Rite Aid (NYSE: RAD ) may be late in launching in-store health-care clinics, but Rite Aid may quickly make up ground on competitors CVS Caremark (NYSE: CVS ) and Walgreen (NYSE: WAG ) following its purchase of the Texas-based RediClinic in April.
The RediClinic deal gives Rite Aid a proven model that shortens the company's learning curve and catapults it into competition with its larger peers, so let's take a closer look at Rite Aid's plans for in-store health-care clinics.
First, a bit of background
RediClinic already operates successfully within 30 H.E.B. grocery stores in Texas, and based on Rite Aid's earnings conference call last week, the company is pressing forward with rolling out RediClinics in its stores soon.
The market for in-store clinics is intriguing. Historically, under-insured patients and patients needing off-hour care have made their way to pricey hospital emergency rooms.
Now that health-care reform is adding millions of new Medicaid and private insurance members, urgent care and in-store clinics have the potential to win away business from those emergency rooms as insurers direct consumers to lower-cost alternatives.
Rite Aid is already seeing a wave of new patients thanks to reform. In its most recent quarter, the company reported that its pharmacy script volume rose 2.3% in the past year, with a major driver of that growth being new Medicaid patients in the 26 states that embraced Medicaid expansion as part of Obamacare.
That early success suggests that RediClinic could see dramatic sales growth out-of-the-gate, giving Rite Aid a quicker return on investment than CVS and Walgreen, which have had to work hard over the past couple years to carve out the in-store clinic niche, without the advantage of reform.
Plans for a rollout
Rite Aid has run the numbers and expects that adding a RediClinic to its stores will cost roughly $200,000 per store.
In return for that investment, RediClinics will not only generate revenue on their own by providing basic health care services using nurse practitioners, but also by driving prescriptions and OTC medicine sales.
Rite Aid's RediClinic roll-out plans include opening 70 in-store clinics over the next 18 months. Those clinics will be launched in Rite Aid stores that have already been remodeled into the company's new (and highly successful) wellness format.
According to the company, those new wellness remodeled stores are outperforming legacy stores. Front-end sales and prescription volume at wellness stores were 2.6% and 1.2% higher than at non-wellness stores last quarter, respectively. Adding clinics to these top-performing stores should further boost same-store sales, providing additional margin friendly leverage.
Fool-worthy final thoughts
Rite Aid has also previously said it would consider opening additional RediClinics in non-Rite Aid stores. That suggests that RediClinic could continue to capture market share in Texas by expanding into other H.E.B. locations (H.E.B. operates stores in 150 communities). It could also conceivably serve as a launch pad for Rite Aid to enter other important retiree markets like Florida, where it's currently absent. Publix, one of Florida's largest grocers, had previously hosted 40 Little Clinics until it pulled the plug on leases in 2011 following Little Clinics' sale to competitor Kroger.
Rite Aid won't surpass CVS or Walgreen's clinic market share anytime soon. CVS already operates 800 MinuteClinics (with a goal of 1,500 by 2017) and Walgreen plans to operate more than 500 by year end, but Rite Aid's RediClinic's should provide additional tailwinds to the company's growth for years to come, and that should prove profit-friendly.
Even Rite Aid may have a hard time keeping up with this stock
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