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Health Care Industry

Thrifty PayLess - Annual Report

Drug Store News, April 28, 1997

Two dramatic events marked 1996 for the 1,000-store Thrifty PayLess chain. The first was TPI's initial public offering in April. The second, six months later, Rite Aid's announced acquisition of Thrifty PayLess in a stock-swap merger, signaled the demise of the largest drug chain in the West.

Before there was a Thrifty PayLess, there were two Western region chains. Each experienced dynamic upheavals in the last half dozen years. During that time their systems and assets were streamlined in ways that made a deal like the Rite Aid merger possible.

Thrifty's tradition dates back nearly 70 years. Its name is well known in California and has been familiar in other states including Arizona and Nevada, where it had stores at one time.

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By 1990, Thrifty's stores, many of them old and shabby, had slipped behind the times. One reason was an incompatible parent, Los Angeles-based Pacific Enterprises, a conglomerate with its primary business in utilities. Along with Thrifty Drug (acquired in 1986), PE's stable included 40-unit Oregon-based Bi-Rite Discount stores, Seattle-based Pay `n Save drug chain and three sporting goods chains.

In May 1992, PE sold its Thrifty Corp. subsidiary with its 580 Thrifty Drug Stores to a management led buyout backed by a dozen Thrifty executives and headed by the Los Angeles-based investor group Leonard Green & Partners. The new company was called Thrifty PayLess Holdings.

The new Thrifty Corp. split off the sporting goods unit into a separate operating division. At the same time, PE sold the 124-unit Pay `n Save drug chain to PayLess Northwest based in Wilsonville, Ore., a subsidiary of Kmart Corp.

This foreshadowed another twist two years later, when an assimilated Pay 'n Save would be rein-corporated back into Thrifty PayLess. But five years ago, Pay 'n Save was a manageable acquisition target. The formats of the two chains, Pay 'n Save and PayLess, were similar. Both had large stores with wide front- end selections. PayLess tackled the electronic melding of the two POS systems, ordering and warehousing, closed overlapping stores and mounted a high-visibility campaign to welcome customers to be converted stores.

Meanwhile, in California and the Southwest, Thrifty Corp. was closing stores at a fast clip, liquidating inventory, leaving entire markets such as Arizona and Nevada behind, and reducing the chain by 20 percent or by almost 100 stores within a year.

Phase two

In the next merger phase, Thrifty's parent, TCH Corp., headed by Green & Partners, acquired the 570-store PayLess Northwest from its parent Kmart Corp, which had acquired it in 1985. The billion dollar deal, executed largely through a stock swap between Green & Partners and Kmart, was announced in fall 1993 and became final in April 1994.

Soon the TPI operation moved out of Los Angeles, despite civic outcry, to PayLess headquarters in Wilsonville, Ore., where PayLess chief executive Tim McAlear headed the combined chain. A few Thrifty buyers moved North, but most didn't.

To make this merger work (Thrifty had 500 stores, compared to the 100-store Pay `n Save assimilation), Thrifty PayLess contracted for a new IBM System 2000 to supersede both chain's POS, replenishment and warehouse management systems. It took 18 months before the data merge was accomplished.

Before that could be achieved, there was more streamlining. Early in 1995, Thrifty PayLess pulled out of Hawaii, divesting 17 stores, including those it had painstakingly converted from Pay `n Save to PayLess. On the mainland, two distribution centers and about 100 stores were closed, although the chain continued to open about 20 stores per year.

After the full data merge of Thrifty and PayLess was implemented in fourth quarter 1995, operational benefits became evident in first quarter 1996 and the retailer showed a 27.6 percent increase in operating profit. Shortly thereafter, in February, TPI announced that it would issue 29 million shares and take the company public, meaning that about half of TPI would be publicly traded while private shareholders, including Green & Partners and Kmart, would retain a majority postion.

At the same time Thrifty PayLess staff was working hard to wrestle unity and operating profit from the two chains, on the pharmacy side TPI was busy fortifying its position as the Western chain with the most pharmacy doors for managed care contracts.

In early 1996, the chain launched Thrifty PayLess Health Services, its pharmacy benefit management division. The company claimed that within a year of the merger, leading toward formation of the PBM, it had landed about 400 third party contracts. It projected that TPHS would have 500,000 lives under its management by the end of 1996.

Now, with a merged data stream demonstrating the chain's operational achievements, a new PBM and a more-or-less successful public offering, the time was ripe for Thrifty PayLess to take the next step.

It turned out to be Rite Aid.

Health Care Industry

Thrifty PayLess - Annual Report

Drug Store News, April 28, 1997

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