reveries - beth kaplan

JULY 1999

"I never thought I would leave Procter & Gamble." Beth Kaplan, marketing chief of Rite Aid, says the words like she still doesn't quite believe what she's done.

"If you had asked my business school friends, or any of my friends early on in my business school career," she continues, "there was one word written across Beth Kaplan's forehead, and that was 'Lifer.' There was no question. I was a lifer at Procter & Gamble."

So what happened?

Well, it goes something like this. When Beth moved to Baltimore to run P&G's Noxell division, she became friends with Martin Grass, the chairman of Rite Aid. Martin had just moved to Baltimore with his family. They had some mutual friends who sort of fixed them up, if you will -- Martin and his wife and Beth and her husband. They thought, you know, Baltimore is not that big, and the Grasses and the Kaplans ought to know each other.

Rite Aid obviously was a very big customer of Procter & Gamble's. So Beth spent a lot of time at Rite Aid. And then Martin became CEO of Rite Aid. He had this vision of creating a brand and turning Rite Aid into a very different kind of company.

Martin knew he didn't have anybody who knew anything about marketing because Rite Aid was a company that never advertised and never marketed. The marketing group primarily put ad slicks together -- and not even that many. Martin had just hired an advertising agency to create the first brand advertising for Rite Aid and concluded he needed someone to really run the marketing.

Beth elaborates: "So, I left Procter & Gamble because Martin was really persuasive. I turned him down a couple of times. He kept coming back. It was really hard because I like Martin so much. He is really a friend and I didn't want to -- it wasn't like going through a recruiter where you can easily say "thank you but no thank you." He kept calling and saying, 'Let's have lunch.' Or, 'why don't you come up and see me.' Or 'I'll meet you over here. I'm not going to let you say no.'"

I grew up in the Midwest, in Omaha. That's interesting only to the extent that most people find it surprising that somebody actually grew up in Omaha.

And then Beth lays it all out with the efficiency of a Procter & Gamble memo: "Joining Rite Aid was an opportunity to make a huge impact. Rite Aid, unlike P&G, was extremely lean. They didn't have another Beth Kaplan. At P&G, notwithstanding that I was one of the senior women in line management, when I left, the next day they had two or three really top-flight people ready to step into my job.

"So it was an opportunity to have an impact, and not just in a little backwater company. Rite Aid at that time had $6 billion in sales, which over the last couple of years, through acquisition and internal growth, has grown to $12 billion of sales. We've got four thousand stores across the country.

"It was a chance to have an impact, and a chance to eventually run the company. My family had really fallen in love with Baltimore, my husband loves it. I knew that I couldn't stay in Baltimore with P&G. Eventually my career was going to grow and I was going to have to leave the country or go back to Cincinnati. It was an opportunity to put down some roots."

Do your friends from the packaged goods world treat you any differently now that you've crossed the great divide to retail?

Yes, they treat me with a lot more respect! I'm now a customer! People like me a lot more now!

What did you find most challenging about making the transition?

It was extremely challenging. It's not for the faint of heart. You grow up in one system and now you move to a different system. It's not like you move from one consumer goods company to another, where the same fundamentals are in play. Some of the fundamentals are the same, but there are a lot of other success factors that I knew nothing about.

I had no understanding of how a retail store really operated, how you make money running stores! I knew precious little about purchasing. I didn't know a lot of the operational and executional issues. I had been running a beauty business and here was a company about pharmacy. I knew nothing about health care and pharmacy.

I left Omaha when I was eighteen and went to the University of Pennsylvania. I was a campus tour guide and one day I gave a campus tour to Bob Goldstein, who was the senior staff marketing officer for Procter & Gamble, and his son.

So there was a lot to learn and I was very fortunate. Besides, obviously having Martin Grass as a proponent, our current chief operating officer, Tim Noonan, really took me under his wing and taught me and continues to teach me.

