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Management Ventures, Inc. Corporate: MVI-Worldwide.com, Licensed: MVI-Insights.com © 2009 MVI Presented by: Brendan Langan Director of Retail Insight April.

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Presentation on theme: "Management Ventures, Inc. Corporate: MVI-Worldwide.com, Licensed: MVI-Insights.com © 2009 MVI Presented by: Brendan Langan Director of Retail Insight April."— Presentation transcript:

1 Management Ventures, Inc. Corporate: MVI-Worldwide.com, Licensed: MVI-Insights.com © 2009 MVI Presented by: Brendan Langan Director of Retail Insight April 29, 2009 Chain Drug Re-Planning for an Uncertain Reality

2 5-2 Corporate: MVI-Worldwide.com, Licensed: MVI-Insights.com © 2009 MVI Copyright and Disclaimers Copyright © 2009 MVI, a Kantar Retail company. All Rights Reserved st Street, Cambridge, MA USA (617) No part of this material may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photography, recording, or any information storage and retrieval system now known or to be invented, without the express written permission of Management Ventures, Inc. The printing of any copies for back up is also strictly prohibited. Disclaimers The analyses and conclusions presented in this seminar represent the opinions of MVI, a Kantar Retail company. The views expressed do not necessarily reflect the views of the management of the retailer(s) under discussion. This seminar is not endorsed or otherwise supported by the management of any of the companies covered during the course of the workshop or within the following slides.

3 5-3 Corporate: MVI-Worldwide.com, Licensed: MVI-Insights.com © 2009 MVI MVI Planning Forum Up, Down or Sideways? The New Path to Partnership Full Steam Ahead Living on Borrowed Time

4 5-4 Corporate: MVI-Worldwide.com, Licensed: MVI-Insights.com © 2009 MVI Up, Down or Sideways? Re-Planning for an Uncertain Reality Source: MVI analysis Step 1: Survival of the Fittest Decade of growth and consolidation Not everyone will be here, at least in current form Near-term challenging, but this too shall pass Step 2: Retail Climate Change Health care providers 1st, retailers 2 nd Step-change underway, necessary given heavy Rx economic model, growing complexity of health care & hyper-competition Step 3: Mandate for Retail Step-Change Drug must look very different years out –Requires step-changes to the box, assortment, and brand necessary to build clearly defined & differentiated consumer value proposition Must be easy, relevant, and/or different

5 5-5 Corporate: MVI-Worldwide.com, Licensed: MVI-Insights.com © 2009 MVI If You Only Use 2 Slides Today… Source: MVI research and analysis Chain drug to grow at 3.6% CAGR 08-10E to USD159 million, 10.3% of $ Added… Slowing growth and deflation (PL & Generics) Despite slowdown, WAG still projected to generate 60% of chain drug sales thru 2010E, adding $600MM in FE sales and 280 stores Longs enters base in 2010E, to outpace WAG in FE sales adding $900 million thru 2010E (5% CAGR) and 80 new stores Shrinking store base and per store FE and Rx productivity driving decline in sales and stores

6 5-6 Corporate: MVI-Worldwide.com, Licensed: MVI-Insights.com © 2009 MVI Past (1990 – 2008) Double digit growth and consolidation, fueled by rapid growth of Rx, changing economic and operating model, and need for scale Present ( ) Prescription unit and sales volume slowing From channels to duopolies, leaders are pulling way Consolidation accelerating and competition intensifying Unemployment is the indicator to watch (now 8.5%) Future (2010 and Beyond) Aging and diversification of the population Health and wellness trends Fewer, more sophisticated and focused customers –Did we lose something along the way? Channel: Key Planning Considerations

7 5-7 Corporate: MVI-Worldwide.com, Licensed: MVI-Insights.com © 2009 MVI Location, Location, Location One Size Does Not Fit All Customer (She) is Always Right Less is More Cash is King! Channel: Key Planning Considerations

8 5-8 Corporate: MVI-Worldwide.com, Licensed: MVI-Insights.com © 2009 MVI MVI Planning Forum Up, Down or Sideways? The New Path to Partnership Full Steam Ahead Living on Borrowed Time

