February 26, 2001, 11:03 AM — Multimillion-dollar losses, allegations of software-based consumer fraud, computer problems at an advanced distribution center and a new CIO have put the IT group at Rite Aid Corp. through the wringer during the past two years.
Once known as innovative IT practitioners, the 500 members of Rite Aid's IT staff are now more cautious and money-conscious than ever. "They were past leading-edge," says Loren Foster, a project leader and systems engineer at Rite Aid from 1987 to 1996.
"We loved it. You got to play with all the new toys," says Foster, now an independent contractor. But these days, he says, "they don't have the luxury to experiment."
For example, Camp Hill, Pa.-based Rite Aid in 1994 became one of the first pharmacy chains to use a nationwide satellite network, which allowed its customers to walk into any Rite Aid store in the U.S. and get prescriptions filled or refilled on the spot.
But having lost US$1.1 billion in fiscal 2000 and $461.5 million the year before, Rite Aid is no longer a high-tech playground.
Several factors triggered the red ink, including unfavorable real estate deals, overenthusiastic store expansion plans and questionable accounting practices that were investigated by the U.S. Securities and Exchange Commission. These problems forced the company to restate its financial results last August for 1998 and 1999.
Then, IT missteps, such as computer problems at an advanced distribution center, made matters worse.
With $14.7 billion in sales for fiscal 2000, Rite Aid is still one of the world's biggest pharmacy chains. But now it's more prudent about its IT spending, says Don Davis, who was named CIO last February as part of an executive shakeup to address Rite Aid's financial troubles.
Previously, Davis was vice president of application delivery at home improvement chain Lowe's Companies Inc. in North Wilkesboro, N.C. Before working at Lowe's, he managed IT outsourcing at Thrifty PayLess Inc., a Wilsonville, Ore.-based pharmacy chain.
Davis says he came to Rite Aid for the personal challenge. "I've done just about everything I can in retail except be involved in a turnaround situation, which is what this is," he says.
"In the past, the company took more liberty [with IT spending]. We're more cautious about that now," Davis says, acknowledging that Rite Aid has seen an undisclosed number of IT people quit as a result.
For example, before Davis took over IT, Rite Aid had staffed up for a major e-commerce drive. It planned to launch an Internet storefront in 1999 to sell and refill prescriptions online. But then the company decided that buying 25 percent of Drugstore.com Inc. would be less expensive and more lucrative.
After a 10-year, $7.6 million deal with Drugstore.com was announced in June 1999, "the people associated with the old plan were disillusioned," Davis says. (Rite Aid's stake in Drugstore.com was diluted to 15 percent after the Internet company's initial public offering in July 1999.)
He declines to cite turnover rates in the company's IT department or specify the size of its IT budget.
Several telephone calls to Kent Whiting, former senior vice president of information systems at Rite Aid, went unanswered.
Still, Rite Aid must be careful not to cut IT spending -- and experimentation -- too deeply, says Paul R. Brown, chairman of the accounting department at New York University's Stern School of Business.
The use of IT in product and inventory management is central to pharmacies, Brown says. "Rite Aid is still struggling and in an industry that's highly, highly competitive," he says. IT strategy "is one of the last areas where I'd be shooting for no room for error."
Righting Wrongs
In response to its huge losses, Rite Aid has said it expects to spend more than $94 million to reassess and restate its financial results for 1998 and 1999. That includes rerunning mainframe-based accounting systems and paying IT people overtime to work with internal and external accountants and auditors during the process.
Still, Rite Aid doesn't plan to replace its combination homegrown/Geac Computer Corp. accounting system, though Davis had expected to do that when he took the job. "The basic capabilities are OK," he says.
Instead, Davis says he plans to build a new decision-support application to refine financial reports that flow through the accounting department. It will be a combination of an as-yet unselected package and internally built software.
One of the risks Rite Aid faces in spending less freely on IT is falling behind key rivals Walgreen Co. and CVS Corp., says Mark Husson, an analyst at Merrill Lynch & Co. in New York.