Having grown up in the kind of polished world of Px, you kind of trust that everybody does what's right. I never had reason to question people's motives, etc. But you go to a retailer -- not just Rite Aid but any retailer -- and I don't want to call it the seamier side of things but the fact is you're running stores. You churn retail employees. Many of them are making minimum wage. You have to deal with things like security and fraud, shrink. I always trusted people. I've learned to be a little less trusting, a little bit more suspicious. The last three years here have been a lot more about what the real world is like.

The retail industry is heavily dominated by men. What's that been like for you?

Martin is very sensitive to this. He said, "you know, everybody is going to take shots at you. You're from the outside, you didn't grow up here." The few outsiders who did come in ended up getting their heads chopped off. None of them made it because they didn't adjust to the intense culture here. The attitude is that tomorrow's too late and we've got to get it done now. Very responsive. Very intense. We work six days a week.

So, Martin said, "you've got to do the kinds of things that make the culture accept you." Part of it was working the hours, rolling up my sleeves and doing what was necessary. The culture also recognized that I brought something to the party that nobody else brought. We had some early successes. I kind of earned it. I'm not saying people don't take pot shots at me. I'm sure they still do.

I'm fairly visible in the industry. That makes me different. I think it's a benefit to the company from the standpoint that I am our customer, in many ways. Even more than when I was at Px, a lot of the time I just trust and go with my instincts here because I can think like our customers think. A lot of what I've done, I've brought to bear out of my own personal experiences. Our target is a woman, late thirties, early forties, with a family. That's me!

I had no idea who Bob Goldstein was. I didn't even really know what Procter & Gamble was.

So when I go into our stores I always wear two hats. I wear a merchant's hat. I go into the stores as an owner and think about what's wrong with this store. I also go in as a customer. I think that certainly makes for a different perspective that benefits the company.

How much of the new Rite Aid is being created in Beth Kaplan's own image?

I wouldn't say it's being created in my image. It's being created in our target customer's image. There are a couple of things we've done that I'm very proud of. One is that we've re-designed our whole beauty department to make it very integrated, very prominent, in the store. We're a store for women.

I always tell the story of, when I first got to know Martin, I went into a Rite Aid to go look at Cover Girl. I was dismayed by the way Cover Girl was presented. I remember having dinner with Martin and teasing him and saying, "Gee, Martin. You know, I had to climb over the displays of the plastic turkey platters to get to the Cover Girl!" He rolled his eyes and said, "Oh my God, you're right."

Cosmetics was a business that was an afterthought for Rite Aid, and the whole beauty business was relegated to "yeah, we've got to carry it but we don't like it." What we've done over the last three years -- and it's not just me, it's my merchandising organization and the category managers working together x is we've made beauty front-and-center in the store. You walk in these stores and you are hit over the head with beauty. The store is about beauty. The beauty category has grown very, very strongly for us. Cosmetics, in particular.

One of the early wins was when we designed this marketing program called the Rite Aid cosmetic money back guarantee. It was a sensation. People were talking about it. It was such a simple idea. Frankly, flattery is people following in your footsteps and virtually every retailer followed us.

Cosmetics are a badge product. You normally don't think of a drug store as being a badge retailer. How do you reconcile that?

You need to realize that actually drug stores were the core franchise of the mass market cosmetic brands -- long before discount department stores like Wal-Mart, and certainly before grocery chains. So, in fact, there used to be a group of brands called franchise cosmetic brands which were always sold at drug stores.

About a week later I got a letter from P&G recruiters that they'd love to talk to me the next time I was in town. There began a long courtship. I joined P&G five years later, after getting my MBA at Wharton.

So if you go to the roots of Revlon, or L'Oreal, they were sold almost exclusively through drug stores. It's only recently that L'Oreal was sold in Wal-Mart and grocery stores. So women have always shopped for cosmetics in drug stores.

