores — for around $7 billion in cash and stock.
This time it was Rite Aid’s own shareholders and shareholder advocates who balked, insisting the company must be worth more.
The federal government has lately challenged big drugmakers’ cozy relationships with the pharmacy-benefit managers that have taken corporate accounts away from drugstores but hasn’t done much to measure what the rapid consolidation of pharmacies has done to price competition, or customer service, says Michael Carrier, an antitrust expert at Rutgers Camden law school.
Is Rite Aid going out of business?
Rite Aid will continue to operate while in bankruptcy.
Before seeking bankruptcy protections, Rite Aid closed more than 200 stores, including around 22 in the Philadelphia area; put its benefit manager Elixir up for sale (it has since announced a deal); hired Jeffrey Stein as a restructuring consultant (he became CEO when the company filed for bankruptcy); dropped low-profit products; fired middle managers; used available cash to pay down some of its debt; negotiated with financiers to consider longer payback terms; and sold warehouses and other no-longer-needed properties.
The plan filed in court calls for more store closings, walking away from leases and other costs, and the possible sale of what’s left of the company to new owners.
Stein is a veteran corporate undertaker, having lead earlier restructurings or liquidation at refinery operator Philadelphia Energy Solutions, Westmoreland Coal, and other companies.
Starting in 2019, through the pandemic that saw a rise in both in-store vaccinations and home-delivery drugs, a new CEO, former insurance and tech executive Heyward Donigan, had tried to convince investors Rite Aid was prepared to prosper.
Last year, the company opened a new headquarters at the Philadelphia Navy Yard, the latest in a string of Pennsylvania companies that have set up shop in the metro area in an effort to attract high-quality executives and recent college grads.
But Rite Aid still lost money. By January 2023, Donigan was gone (after collecting $9 million for her last year at Rite Aid), and the company was working on a bankruptcy proposal.
The company is up for sale once again.