After Combo Test, Rite Aid Eyes Food Expansion

CAMP HILL, Pa. — Although Rite Aid’s experiment with co-branded Save-A-Lot stores appears to be a limited run, the drug chain still has an appetite for food.

Rite Aid has been working with outside consultants studying ways to use perishable food as a means to boost performance at its other stores — particularly the chain’s lower-volume units, officials said in a recent conference call. The effort would also call on the lessons learned from operating those 10 Save-A-Lot/Rite-Aid stores in the Greenville, S.C., market. Those stores are run by Rite Aid and licensed from the Supervalu-owned discounter.

Speaking with financial analysts in a conference call late last month, John Standley, Rite-Aid’s chief executive officer, said the company would likely detail plans for an expanded food offering later this year.

“We are looking very carefully at the [food] strategy,” he said. “We’re still really strong believers in it, and we think food can play a key role … in all of our stores, and that’s really why we brought in some additional expertise.”

A Rite-Aid spokesman declined to identify the consultants.

Industry observers noted it is likely that drug stores will continue to get more into the food business, as have their counterparts in discount and mass, and increasingly, drug chains like New York’s Duane Reade, owned today by Walgreen.

“I think we’re going to see expanded grocery throughout the drug stores at some point,” Mary Ross Gilbert, an analyst following Rite Aid for Imperial Capital, Los Angeles, told SN in a recent interview. “Just look at how the business is evolving. If you look at dollar stores, they have consumables there. Target has added grocery. The drug store retailer is very close to the consumer. And so for them, it’s just natural to add grocery.”

The 10-store test of co-branded stores in Greenville, hatched in 2010, has met with mixed success, Standley admitted. While the new merchandise mix improved comparable sales at Rite Aid considerably, the heavy increase in perishables proved difficult at some locations. That was partly a result of converting all of Rite-Aid’s stores in the market at once, rather than choosing particular locations in the market where a food-drug combination would make the most sense, he explained.

“We did it in 10 stores — we took a whole market and we just did the whole thing,” Standley said. “If you looked at the demographics and the kinds of analyses that you do to project sales, you probably would have said you’d do it in four or five of the stores, not all 10. But we wanted to be able to market fairly aggressively to kind of explain to people what we were doing with this Rite-Aid/Save-A-Lot concept. So we decided to just do all 10 of the stores.”

So while sales more than tripled in some stores others had margins that were “fairly horrific,” Standley said.

“We have a team out there that doesn’t have a lot of food experience,” Standley said during another investor event in October. “We were handling all kinds of perishable products and things that we just didn’t have experience with. So margins were really difficult initially. They’ve gotten better every single month along the way and are getting to a pretty good place today, still got a little work to go.”

From Supervalu’s perspective, the stores did too little volume, Standley added. A Supervalu spokesman confirmed to SN that the company was unlikely to continue the licensed stores with Rite Aid but declined to discuss the company’s specific concerns.

Food will likely be a part of the package at the lower-volume units Rite Aid refers to as its “value” stores. The company has reduced costs, selections and prices at these stores as a means of improving sales and reducing costs. The company is concurrently converting other locations to a “wellness” format that integrates the pharmacy and front ends of the store.