After reporting its first profitable year since 2007, Rite Aid (NYSE:RAD) is doing everything possible to maintain its momentum. The total net income for the fiscal year 2012 stood at $118 million as margins expanded owing to lower generic costs over their branded counterparts, but Rite Aid is determined not to leave anything to chance in order to continue its profitability streak. Using the customer engagement theory straight out of the management book, Rite Aid is betting big to gain customer loyalty and repeat purchases.
Consumer Engagement Programs May Revive Ailing Front End Sales
Rite Aid is currently running a much hyped online “Nail-Art Contest” in which customers can submit their nail art designs at www.riteaidnails.com to win 20 different prizes, including a $500 Rite Aid gift card, nail products from exclusive Rite Aid suppliers and “Gold” status for a year on Rite Aid’s free customer loyalty program, Wellness+.  This is the second time that the company is hosting this contest after receiving excellent response last year, boosting front-end sales by 1.4% in the second quarter, as compared to the previous year period.
The company seeks to gain higher customer penetration and brand recall through this program which runs all through May and June. We also estimate the contest to lift its front-end store sales, which currently contributes about one-third to the stock’s value.
Wellness+ Program And Telemedicine May Lend Support To Declining Pharmacy Sales
The company’s Wellness+ customer loyalty program has been well received by its customers as it provides them with the opportunity to earn significant discounts for repeat purchases at Rite Aid stores. The program had as many as 25 million active members as of April, 2013, who accounted for 79% of Rite Aid’s front-end sales and 68% of prescriptions filled. An active member is one who has made at least two purchases using the card in the last six months. Rite Aid has also converted about 800 stores of its existing 4,623 stores to the new Wellness format, which provides expanded clinical pharmacy services. The company plans to make incremental investments in developing its Wellness+ program and remodel 400 additional stores to the new Wellness format in FY 2014, and we estimate it to provide a solid support to its declining pharmacy sales.
Rite Aid also plans to foray into telemedicine by rolling out its NowClinic program to 58 locations in Boston, Baltimore, Philadelphia and Pittsburgh.  Telemedicine is the process of getting diagnosed by a specialist over the Internet, without having to visit the specialist’s location. It helps consumers to save on their commuting and waiting time. The process is neither new nor unique, as Walgreen (NYSE:WAG), Rite Aid’s major competitor, is providing a similar service to Cisco employees through its subsidiary, Take Care Health Services.  However, this service would help provide Rite Aid customers another reason to stick around and not shift to its competitors.
Challenges Lie Ahead Due To Reimbursement Rate Pressures
Although Rite Aid is coming up with a slew of consumer engagement programs to revive declining sales, the margins will remain under pressure due to lower reimbursement rates from third party payers such as insurance companies, prescription benefit management companies, government agencies, private employers or other managed care providers. Reimbursement from these agencies accounted for almost 96.6% of the company’s business in 2012.Notes: