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Presented by: Brendan Langan Director of Retail Insight April 29, 2009

Chain Drug Re-Planning for an Uncertain Reality. Presented by: Brendan Langan Director of Retail Insight April 29, 2009. Up, Down or Sideways? The New Path to Partnership Full Steam Ahead Living on “Borrowed” Time. MVI Planning Forum.

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Presented by: Brendan Langan Director of Retail Insight April 29, 2009

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  1. Chain Drug Re-Planning for an Uncertain Reality Presented by: Brendan Langan Director of Retail Insight April 29, 2009

  2. Up, Down or Sideways? The New Path to Partnership Full Steam Ahead Living on “Borrowed” Time MVI Planning Forum

  3. Up, Down or Sideways?Re-Planning for an Uncertain Reality • Step 1: Survival of the Fittest • Decade of growth and consolidation • Not everyone will be here, at least in current form • Near-term challenging, but this too shall pass • Step 2: Retail Climate Change • Health care providers 1st, retailers 2nd • Step-change underway, necessary given heavy Rx economic model, growing complexity of health care & hyper-competition • Step 3: Mandate for Retail Step-Change • Drug must look very different 2 - 3 years out • Requires step-changes to the box, assortment, and brand necessary to build clearly defined & differentiated consumer value proposition • Must be easy, relevant, and/or different Source: MVI analysis

  4. If You Only Use 2 Slides Today… Chain drug to grow at 3.6% CAGR 08-10E to USD159 million, 10.3% of $ Added… Slowing growth and deflation (PL & Generics) Despite slowdown, WAG still projected to generate 60% of chain drug sales thru 2010E, adding $600MM in FE sales and 280 stores Longs enters base in 2010E, to outpace WAG in FE sales adding $900 million thru 2010E (5% CAGR) and 80 new stores Shrinking store base and per store FE and Rx productivity driving decline in sales and stores Source: MVI research and analysis

  5. Channel: Key Planning Considerations • Past (1990 – 2008) • Double digit growth and consolidation, fueled by rapid growth of Rx, changing economic and operating model, and need for scale • Present (2009 - 2011) • Prescription unit and sales volume slowing • From channels to duopolies, leaders are pulling way • Consolidation accelerating and competition intensifying • Unemployment is the indicator to watch (now 8.5%) • Future (2010 and Beyond) • Aging and diversification of the population • Health and wellness trends • Fewer, more sophisticated and focused customers • Did we lose something along the way?

  6. Channel: Key Planning Considerations • Location, Location, Location • One Size Does Not Fit All • Customer (She) is Always Right • Less is More • Cash is King!

  7. Up, Down or Sideways? The New Path to Partnership Full Steam Ahead Living on “Borrowed” Time MVI Planning Forum

  8. Walgreens New Sense of Urgency Historical Stock Price (Jan 2006–Feb 2009) 2006 2007 2008 2009 Q4 FY07 Earnings Miss Jeff Rein Named CEO CVS Announced Caremark Merger Re-launched Prescription Savings Club (PSC) Acquired Happy Harry’s 2nd “Unsolicited” Bid For Longs Acquired CuraScript Infusion Pharmacy Walmart Launches $4 Generics Further slowed organic store growth Acquired Take Care Health Acquired Option Care Acquires I-Trax and Whole Health, Forms New Health and Wellness Division Credit Ratings Cut, Announced Plans to Slow Organic Growth Appointed new CEO Greg Wasson Cut corporate and field management positions by 9% Walgreens Withdraws Bid for Longs, Credit Ratings Cut Abrupt Departure of Jeff Rein, Alan McNally Named Chairman and Acting-CEO Source: Company reports, MVI research and analysis

  9. Walgreens 2011: More From the Core Source: Walgreen Co., MVI research

  10. Slowing Organic Unit Growth Net Organic New Drugstores 161 529 475 280 200 9% CAGR 2.5% - 3% Source: Company reports, MVI research

  11. Mandate for Step-Change: Enhancing the Shopping Experience and Shop-ability What Does the Walgreens Brand Stand For? A Drugstore or Santa’s Workshop? Source: MVI store visit

  12. Redefining Convenience: When Location isn’t Enough & More Doesn’t Always = More Source: MVI store visit, research and analysis, Walgreen Co.

  13. The Challenge and the Opportunity • % of Baskets and Average Front-End Items per Basket Cross-sell Solution sell Understand and grow Learn and reward GOAL # of items in Basket Source: Walgreen Co.

  14. Step 1: Who is She? How Does She Shop? Source: MVI research and analysis

  15. Segmenting the Shopper • Efficient Eileen:Represents approximately 45% of sales. Young Boomer (or older Generation Xer) who is a frequent shopper – enjoying the convenient locations, efficiency and information delivered at the shelf. Shops with immediate need in mind (i.e. OTC). • Active Amy: Represents approximately 17% of sales. Busy mom who is a fickle, but family-focused convenience seeker. Less likely to stock-up and is not loyal to a specific retailer. • Socialite Stella: Represents approximately 16% of sales. Fun seeking consumer who enjoys the treasure hunt and likes the current store. Walgreens loyalist, who tends to be African American. Fill-in shopper who gets to know the employees personally and is a social-influencer. • Merry Maria: Represents approximately 11% of sales. Advice seeking, community-conscious shopper who tends to be Hispanic, a parent and interested in getting health and wellness advice. This Walgreens-loyal shopper reviews the circular before shopping and shops for entire basket. • Care Seeking Carol: Represents approximately 4% of sales. Older demographic (62 years old and older) with special needs. She is a heavy pharmacy user and health care is her top priority. Considers herself a traditionalist and does not typically use the Internet . Often has a smaller basket size and is looking for a personal service. Source: Company presentation, MVI research and analysis

  16. Segmenting the Trip Missions Source: Company presentation, MVI research and analysis

  17. Walgreens New Merchandising Strategy“Placing Bets” – Consumers, Categories, Vendors “We have to stop betting $2 on every horse. Not all sales from all categories are equal.” — John Fleming, Walmart Sept. 2008 Signature Power Staple Complement Category Identifiers “Best in US” “Products that are representative of who we are – the product categories we want to win in.” - - Kim Feil Examples: OTC, pharmacy, skin care, vitamins, photo, etc. “Best in Drug” “Products that are critical to a drug retailer and are part of a person’s everyday life.” - Kim Feil Examples: batteries, candy, dry groceries, snacks, etc. “In the Game” Routine categories with varying growth prospects. Examples: candles, stationary, household cleaners, toys “Convenience” “Categories you expect to find with something else.” – Kim Feil Examples: alarm clocks, apparel, electrical, hardware, light bulbs, frames, etc. Source: MVI research and analysis, Walgreen Co.

  18. Source: Walgreens.com, www.blind.com

  19. Grouping the Store into Solution Centers or “Worlds” to Improve the Experience Source: MVI Store Visits, MVI Analysis

  20. Redefining ConvenienceFrom Stack it High… to Less is More Tomorrow Today Source: MVI store visit

  21. CCR: Building Loyalty with Distinctive Assortment, Access and Affordability Tomorrow Today • Something for everyone • Best Offerings for valued customers • Item/department focus • Convenient solutions for essentials and discretionary needs • Item-intensive / labor demand • Personalized customer service Source: Walgreen Co., MVI research and analysis

  22. Walgreens 2011: Key Planning Considerations From One-Way to Fully Integrated – Overnight? • Optimize the Assortment • Placing bets on categories, what role do you serve? • Not just about reducing SKUs, though big push on there as well • Brand agnostic – developing solutions for her • Amplify Vendor Relationships • Alignment, collaboration, innovation and focus • Increased 2-way transparency and accountability (Contribution Profit) • Requires mindset shift from sq ft growth to optimization! • Effective Pricing and Promotion • Evaluating all promotional vehicles, including revamp of weekly ad • Less space (ad) and off-shelf = fewer, more impactful themed solutions • More dedicated to getting price/value right on KVIs (hybrid Hi Lo) • Enhance the Shopping Experience • No longer one size fits all, changing profiles and adjacencies • Increased focus on store standards, integrated marketing • THE WAY FORWARD: Partnership and Capabilities