Now, certainly there is a prestige customer who shops at department stores. They buy Estee Lauder and Lancome, etc. But the drug stores have always had a core franchise in cosmetics. Walgreen's was always a leader. I remember in junior high and high school I bought all of my cosmetics at Walgreen's. That's just what you did.

I've paid attention to three big categories. One is the beauty business. Second has been vitamins and nutritional supplements. We started two years ago with a program we called the vitamin institute. We trained our pharmacists to consult with customers on vitamins and herbs.

We took a page out of the book of GNC, long before we had an alliance with them. That's a great business. And then obviously our commitment culminated in a strategic alliance with GNC, which is groundbreaking in the industry. I'm very proud of that. It took us a long time to negotiate. We had to negotiate for over a year. But every month it got better and bigger.

If you boil it back to some of the big things that made the difference for Rite Aid during this time frame, one of them was the GNC alliance. Certainly there's our new store format and the acquisition of PCS, which is the country's largest pharmacy benefit management company. But another big thing that made a difference was the GNC alliance.

Bob Goldstein became a mentor for me. Nobody assigned Bob to me or me to Bob. He just sort of adopted me. I'll never forget. He did things behind the scenes.

So you've got the cosmetics, the vitamins, and the third area is what?

Greeting cards. A big business for us. A very profitable business. We were sorely underdeveloped. We've partnered with American Greetings to the point now where we're expanding totally into a greeting card department that's totally proprietary to Rite Aid. You won't go in and see our greeting card department anywhere else. Basically we're remodeling all four thousand stores. It's a pretty big deal.

You've put perhaps less emphasis on food.

That's not totally correct. We have Food Marts and certainly I placed, especially over the past six months, more emphasis on consumables such as snacks and candy and fill-in impulse shopping. Things like milk and eggs. We actually have a new Food Mart shop design we're starting to roll out.
But food is a little less attractive because of the profit margins. The three categories I've focused on -- cosmetics, vitamins and greeting cards -- have extremely robust profit margins, relative to pharmacy and the store as a whole.

It's a little tougher to make money in the food business. It's also not the core reason for being for drug stores. The big thing I did when I got here was we figured out who our target was. We let go of being other things. We made a choice. We're very clear that we're for women.

You've also focused, to a degree, on ethnic consumers.

Yes. That's largely because we've always been a retailer in the urban core -- long before it was fashionable to be a retailer in the urban core. We continue to invest significantly there. In many communities we are the only retailer. You go into certain pockets of real inner city -- whether you're looking at North Philadelphia or West Philadelphia or inner city Buffalo or inner city, downtown Detroit.

It's always been very profitable for us. It's not just that we're being philanthropic. We're doing good things for the community and we're proud of that. But having said that, it's a good business for us because we've filled so many unmet needs there. We are a local community store ,where people don't have cars so they walk to you. Food is very important in those stores, by the way. We sell a lot of food. In many cases we are the food store.

We've also learned that we can take our small stores, relocate them, and make big, beautiful stores in the urban core and do very well with them. So, what came with that is obviously a higher percentage of ethnic consumers than most chain drug retailers.

In South Central L.A., we went into a shopping center that was burned to the ground in the riots. We built an absolutely gorgeous, seventeen thousand square foot new store that is doing extremely well. It has a 99 percent African-American customer base. We're good at that. So we're focused on the Hispanic customer, the African-American customer. We reflect that in our merchandise mix and prioritize it.

P&G to me was like a hand and a glove. I loved the company. I spent a good part of my adult life there. I started working there when I was 22 and left when I was 38.

Are there any other segments, like the mature market for example, that hold special potential for Rite Aid?

We have clearly, with our focus on vitamins and nutritional supplements and pharmacy, a very critical secondary target are women forty or fifty-plus, where the consumption of pharmacy goes way up and certainly consumption of nutritional supplements accelerate. So that's a very important market.

The other important target audience that we've gone after is teens, particularly for the beauty business. We're the only chain drug retailer that advertises in teenage books like Seventeen and Teen People. We're trying to become the store of preference for teenagers for beauty. We've got the right brands and we want teens in our stores.

