Rite Aid Pleased with Save-A-Lot Combo Stores

Rite Aid and Save-A-Lot have been involved in a pilot project in several South Carolina locations, in which Save-A-Lot has sold groceries in the front end of underperforming Rite Aid pharmacies. Apparently it has worked well:

"The stores have done extremely well since opening and as a group are comping up over 100% on the front end with pharmacy running consistent with the trends before the conversion,” John Standley, Rite Aid’s chief executive officer, said in a conference call discussing the retailer’s quarterly financial results Thursday.

Reportedly there are negotiations between the firms to expand the project. It's an interesting approach, and at this point any good news has to be welcome for Rite Aid.

CVS and the "Lipstick Index"

CVS is taking the bold step of going upscale in the midst of a recession. According to this article, they have been trying for years to get prestige cosmetics and fragrance brands to sell through CVS, but were unsuccessful. Their solution is to open boutiques in the 2500-4000 square foot range, connected to but clearly separate from adjoining CVS stores. At present two are open, fifty are planned for 2009, with the possibility of up to 500 eventually (and talk of being a billion-dollar business).

According to Bloom, CVS shoppers had for years expressed a desire to purchase high-end cosmetics and skin-care products in a convenient location with great service. CVS certainly had enough convenient locations—60% of the female population in the U.S. lives within five miles of one of its 6,800 stores. The key was convincing the top brands to work with CVS. "Health and beauty is important to us, but suppliers have refused to sell us whole classes of products," says CVS CFO David Rickard.

Bloom enticed vendors with a retail environment that looks nothing like a CVS drugstore—white tiled floors, brushed-metal walls, and sea-foam color accents. (The stores measure between 2,500 and 4,000 square feet and are connected to adjacent CVS stores via a breezeway.)

In the course of the video interview attached to the article, a CVS exec refers to the "Lauder Lipstick Index" as part of the justification for the new stores. I had heard the term a couple times recently, but wasn't clear just what it was, so I did a bit of research: It's an idea, proposed by Leonard Lauder, head of the Estee Lauder company, in 2002, that consumers will cut back on big-ticket items in a recession, but will compensate by splurging on a few small "affordable luxuries". Thus a woman might make herself feel better about canceling a proposed winter holiday by buying an upscale lipstick from Estee Lauder.

It's an interesting idea, although The Economist gives it the kiss-off, so to speak, in this graph, which seems to indicate that there's little if any correlation between lipstick sales and the economy -- sales were up a bit in the 2001 recession, but sank in 1991 even worse than the economy did.

I don't know that Mr. Lauder meant his index to be taken quite so literally, though. The idea that people might compensate for foregoing big luxuries by indulging in little ones seems to make sense intuitively, and has obvious applications for a great many marketers in the current economic environment. It would be interesting to know if there is any proof for it, or if any research has been done.

To get back to CVS, their experiment seems like a worthwhile effort. Certainly the times demand innovation, and past history indicates that companies who innovate during recessions benefit disproportionately. Their timing is very good in one regard -- with the decline of department stores, historically the principal channel for prestige cosmetics brands, the suppliers are probably more open to the idea of working with someone like CVS than they were a few years back. They have signed on some leading brands, including Laura Geller, Paula Dorf, and Coty Fragrance.

CVS buys Longs

The purchase of Longs Drug Stores by CVS has finally been completed:

Rhode Island-based CVS can take control of Longs through the transaction as early as today, CVS said. Longs will become a wholly owned subsidiary of CVS.

The purchase will close a 70-year-long chapter in East Bay corporate history that began in May 1938 when brothers Thomas Long and Joseph Long, pioneers in the self service drug retail concept, opened their first store. That initial Longs store was located on Piedmont Avenue in Oakland.

Update on Rite-Aid

It looks like Rite-Aid is going to do a reverse stock split to avoid being de-listed from the big board. Recent stock prices have been in the 75-80 cent range and they have to get up at least over a buck.

The company has not yet selected a ratio for the reverse split. Rite Aid will hold a special meeting of stockholders in December to vote on the reverse stock split.

Rite Aid received notice from the NYSE yesterday that its shares had fallen below the $1 limit for more than 30 days, meaning that the stock was no longer in compliance with listing standards. To regain compliance, its shares have to be worth more than $1 apiece for 30 consecutive days, by the end of a six-month period.

Update on the update: Rite-Aid announces that the reverse split will be between 10x and 20x:

Once stockholders approve the split, Rite Aid's Board will select a reverse stock split ratio of either 1-for-10, 1-for-15 or 1-for-20 so that, depending on the ratio chosen, either10, 15 or 20 shares of issued and outstanding common stock will convert into one share of common stock. The price of each common share would increase by the same ratio so that a stockholder would have fewer but higher priced shares, keeping the total investment the same when the market opens on the date a split becomes effective.

