Rite Aid 2012 Annual Report Download - page 5

The retail drugstore industry is highly competitive and has been experiencing consolidation. We
believe that the continued consolidation of the drugstore industry, continued new store openings,
increased competition from internet based providers and aggressive generic pricing programs at
competitors such as Wal-Mart and various supermarket chains will further increase competitive
pressures in the industry. The pharmacy business has become increasingly promotional, which
contributes to additional competitive pressures.
The retail drugstore industry relies significantly on third party payors. Third party payors, including
the Medicare Part D plans and the state sponsored Medicaid and related managed care Medicaid
agencies, at times change the eligibility requirements of participants or reduce certain reimbursement
rates. These changes and reductions are expected to continue. When third party payors, including the
Medicare Part D program and state sponsored Medicaid agencies, reduce the number of participants
and/or reduce their reimbursement rates, sales and margins in the industry could be reduced, and
profitability of the industry adversely affected. These possible adverse effects can be partially or entirely
offset by controlling expenses, dispensing more higher margin generics and dispensing more
prescriptions overall.
Strategy
Our primary goal for fiscal 2013, consistent with fiscal 2012, is to grow same stores sales, which is
critical for our future financial success. Same store sales growth will enable us to take full advantage of
the improvements that we have made in the areas of cost control and working capital management. We
also plan to take advantage of the costs savings and gross profit improvement opportunities that will
result from the conversion of numerous brand drugs to generic alternatives in fiscal 2013 and beyond.
We also plan to increase our capital investment in our store base, which we expect to lead to additional
sales growth. We expect these initiatives to lead to growth in long term shareholder value. Following is
a description of these initiatives:
wellness +—We rolled out our wellness + loyalty program in April of 2010. wellness + is a free
customer loyalty program that provides benefits to enrolled members based on the accumulation of
points for certain front end and prescription purchases. This program provides significant value to
customers who achieve Gold, Silver, and Bronze tier levels in the program and has been very well
received by our customers. As of April 2012, we had over 52 million members enrolled in the
wellness + program. At the end of our fiscal year, wellness + members accounted for 74% of front
end sales and 68% of prescriptions filled. wellness + members have higher basket sizes than
non-members and also have a much higher rate of prescription retention. wellness + members also are
eligible to receive plus-up rewards, which are discounts on certain items featured in our weekly circular
and provide members with additional savings for return shopping trips. Beginning in January 2012, we
added additional features to the program, which include the creation of a Bronze member tier and the
rollout of our Load2Card feature. The Bronze tier is achieved when a member reaches 250 points,
Bronze tier members receive 10% off on the purchase of all Rite Aid private brand merchandise and a
one-time10% shopping pass. Load2Card is a new coupon management program and is the first of its
kind in the drugstore retailer space. It enables customers to save, manage and redeem Rite Aid and
manufacturer coupons available throughout the internet via their wellness + card. Customers have
responded favorably to these enhancements.
We believe that the wellness + program has contributed to the improvement in our fiscal 2012
sales trends. We plan on making additional incremental investments in wellness + in fiscal 2013,
primarily in additional discounts, as we expect more customers to move into the Gold, Silver, and
Bronze levels.
Express Scripts customers—As of January 1, 2012, the Express Scripts pharmacy benefit
management network decreased the number of participating pharmacies. This has contributed to an
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