What has been the biggest obstacle in the way of establishing Rite Aid as a national brand?

The biggest obstacle is that most people grow up with drug store retailers as brands that they know and love. So if you grew up in New Orleans you grew up with K&H. If you grew up in Seattle you grew up with Payless. If you grew up in Southern California you grew up with Thrifty. The drug store business was very local, very community based. National chains, with the exception maybe of Walgreen's, were virtually non-existent.

So, here you come and you're Rite Aid. You're suddenly going into markets where people never heard of us. We're replacing brands that customers didn't think were perfect by any means, but that they had emotional relationships with. That's tough. I was down in New Orleans. We've done a lot of customer research. We bought a chain called K&D in New Orleans, which had been in business almost a hundred years. What they were known for was the color purple. Everything in the store was purple. The cash registers were purple. People wore purple smocks. I mean, purple!

So, here we come in and rip out everything that was purple. We installed Rite Aid red and blue. I went down and did the research and I'll never forget this quote. This woman, a relatively young woman, said: "People in New Orleans are different. You just don't understand. We knew that K&D was dirty. But it was our dirt. Rite Aid's come in and made the store's all pretty and clean, but it's just not the same." What are you going to do?

So it's been more difficult to establish the Rite Aid Brand in certain geographic regions?

Yes. We were very worried about California because the Thrifty brand was very entrenched. I remember flying out there right when I acquired the company. I was eight months pregnant. I remember flying out there and hearing customers talking about "My Thrifty." Waxing on about their childhood experiences, getting ice cream and buying toys at "My Thrifty."

The story in California is that we've been very successful. We've remodeled a lot of stores. You go out there now and the word "Thrifty" is gone from the vernacular. People talk about Rite Aid. It's been hugely successful.

We've had more trouble in what I'd call headquarter cities, like Portland, Oregon, where Payless was headquartered. That's been a more difficult transition. We bought two companies in the Southeast going on two years ago. One was Kx in Louisiana as I mentioned and one was called Harco in Alabama. The Alabama transition has gone beautifully. The business has gone way up. People love us; we've cleaned up the stores. The merchandise assortment is better. Wildly successful.

In Louisiana, we've struggled. New Orleans is a bit of a different world. People didn't move off K&D purple so easily. Walgreen's has a really strong presence in there. The Walgreen's had a cornerstone that said 1905 on it. Walgreen's has been there forever.

Then an interesting thing happened. Procter & Gamble asked me to go to Baltimore to run Noxell, which P&G had acquired in 1989.

We've faced these situations before. We had trouble early on when we bought a chain of drug stores called Perry, in Detroit. Today Detroit is a very good market for us. We know that we will succeed. It just takes a little time. We've really got to win the customer over.

How do you think Rite Aid's emergence as a national brand will affect the fortunes of packaged goods as national brands?

Oh, I think they're very symbiotic. The relationship we have with big consumer goods companies has really changed over the last couple of years because we're bigger and have more resources. Consumer goods companies are much more willing to dedicate their resources to develop our business. We can offer so much more than we could back to them. It was interesting that P&G restructured again and one of the objectives of the restructuring is to work closely with retailers to tailor things. I mean, P&G tailoring? You about fall off your chair!

It used to be that P&G came in three flavors. A, B or C -- pick one. That was being flexible. It was certainly an improvement over years before when they said, "here's the one flavor you could have it in! You want chocolate? Here's chocolate. You don't want chocolate? Tough." Then they offered chocolate, vanilla and strawberry, but if you needed chocolate with nuts, forget it.

So now they're sitting down with us -- and again I don't think they're doing that with every customer because you can't devote the resources that way. But, listen, Rite Aid, when I was at Noxell, Rite Aid was my -- this is when Rite Aid was just 2,500 stores -- at that point in time Rite Aid was about my sixth largest customer.