Is Rite Aid on the brink?

I've posted many times about the "two-per-channel theory" -- the idea that there's only room in today's marketplace for two (at the most) major players in any channel. If it's true, and I've seen nothing to indicate otherwise, that's bad news for a #3, like Rite Aid.

When the economy has gone smoothly, we've seen the #3s hurting, and in some cases dying (e.g., CompUSA), but most of them manage to scrape by. A poor economy, however, may be the end for many of them. This week we got news that Rite Aid may be delisted from the NYSE, since it's stock price has dropped well below a buck.

This Forbes article indicates that the problems are a combination of poor store performance ("... weak sales at the Brooks Eckerd stores it bought in mid-2007 ...") and heavy debt. There is hope though:

... Raymond James analyst John Ransom said the company's debts are particularly worrying to investors at a time when credit conditions are tight.

"All stocks have gotten destroyed lately, especially any company with a shaky balance sheet," he said in an email. "Rite Aid has the worst balance sheet of any company I follow."

In a client note, Ransom said the company is carrying $6.1 billion in long-term debt. But because Rite Aid has refinanced its debt, he believes it has the financial flexibility needed to implement its turnaround plans.

Walgreen slowing growth

Walgreen has opened more than 1100 new stores in the past three years, and plans to have 7000 by 2010, but intends to slow down a bit for the next few years.

The company plans to grow store expansion by 6 percent in 2010 and 5 percent in 2011, down from a long-term growth target of 8 percent. That translates into 425 stores in 2010 and 365 in 2011.

In its 2008 fiscal year ending Aug. 31, the company's expansion plans have resulted in 9 percent more stores; Walgreens said new store openings already in the works will result in 8 percent growth in fiscal 2009, or 495 stores.

The move is intended to conserve capital apparently, and will result in a savings of $500 million.

Walgreen cutting SKUs

Walgreen is planning to reduce the number of SKUs on its shelves, both because they think they may be confusing customers with excessive choice and because they are looking toward building smaller stores.

Walgreen wants to reduce the number of good its carries, such as multiple varieties of Tylenol, Chief Executive Officer Jeffrey Rein said at a Goldman Sachs Group Inc. retail conference in New York City Friday. The company is also considering opening stores that are smaller than its traditional stores in the 10,000- to 14,000-square-foot range.

While multiple varieties of the same product are one thing (not happy news for McNeil Labs to have their product singled out, is it?), I wonder if this will also be another case of a major retailer reducing the number of brands it offers.

Wednesday quick notes

Wal-Mart and Tesco are both considering buying Carrefour's South Korean operation. "Analysts believe that the French group is committed to selling its 31 stores in South Korea because of their relative underperformance against domestic rivals and after its withdrawal from Japan last year."

P&G has filed another suit against private-label copycats -- their third in the past several months. "P&G claimed First Quality ... was manufacturing and distributing products that copied Tampax Pearl packaging..." A previous post on this subject is here.

CVS announced that a couple top execs, treasurer and controller, had resigned and that the SEC is investigating the company over a 2000 inventory transaction. "An internal review launched in December found that various aspects of the company's accounting for the transaction were incorrect, CVS said, though no adjustments to its financial statements are needed."

CVS and Walgreen

There has been a lot published about the sale of Albertson's, but this one is worth looking at, from The Boston Globe, because it looks at the deal primarily from the viewpoint of CVS, who I think may be the big winner.

CVS has built itself primarily by acquisition:

Major deals have included a 1997 merger with Revco DS that added about 2,500 stores in the Midwest and Southeast, and a 2004 purchase of 1,200 stores from Eckerd Corp. that broadened CVS's reach into Florida and Texas, which are filled with elderly consumers in need of medicines.

Last year, according to analysts, CVS trailed Walgreen's $42b to $37b (although they already led in number of stores). This acquisition may be enough to close the gap, since the 700 stores they acquired are estimated to do about $5.5b.

In most other retail categories, there is a leader with a decided edge on #2 (e.g., Best Buy/Circuit City, Home Depot/Lowes, Wal-Mart/Target). It will be fun to watch a battle between equals.

Albertson's sold ... finally

After being on the market and then off, Albertson's finally put through the deal. Most of the company will be sold to Super Valu, with stand-alone drug stores going to CVS, and other pieces being bought by the Cerberus equity group.

The purchase will triple Super Valu's size and vault it to the #2 spot in supermarkets. The problem for them will be absorbing so much so quickly, and fixing a very broken company -- Albertson's same-store sales have been down eight of the last fourteen quarters.

CVS should close a lot of the lead Walgreens has on them, and this gives them a big piece of the California market, where they've had little penetration. I've heard that they did well with the Eckerd takeover, so perhaps they know how to do this M&A stuff.