9 5-9 Corporate: MVI-Worldwide.com, Licensed: MVI-Insights.com © 2009 MVI Walgreens New Sense of Urgency Jeff Rein Named CEO Walmart Launches $4 Generics Acquired CuraScript Infusion Pharmacy Acquires I-Trax and Whole Health, Forms New Health and Wellness Division Q4 FY07 Earnings Miss Credit Ratings Cut, Announced Plans to Slow Organic Growth Re-launched Prescription Savings Club (PSC) Walgreens Withdraws Bid for Longs, Credit Ratings Cut Abrupt Departure of Jeff Rein, Alan McNally Named Chairman and Acting-CEO Further slowed organic store growth Cut corporate and field management positions by 9% Acquired Take Care Health Appointed new CEO Greg Wasson Source: Company reports, MVI research and analysis CVS Announced Caremark Merger Acquired Happy Harrys Acquired Option Care 2 nd Unsolicited Bid For Longs Historical Stock Price (Jan 2006–Feb 2009)

10 5-10 Corporate: MVI-Worldwide.com, Licensed: MVI-Insights.com © 2009 MVI Walgreens 2011: More From the Core Source: Walgreen Co., MVI research

11 5-11 Corporate: MVI-Worldwide.com, Licensed: MVI-Insights.com © 2009 MVI Slowing Organic Unit Growth 9% CAGR 2.5% - 3% Net Organic New Drugstores Source: Company reports, MVI research Walgreens CAGR E CAGR 08-13E Retail Sales % % Front-end % % Pharmacy % % Stores 4,224 6,4438.8% 7,7843.9%

12 5-12 Corporate: MVI-Worldwide.com, Licensed: MVI-Insights.com © 2009 MVI Mandate for Step-Change: Enhancing the Shopping Experience and Shop-ability Source: MVI store visit A Drugstore or Santas Workshop? What Does the Walgreens Brand Stand For?

13 5-13 Corporate: MVI-Worldwide.com, Licensed: MVI-Insights.com © 2009 MVI Redefining Convenience: When Location isnt Enough & More Doesnt Always = More Source: MVI store visit, research and analysis, Walgreen Co.

14 5-14 Corporate: MVI-Worldwide.com, Licensed: MVI-Insights.com © 2009 MVI The Challenge and the Opportunity # of items in Basket % of Baskets and Average Front-End Items per Basket Source: Walgreen Co. Cross-sellLearn and reward Understand and grow Solution sell GOAL

15 5-15 Corporate: MVI-Worldwide.com, Licensed: MVI-Insights.com © 2009 MVI Step 1: Who is She? How Does She Shop? Source: MVI research and analysis

16 5-16 Corporate: MVI-Worldwide.com, Licensed: MVI-Insights.com © 2009 MVI Segmenting the Shopper Efficient Eileen: Represents approximately 45% of sales. Young Boomer (or older Generation Xer) who is a frequent shopper – enjoying the convenient locations, efficiency and information delivered at the shelf. Shops with immediate need in mind (i.e. OTC). Active Amy: Represents approximately 17% of sales. Busy mom who is a fickle, but family-focused convenience seeker. Less likely to stock-up and is not loyal to a specific retailer. Socialite Stella: Represents approximately 16% of sales. Fun seeking consumer who enjoys the treasure hunt and likes the current store. Walgreens loyalist, who tends to be African American. Fill-in shopper who gets to know the employees personally and is a social-influencer. Merry Maria: Represents approximately 11% of sales. Advice seeking, community-conscious shopper who tends to be Hispanic, a parent and interested in getting health and wellness advice. This Walgreens-loyal shopper reviews the circular before shopping and shops for entire basket. Care Seeking Carol: Represents approximately 4% of sales. Older demographic (62 years old and older) with special needs. She is a heavy pharmacy user and health care is her top priority. Considers herself a traditionalist and does not typically use the Internet. Often has a smaller basket size and is looking for a personal service. Source: Company presentation, MVI research and analysis

17 5-17 Corporate: MVI-Worldwide.com, Licensed: MVI-Insights.com © 2009 MVI Segmenting the Trip Missions Source: Company presentation, MVI research and analysis

18 5-18 Corporate: MVI-Worldwide.com, Licensed: MVI-Insights.com © 2009 MVI Walgreens New Merchandising Strategy Placing Bets – Consumers, Categories, Vendors Category Identifiers We have to stop betting $2 on every horse. Not all sales from all categories are equal. John Fleming, Walmart Sept. 2008We have to stop betting $2 on every horse. Not all sales from all categories are equal. John Fleming, Walmart Sept SignaturePowerStapleComplement Best in US Products that are representative of who we are – the product categories we want to win in. - - Kim Feil Examples: OTC, pharmacy, skin care, vitamins, photo, etc. Best in Drug Products that are critical to a drug retailer and are part of a persons everyday life. - Kim Feil Examples: batteries, candy, dry groceries, snacks, etc. In the Game Routine categories with varying growth prospects. Examples: candles, stationary, household cleaners, toys Convenience Categories you expect to find with something else. – Kim Feil Examples: alarm clocks, apparel, electrical, hardware, light bulbs, frames, etc. Source: MVI research and analysis, Walgreen Co.

