Rite Aid woes caused by too much, too fast

CEO: In putting his stamp on the drugstore chain founded by his father, Martin L. Grass strained family relations and precipitated his downfall.

October 24, 1999|By Lorraine Mirabella, Kristine Henry and William Patalon III | Lorraine Mirabella, Kristine Henry and William Patalon III,SUN STAFF

Martin L. Grass seemed to have it all: He led one of America's top drugstore chains, lived among the horsy set on a 10-acre estate in the posh Green Spring Valley, earned $1 million a year, and was chauffeured back and forth to work each day in a $3 million helicopter.

His wealth earned him prominence in arts and health circles, as he gave generously to numerous charities. He was featured in Business Week and Fortune magazines, praising his stewardship of Rite Aid Corp. and enhancing his standing on Wall Street.

It was never enough.

Grass wanted his regional drugstore chain's name to be known across the United States as the corner drugstore -- a bigger, better version of rivals such as CVS and Walgreen's.

But he tried to do too much, too fast -- buying drugstore chains, closing old stores as he opened new ones, and loading up on debt. As he engineered the growth, he unwittingly engineered his downfall.

Last week, Grass was ousted, and the company revealed that it would have to go back and slash its profits for the past three years by a total of at least $500 million -- about half of what it earned.

Grass did not respond to repeated requests for interviews, and Rite Aid officials and board members declined to discuss Grass' sudden departure. But interviews with family members, associates, retail consultants and Wall Street and industry analysts point to Grass' fall as the result of an overly aggressive race to dominate the industry.

Grass mistakenly went from a conservative plan to a wide-open attack, they said. And it cost him.

"They were winning Super Bowls but not beating the other team by 40 points -- what's the problem?" said Roger Grass, criticizing his elder brother's shift in the company's strategy. The brothers have been estranged in a feud over the business their father founded 37 years ago.

In Martin Grass' wake is a struggle for power and wealth that left a family fractured and the company's ability to survive in question.

Friction in the family grew out of Grass' ascent from president to chief executive and chairman in 1995.

In the fall of 1994, Rite Aid founder Alex Grass decided to elevate Martin, his eldest son, as the heir apparent to lead the company. The next February, as Martin Grass stepped into the CEO slot, he decided that wasn't enough -- he wanted the chairmanship, too.

While his father was traveling on a plane home from a trip to Israel, Martin Grass was engineering a coup that demoted his father to chairman of the executive committee.

"He and I have not been very close since the changeover took place," Alex Grass said in an interview last week.

The change in leadership brought a change in strategy. Instead of slow, measured growth, Rite Aid developed an appetite for growth by any means: gobbling up rival chains, swapping strip mall stores for bigger, stand-alone neighborhood stores. Under Martin Grass, the regional Rite Aid wanted to go national.

As a start, he announced plans in 1995 to buy Revco D. S. Inc., a 2,100-store chain based in Cleveland. The stores were a match geographically, in size and in the products they sold. Grass boasted to insiders that it was a "done deal."

The Federal Trade Commission thought otherwise.

Worried that Rite Aid would have an East Coast monopoly, the FTC said it would only approve the deal if Rite Aid shed a significant number of stores.

For Grass, from a financial standpoint the deal no longer made sense. But its failure was an affront to his pride.

Like a spurned lover, he announced a bigger takeover: Thrifty PayLess Holding Inc., a wheezing West Coast pharmacy chain. The price: $1.4 billion in stock and $890 million in debt.

The loss of Revco "absolutely motivated him to go out and do something else, to show he couldn't be undone," said a one-time associate. "That was the beginning of the end."

"It was ego-driven," said Roger Grass, asserting that his brother only bought the chain after he was denied the one he wanted.

Today, shoppers coast to coast know Rite Aid. Its stores are spacious and bright, with round-the-clock drive-through pharmacies, shelves of faddish herbs and vitamins, and coolers with sodas, milk, eggs and frozen pizza.

But the brightness conceals a near-fatal level of debt, $5 billion, the $500 million in falsely booked operating profits, and perhaps a ticket to the auction block.

The acquisition of Thrifty was ill-conceived. Thrifty's stores were dumpy, losing customers, and generally far bigger than those Rite Aid knew how to manage.

Roger Grass said his brother bought Thrifty for all the wrong reasons. "It was on the rebound from not being able to get Revco," he said, describing Thrifty as "a chain of mishmash, B Kmarts with a pharmacy."

"My brother is a very smart guy," he said. "The problem here is you can make one real bad decision and not be able to fix it."

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