Rite Aid Out-of-Stock Items Hurt Shopper Loyalty, Unions Say

Rite Aid Corp. (RAD)’s failure to keep items such as Maxwell House coffee and Charmin toilet paper on its drugstores’ shelves is hurting a shopper loyalty program intended to boost sales, according to a labor federation representing a quarter of the retailer’s workers.

A survey of 220 stores to be released today by the Change to Win unions found that 40 percent of outlets, and more than half in the New York City-Philadelphia area, were out of stock on at least one item discounted as part of the program.

Chief Executive Officer John Standley has been trying for two years to spur Rite Aid sales with discounts to the more than 47 million members of its Wellness+ program. The Camp Hill, Pennsylvania-based operator of almost 4,700 U.S. stores has lost money for the past four years, as its revenue growth trailed larger rivals Walgreen Co. (WAG) and CVS Caremark Corp. (CVS)

“With a rewards program, you don’t want to promote and then disappoint your most loyal customers,” said David Slavick, who developed such efforts for retailers such as Sears Holdings Corp. and American Eagle Outfitters Inc.

“Rite Aid’s program may have been more successful than it and its suppliers had anticipated and in that case they need to do a better job of advance planning,” said Slavick, vice president of retail consulting and business development for Customer Communications Group Inc., a customer-relations marketing company based in Lakewood, Colorado.

‘Taking a Risk’

The drugstore chain “is taking a risk by tying its loyalty program to in-store sales when it has trouble maintaining sale inventory with a high degree of precision,” Change to Win said in a report on the survey. The Washington-based group said Rite Aid must improve “inventory management capabilities and performance if it is to restore investor confidence.”

The company’s “overall in-stock rate for advertised items is consistently above 96 percent,” said Susan Henderson, a Rite Aid spokeswoman, citing its internal checks. On any given week, the retailer manages as many as 8,500 promotional items, she said in an April 5 e-mail.

The union group didn’t contact Rite Aid about the survey and didn’t share methodology or results, Henderson said. When items aren’t in stock, shoppers get a rain check to buy the products at advertised prices when they’re back on the shelves, she said.

Rite Aid will post a loss of 14 cents a share for its fiscal fourth quarter that ended March 3, according to the average of six analysts’ estimates compiled by Bloomberg. That would be the company’s 19th straight unprofitable quarter. Rite Aid is scheduled to report the results on April 12.

Rite Aid fell 1.7 percent to $1.70 at 1:54 p.m. in New York. The shares, which closed as low as 20 cents in 2009, gained 62 percent in the 12 months before today.

Union Representation

Of Rite Aid’s workforce of about 90,000 people, 26 percent are represented by unions such as the Service Employees International, the Teamsters and the United Food & Commercial Workers, said Matt Painter, a spokesman for Change to Win. The federation’s CtW Investment Group works with union-sponsored pension funds that hold about 3 million Rite Aid shares.

The Change to Win survey, conducted September through March, checked whether items advertised in Rite Aid’s weekly sales circular were on shelves. The sample of 20 to 25 products included food, household goods, over-the-counter medicines and items for the care of babies and pets. The survey was based on 1,100 store visits in 13 states and the District of Columbia.

Mix of Brands

On 78 percent of the visits, at least one advertised item was not in stock, Painter said today in a telephone interview.

The federation said a mix of national and private brands was often out of stock, according to a finding that four in 10 stores didn’t have at least one of the advertised products every time the outlets were surveyed.

Those items included an eight-ounce container of Maxwell House instant regular coffee, missing from 47 percent of stores, and Diet 7-Up soda in 12 packs, out of stock at 30 percent, according to the survey. A quarter of stores were missing 24- pack Charmin Ultra bathroom tissue.

“We have an interest in ensuring that Rite Aid corrects longstanding operational problems,” Painter said. “Despite some improvements in sales, we have serious questions about management’s turnaround plan.”

Standley, 49, was promoted to Rite Aid CEO from operations chief in June 2010. The Wellness+ program, introduced nationally in April 2010, is intended to increase repeat traffic by giving credits on future purchases.

The program also gives members exclusive discounts on items listed in newspaper ad circulars and provides special deals to people with diabetes. Customers can download online coupons to their membership cards.

More Return Customers

Pharmacy customers enrolled in Wellness+ return more often than nonmembers, Chief Financial Officer Frank Vitrano told analysts in December.

Five straight quarters of comparable-store sales growth show customers are responding favorably to the program, Henderson said. Rite Aid increased March same-store sales 3.6 percent, with gains in pharmacy and general merchandise.

The company continues spending to improve inventory management, Henderson said. Rite Aid increased minimum quantities of some items and provided more inventory of advertised products in the third quarter ended Nov. 26, Vitrano said on the Dec. 15 conference call.

To contact the reporter on this story: Chris Burritt in Greensboro, North Carolina, at cburritt@bloomberg.net

To contact the editor responsible for this story: Robin Ajello at rajello@bloomberg.net

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