Many of the larger consumer goods companies, especially those that are driven by beauty and healthcare, were sometimes number three, number four or number five. We can be a very big part of their business. Many times we're not bigger than Wal-Mart, and generally not bigger than Kmart, but sometimes we're bigger than Target. Many times we're bigger than many other chain drug customers. You can marshall the resources, you can create things uniquely for your store. So I think it's a very symbiotic relationship.

It was my dream come true. It was much more like being the president of a small company than anything you would have experienced in Cincinnati.

Now that Rite Aid has made a big investment in Drugstore.com, how will you integrate your on-line and on-land operations?

It's funny. I stood up at a Morgan Stanley Internet investors conference, an analysts conference, a couple of months ago. I stood up and said I didn't think there was much of a future for stand-alone Internet drug stores. The real win is a combination of on-line and on-the-ground. That wasn't really popular among the Internet people in the audience.

Everybody was thinking that drugs would be like Amazon and books. But I sat there and listened to all of these Internet presenters and they all talked about the size of the pie -- that health care is a kajillion dollar business. They kept saying it was a hundred times bigger than books. But they didn't understand pharmacy. They didn't understand healthcare, which is not like selling books.

In pharmacy -- who's the payer? Who pays for your prescription? Not the customer. Eighty-five percent of the time people slap down a plastic card and an employer or some kind of health care organization pays for the prescription. That changes the entire dynamic. These on-line drugstores, initially -- they understand it today -- but early on all they could see was that, my God, prescription pharmaceutical is a $100 billion business. I remember one Internet drugstore CEO saying, "Even if I get two percent of that I'll be happy. It's such a humungous business."

Well, that wasn't the point. The point was, people have to be able to pay for their prescriptions on-line. So what happened was, these sites got some traffic, but their insurance plans weren't accepted on-line. So, my God, these stores were doing no business. The two big ones, Planet Rx and Drugstore.com, came online in February and March and basically they realized they had no business.

That Morgan Stanley conference was in March. By early March or late April all the on-line drug stores were talking to us because they suddenly figured out -- holy cow -- they couldn't fill acute medications, either. If I get home from the doctor and I've got a prescription in my hand, I can't wait 48 hours to get it. I want it now! So they cut themselves out from that half of the market because the market breaks about half acute and half chronic.

The acute is tossed because no one can wait 48 hours. The chronics were relegated to the cash customers, which is like my mother, who has no insurance coverage for pharmaceuticals. She'll look for the cheapest price she can get. But that's a small and increasingly smaller part of the pie. As Medicare reform gets passed -- and it probably will -- even that will go away because my mother will get coverage through Medicare.

The on-line pharmacies suddenly woke up and said, "number one, we need an on-the-ground retail partner because that will bring the managed care contracts that we need and number two, we need someone to fill on the ground for acute medications."

How big a business do you think on-line drugstores is?

Noxell was also very retail-driven. There were a lot of aspects of the business that set me up pretty well for my transition into retail.

The jury's still out on how big a business this is. Who knows? We actually were starting to do Internet sales in fall of 1997. It's a nice little business for us. But we decided that if we were going to play in this space we had to be number one or number two. If we just did it on our own we were never going to have the clout. It would just be too fragmented and too cluttered. They needed us. We wanted a bone fide partner who knew Internet and had the resources and was credible. We talked to everybody. After many months of discussion and assessment we ended up partnering with Drugstore.com.

Other than the Internet, how else do you see technology converging with marketing for Rite Aid?

Oh, I laugh about that! I thought I joined a merchandising company; what I really joined was a technology company! Pharmacy technology is critical for the future because, for pharmacies to make money, to be able to do the prescription volumes they will do in the future, you've got to bring technology to bear.

We have in test in three markets now, a technology called RapidScript, which is an automated pharmacy system. Basically it allows us to make brilliant marketing claims, such as ten minute prescription fills and more security checks. All kinds of really important claims. We've developed advertising and are marketing it heavily in a couple of markets to see if we can make that work.