19 5-19 Corporate: MVI-Worldwide.com, Licensed: MVI-Insights.com © 2009 MVI Source: Walgreens.com,

20 5-20 Corporate: MVI-Worldwide.com, Licensed: MVI-Insights.com © 2009 MVI Grouping the Store into Solution Centers or Worlds to Improve the Experience Source: MVI Store Visits, MVI Analysis

21 5-21 Corporate: MVI-Worldwide.com, Licensed: MVI-Insights.com © 2009 MVI Redefining Convenience From Stack it High… to Less is More Today Tomorrow Source: MVI store visit

22 5-22 Corporate: MVI-Worldwide.com, Licensed: MVI-Insights.com © 2009 MVI CCR: Building Loyalty with Distinctive Assortment, Access and Affordability Today Tomorrow Something for everyone Best Offerings for valued customers Item/department focusConvenient solutions for essentials and discretionary needs Item-intensive / labor demand Personalized customer service Source: Walgreen Co., MVI research and analysis

23 5-23 Corporate: MVI-Worldwide.com, Licensed: MVI-Insights.com © 2009 MVI Walgreens 2011: Key Planning Considerations From One-Way to Fully Integrated – Overnight? Optimize the Assortment Placing bets on categories, what role do you serve? Not just about reducing SKUs, though big push on there as well Brand agnostic – developing solutions for her Amplify Vendor Relationships Alignment, collaboration, innovation and focus Increased 2-way transparency and accountability (Contribution Profit) Requires mindset shift from sq ft growth to optimization! Effective Pricing and Promotion Evaluating all promotional vehicles, including revamp of weekly ad Less space (ad) and off-shelf = fewer, more impactful themed solutions More dedicated to getting price/value right on KVIs (hybrid Hi Lo) Enhance the Shopping Experience No longer one size fits all, changing profiles and adjacencies Increased focus on store standards, integrated marketing THE WAY FORWARD: Partnership and Capabilities

24 5-24 Corporate: MVI-Worldwide.com, Licensed: MVI-Insights.com © 2009 MVI MVI Planning Forum Chain Drug: Up, Down or Sideways? The New Path to Partnership Full Steam Ahead Living on Borrowed Time

25 5-25 Corporate: MVI-Worldwide.com, Licensed: MVI-Insights.com © 2009 MVI CVS Growth Projections E Retail Sales Projected to Grow to $64.9 billion Source: MVI estimates; company reports Eckerd Osco/Sav-on Longs Drug

26 5-26 Corporate: MVI-Worldwide.com, Licensed: MVI-Insights.com © 2009 MVI The Big 3: Same Direction, but Different Rates of Growth Retail Drugstores Source: Company reports, MVI analysis 6,923 6,636 4,915 Eckerd Osco / Sav-on Longs Happy Harrys Brooks Eckerd

27 5-27 Corporate: MVI-Worldwide.com, Licensed: MVI-Insights.com © 2009 MVI Locking Up Share in Key Growth Markets Decade of M&A Fueled Expansion/Diversification Longs Drug Stores: Completed acquisition of 521 Longs Drug Stores in October 2008, gaining valuable real estate and market share in California, Hawaii, Nevada and Arizona Also picked up 4 distributions centers and RxAmerica PBM business MinuteClinic Small, but one of the single most strategic acquisitions of all Forms core of patient-focused healthcare strategy, plus growing demand from B2B customers (pull strategy) Slowing growth to focus on expansion of services Osco/Sav-on Remodels went off without a hitch, stores have been transformed to meet with CVS standards Southern California now outpacing Core CVS, both in terms of sales per building and margin –S. California now the largest sales producing market in the chain Eckerd Continued progress in core acquisition markets Increased marketing efforts to gain Rx share in the face of stiff competition Source: Company reports, MVI analysis

28 5-28 Corporate: MVI-Worldwide.com, Licensed: MVI-Insights.com © 2009 MVI Acquisition of Longs Accelerated Expansion in N. Cal and Hawaii Source: MVI research and analysis

29 5-29 Corporate: MVI-Worldwide.com, Licensed: MVI-Insights.com © 2009 MVI Operated 6,923 Stores in 40 states and the District of Columbia as of December 31, DE - 1 MD NJ CT RI - 57 MA CVS States CVS and Longs States Source: Company reports, MVI Research 19 DC - 53 Longs Corporate HQ Longs Distribution Facility Longs provided 529 stores and 4 DCs, making California CVSs largest market Longs stores

