Rite Aid 2012 Annual Report Download - page 16

We are substantially dependent on a single wholesaler of branded pharmaceutical products to sell products to
us on satisfactory terms. A disruption in this relationship may have a negative effect on our results of
operations, financial condition and cash flow.
We purchase all of our brand prescription drugs from a single wholesaler, McKesson, pursuant to a
contract that runs through April 1, 2013. Pharmacy sales represented approximately 68.1% of our total
sales during fiscal 2012, and, therefore, our relationship with McKesson is important to us. Any
significant disruptions in our relationship with McKesson would make it difficult for us to continue to
operate our business until we executed a replacement wholesaler agreement or developed and
implemented self-distribution processes. There can be no assurance that we would be able to find a
replacement wholesaler on a timely basis or that such a wholesaler would be able to fulfill our demands
on similar terms, which would have a material adverse effect on our results of operations, financial
condition and cash flows. In addition, because McKesson acts as a wholesaler for drugs purchased from
ultimate manufacturers worldwide, any disruption in the supply of a given drug could adversely impact
McKesson’s ability to fulfill our demands, which would have a material adverse effect on our results of
operations, financial condition and cash flows.
A significant disruption in our computer systems or a cyber security breach could adversely affect our
operations.
We rely extensively on our computer systems to manage our ordering, pricing, point-of-sale,
inventory replenishment and other processes. Our systems are subject to damage or interruption from
power outages, computer and telecommunications failures, computer viruses, cyber security breaches,
vandalism, severe weather conditions, catastrophic events and human error, and our disaster recovery
planning cannot account for all eventualities. If our systems are damaged, fail to function properly or
otherwise become unavailable, we may incur substantial costs to repair or replace them, and may
experience loss of critical data and interruptions or delays in our ability to perform critical functions,
which could adversely affect our business and results of operations. Any compromise of our security
could also result in a violation of applicable privacy and other laws, significant legal and financial
exposure, damage to our reputation, loss or misuse of the information and a loss of confidence in our
security measures, which could harm our business.
Risks Related to our Industry
The markets in which we operate are very competitive and further increases in competition could adversely
affect us.
We face intense competition with local, regional and national companies, including other drugstore
chains, independently owned drugstores, supermarkets, mass merchandisers, dollar stores and internet
pharmacies. Competition from discount stores and mail order has significantly increased during the past
few years. Our industry also faces growing competition from companies who import drugs directly from
other countries, such as Canada, as well as from large-scale retailers that offer generic drugs at a
substantial discount. Some of our competitors have or may merge with or acquire pharmaceutical
services companies or pharmacy benefit managers, which may further increase competition. We may not
be able to effectively compete against them because our existing or potential competitors may have
financial and other resources that are superior to ours. In addition, we may be at a competitive
disadvantage because we are more highly leveraged than our competitors. The ability of our stores to
achieve profitability depends on their ability to achieve a critical mass of loyal, repeat customers. We
believe that the continued consolidation of the drugstore industry will further increase competitive
pressures in the industry. We cannot assure you that we will be able to continue to effectively compete
in our markets or increase our sales volume in response to further increased competition.
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