There's a lot of industry buzz about loyalty marketing. It seems like most of loyalty marketing so far is just a synonym for targeted couponing and promotions. Do you see a larger purpose for all that data?

I think loyalty is tough, I really do. We've been test marketing this for a couple of years now and customers like the program. Loyalty club market baskets are larger than non-loyalty club market baskets. But you don't know what's chicken and egg there. You don't know whether your best customers just signed up, for example.

I think that people want a relationship with the pharmacist. That's the core. I run around here saying, "It's the pharmacy, stupid." And I think you can use database marketing to further cement relationships at the pharmacy, with the pharmacist. I think it's more difficult in the front end, but not impossible. We're experimenting with a lot of different things.

But where the relationships really count is with the pharmacist, because that's where the loyalty is. Consumers will go buy their shampoo anywhere they happen to be, where it's convenient. When they get a prescription filled, they like to go to Jack who knows them, their history and their family and has provided them with good service in the past. I think database marketing can help us there.

What is the thinking -- the big idea -- behind the format?

The big thinking was that it was designed for women. We have tons of windows. The building is ringed on three sides with windows. Our color palette is not traditional drug store colors like red and blue and black. It's pastels. It's a very light and bright store.

The whole concept of the layout of the store is very different and remains today controversial. We designed a series of stores within stores. Most drug stores you go into are a straight line of gondolas. You walk in and you make a bee-line for the pharmacy. You don't pass go, you don't collect $200, you don't see anything else in the store.

We created a drive aisle that actually takes you through the store before you get back to the pharmacy. It divides the store into essentially four quadrants which are each stores within the store. We have a beauty store, we have a greeting card and seasonal store, and we have a general merchandise store. We have a healthcare store, which includes vitamins. So we laid it out in four quadrants to create a more intimate shopping experience within each of these core parts of the business. That was very controversial because it's a totally different concept from what anybody else is doing.

It's been received extremely well. If you look at our numbers, where we've put these new stores in, we've received very strong growth in years one and two and the growth continues in year three. The best evidence is that we'll take a two million store, a six thousand square foot store in a strip mall, relocate it out onto a busy street corner and re-design it as a ten thousand square foot store. Within three years it becomes a four million dollar store. It's pretty powerful.

There have been several stories lately about how drug chains are moving into small towns, tearing down old and somewhat historic buildings and replacing them with bland, brick boxes. What's your point of view on that?

I still feel very connected to Noxell, even though I haven't been there for three years now. A lot of the people I hired are still there.

There's no one answer. It very much depends on the situation in the community. Rite Aid actually has gotten positive press in many cases where we've taken a historic building and worked within the historic building. For example, in Brooklyn, we took a historic bank building and remodeled it, leaving the edifice the way it was. We've done that in San Francisco. We've done it many major metro areas. We took an old department store in downtown Baltimore, took a big chunk of it and turned it into a beautiful new store.

So, many times we certainly work to try to preserve the architectural integrity of the historic locations. In other cases, the fact is that you can't work with the historic structure, there's no support in the community broadly for the structure and you end up tearing it down. We are, though, very sensitive to communities. If you go up to our stores in Maine and New Hampshire, they don't look like the stores in Philadelphia. We tailor the exterior of the stores, the elevations are very different. We'll use clapboard and make it look like it fits in the community. We have a design package that we use in Southern California that's different from Maine and New Hampshire.

What do you want people to think of when they think of Rite Aid?

That we understand what women need and we've got the novel solutions for people's everyday drug store problems. So that, when they think about the sea of drug chains, where one is almost indistinguishable from the other, they think about Rite Aid as being for women -- and that it is also committed to creating real solutions to real problems. While a lot of the focus has been on Colgate Total, we're looking at where are the needs in the marketplace, where we can have a product in the marketplace that addresses a need in a meaningful way.