30 5-30 Corporate: MVI-Worldwide.com, Licensed: MVI-Insights.com © 2009 MVI The Competitive Landscape: Increased Direct Competition Source: Company reports, MVI Research Longs gives CVS a leading position throughout Central and Northern California, and Hawaii It would have taken CVS 10 years to develop these markets organically Facing intense direct in- channel and small box competition

31 5-31 Corporate: MVI-Worldwide.com, Licensed: MVI-Insights.com © 2009 MVI Longs Heavy Shoppers More Affluent and Ethnically Diverse Source: MVI analysis based on Mid year 2008 IRI Panel Data 6% % Heavy Shoppers Total US Average CVS Longs Drug Affluence: Doing Well 35. 9%39.5%55.3% Ethnicity: Hispanic HH 9.1%8.6%14.6% FMHH Age: %36.8%36.5% Annual Spend $ 448 $ 440 Share of Dollar Requirements 6.0%5.4% Trips per Shopper Dollars per Trip$ 24.9$ 24.3 Heavy Shoppers: Demographic Summary

32 5-32 Corporate: MVI-Worldwide.com, Licensed: MVI-Insights.com © 2009 MVI East Coast vs. West Coast Drugstores The Longs Optimization Challenge Source: Company reports, MVI analysis How will CVS change the assortment in the newly acquired Longs stores?

33 5-33 Corporate: MVI-Worldwide.com, Licensed: MVI-Insights.com © 2009 MVI Pricing and Promotional Strategies Weekly Advertising Circular Longs employs a classic Hi-Lo strategy, of which the weekly circular and United Rewards Program play a key role Longs distributes a weekly advertising circular, offering a wide assortment of promotions Longs circular strategy is more akin to a grocery format, underdeveloped PL relative to CVS Source: ECRM, MVI analysis

34 5-34 Corporate: MVI-Worldwide.com, Licensed: MVI-Insights.com © 2009 MVI California is now largest market, (12% of base ~850 stores) and a disproportionate share of total sales Still, CVS is a national chain with a New England state of mind –Not completely comfortable in a store over 11,000 sq ft –Must now contend with a box upwards of 4X the size –Managing this from centralized HQ in RI could prove difficult CVS will need help from suppliers to get arms around very different markets, footprint, economic model, promotional and merchandise mix and shopper base Opportunities to improve sales productivity and GM% though introduction of ExtraCare, CVSs private brands, mix shift, and focus on shrink How far assortment optimization? Will CVS still cut keys? Can CVS localize in a meaningful and scalable way? May be dilutive in near-term, but the right long-term investment –Concentrated exposure to regional economic conditions –Facing increased small box competition CVS: Key Planning Considerations

35 5-35 Corporate: MVI-Worldwide.com, Licensed: MVI-Insights.com © 2009 MVI MVI Planning Forum Up, Down or Sideways? The New Path to Partnership Full Steam Ahead Living on Borrowed Time In the struggle for survival, the fittest win out at the expense of their rivals because they succeed in adapting themselves best to their environment. – Charles Darwin In the struggle for survival, the fittest win out at the expense of their rivals because they succeed in adapting themselves best to their environment. – Charles Darwin

36 5-36 Corporate: MVI-Worldwide.com, Licensed: MVI-Insights.com © 2009 MVI Todays Retail Reality Living on Borrowed Time Turnaround of acquired stores taking longer than expected –Plan in place to address weakening operating trends, execution and credit metrics Revamped management team focused on reducing costs and working capital to drive cash flow Heavily leveraged, but last summers debt refinancing (though costly) bought some time Liquidity ok for now, but secondary sources unreliable and options constrained…. Cash is King! Amended A/R facility, albeit reduced and repriced Should regain compliance with New York Stock Exchange Primary banking and vendor relationships stable, management maintaining open lines of communication Source: Company reports, MVI research

37 5-37 Corporate: MVI-Worldwide.com, Licensed: MVI-Insights.com © 2009 MVI Can Rite Aid Shrink to Profitability? Growth Projections E Source: MVI estimates; company reports USD Billions Retail Stores Preservation - closing underperforming locations,optimizing resources and consolidating distribution network (158) (105) (45) (18) , (22) (26) (33)

38 5-38 Corporate: MVI-Worldwide.com, Licensed: MVI-Insights.com © 2009 MVI Rite Aids Top Priority is Generating Cash Flow to Begin Deleveraging Adj. EBITDA and MarginDebt and Debt / Adj. EBITDA

39 5-39 Corporate: MVI-Worldwide.com, Licensed: MVI-Insights.com © 2009 MVI Debt Maturity Profile (Estimate effective November 29, 2008) Effective November 29, 2008, Rite Aid reported USD6,347.7 million of debt and capital leases outstanding, excluding off balance sheet operating lease obligations with an estimated debt equivalent of approximately USD10 billion Last summers debt refinancing, though costly, bought time to execute turnaround plan Plan to refinance the revolver and tranche 1 term loan towards the end of 2009 / early 2010 Refinancing expected to be a combo new revolver, term loan and senior secured notes No other significant debt maturities until June 2014 USD in Millions Source: Company reports, MVI research and analysis

40 5-40 Corporate: MVI-Worldwide.com, Licensed: MVI-Insights.com © 2009 MVI Customer Satisfaction Levels Monday Ad Outs – Off Shelf Financial Constraints Compound Operational Issues Source: MVI store visit

41 5-41 Corporate: MVI-Worldwide.com, Licensed: MVI-Insights.com © 2009 MVI Cash is King! Cash Flow from OperationsHistorical Gross Liquidity

42 5-42 Corporate: MVI-Worldwide.com, Licensed: MVI-Insights.com © 2009 MVI Monthly Same Store Sales Source: Company reports, MVI research and analysis

43 5-43 Corporate: MVI-Worldwide.com, Licensed: MVI-Insights.com © 2009 MVI Scale Helps, Doesnt Fix Legacy Decisions or Structural Issues 9% to 12% Store Base Source: Company reports, MVI Research 6% to 8.9% Store Base 3% to 5.9% Store Base 0% to 2.9% Store Base (D.C.) 50% of Stores Located in 5 States, Lack Presence in Key Growth States 3rd Largest Chain in the US with 4,900 Stores 900 in the West 4,000 in the East 4,901 Stores in 31 States and D.C.

44 5-44 Corporate: MVI-Worldwide.com, Licensed: MVI-Insights.com © 2009 MVI Segmentation Strategy Benefits of Segmentation Enables key initiatives Focus efforts where highest return is made Maximize limited resources Store Segmentation Consumer/demographics Urban/suburban High volume/low volume Growth potential Earnings $200 million opportunity if Rite Aid achieves 7% EBITDA High Volume Store Segmentation Example How many of the 4,900 stores are high volume vs. low volume? What is the chain wide opportunity? Major Competitor Rite Aid Group A Averge store sales $7.2 million EBITDA margin 7.0% 5.9%

45 5-45 Corporate: MVI-Worldwide.com, Licensed: MVI-Insights.com © 2009 MVI Rite Aid: Key Planning Considerations Living on Borrowed Time… Balancing Financial and Retail Realities No longer about managing for profitability Plans must reflect risks and rewards Make a friend in credit / finance The Path Forward… Stabilization, Execution and Differentiation On the ropes, next 3 – 12 months are pivotal Must gain economies of scale and grow Rx scripts for survival Focus on generics and PL will have a deflationary impact on top-line Need to improve blocking and tackling to win her back Variance across shopper and store base present challenges One Size Does Not Fit All… Focused on Unlocking the Value of Rite Aid through Segmentation Closing stores, consolidating DCs, cutting labor and expenses and unlocking working capital Near-term pain necessary for long-term survival THE WAY FORWARD: Tactical Defense and Execution

46 5-46 Corporate: MVI-Worldwide.com, Licensed: MVI-Insights.com © 2009 MVI Big 3: Key Planning Considerations Walgreens: Balancing Growth and Re-Invention More from the core, realignment of cost, culture and capabilities Must improve the experience to grow basket – starts with shopper Slowing growth shifts focus from square footage growth to optimization THE WAY FORWARD: Partnership and Capabilities CVS/pharmacy: Brand Extension and Adaptation Put in a position to win, locked up share in key growth markets Latest acquisition (Longs) will challenge the status quo To gain share of wallet ($ and GP$) must capture share of values Current climate will require more emphasis on traffic and value THE WAY FORWARD: Alignment and Innovation Rite Aid: Stabilization, Execution and Differentiation Living on borrowed time… balancing new financial / retail realities Must gain economies of scale, Rx script growth is a must for survival Need to improve blocking and tackling to win her back Focused on Unlocking the Value of Rite Aid through Segmentation THE WAY FORWARD: Tactical Defense and Execution

47 Thank You!... A Partner in Your Success Corporate: MVI-Worldwide.com, Licensed: MVI-Insights.com © 2009 MVI 47 Brendan Langan Director of Retail Insight Global Headquarters: 245 First Street Cambridge, MA


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