  23. Chain Drug: Up, Down or Sideways? The New Path to Partnership Full Steam Ahead Living on “Borrowed” Time MVI Planning Forum

  24. CVS Growth Projections 2003-2013ERetail Sales Projected to Grow to $64.9 billion Longs Drug Osco/Sav-on Eckerd Source: MVI estimates; company reports

  25. The Big 3: Same Direction, but Different Rates of Growth Osco / Sav-on Eckerd Longs Brooks Eckerd Retail Drugstores 6,923 6,636 4,915 Happy Harry’s Source: Company reports, MVI analysis

  26. Locking Up Share in Key Growth MarketsDecade of M&A Fueled Expansion/Diversification Longs Drug Stores: Completed acquisition of 521 Longs Drug Stores in October 2008, gaining valuable real estate and market share in California, Hawaii, Nevada and Arizona Also picked up 4 distributions centers and RxAmerica PBM business MinuteClinic Small, but one of the single most strategic acquisitions of all Forms core of patient-focused healthcare strategy, plus growing demand from B2B customers (pull strategy) Slowing growth to focus on expansion of services Osco/Sav-on Remodels went off without a hitch, stores have been transformed to meet with CVS standards Southern California now outpacing “Core” CVS, both in terms of sales per building and margin S. California now the largest sales producing market in the chain Eckerd Continued progress in core acquisition markets Increased marketing efforts to gain Rx share in the face of stiff competition Source: Company reports, MVI analysis

  27. Acquisition of Longs Accelerated Expansion in N. Cal and Hawaii Source: MVI research and analysis

  28. Operated 6,923 Stores in 40 states and the District of Columbia as of December 31, 2008 Longs provided 529 stores and 4 DCs, making California CVS’s largest market 19 12 6 2 35 31 MA - 329 28 432 RI - 57 242 CT - 133 455 10 25 372 NJ - 257 4 DE - 1 311 289 233 MD - 166 64 49 DC - 53 244 29 46 57 389 288 126 34 127 2 184 2 147 295 33 493 87 681 44 Longs stores CVS States Longs Corporate HQ CVS and Longs States Longs Distribution Facility Source: Company reports, MVI Research

  29. The Competitive Landscape:Increased Direct Competition • Longs gives CVS a leading position throughout Central and Northern California, and Hawaii • It would have taken CVS 10 years to develop these markets organically • Facing intense direct in-channel and small box competition Source: Company reports, MVI Research

  30. Longs Heavy Shoppers More Affluent and Ethnically Diverse Heavy Shoppers: Demographic Summary 6% Source: MVI analysis based on Mid year 2008 IRI Panel Data

  31. East Coast vs. West Coast DrugstoresThe Longs Optimization Challenge How will CVS change the assortment in the newly acquired Longs stores? Source: Company reports, MVI analysis

  32. Pricing and Promotional StrategiesWeekly Advertising Circular Longs employs a classic Hi-Lo strategy, of which the weekly circular and United Rewards Program play a key role Longs distributes a weekly advertising circular, offering a wide assortment of promotions Longs circular strategy is more akin to a grocery format, underdeveloped PL relative to CVS Source: ECRM, MVI analysis

  33. CVS: Key Planning Considerations • California is now largest market, (12% of base ~850 stores) and a disproportionate share of total sales • Still, CVS is a national chain with a New England state of mind • Not completely comfortable in a store over 11,000 sq ft • Must now contend with a box upwards of 4X the size • Managing this from centralized HQ in RI could prove difficult • CVS will need help from suppliers to get arms around very different markets, footprint, economic model, promotional and merchandise mix and shopper base • Opportunities to improve sales productivity and GM% though introduction of ExtraCare, CVS’s private brands, mix shift, and focus on shrink • How far assortment optimization? Will CVS still cut keys? Can CVS localize in a meaningful and scalable way? • May be dilutive in near-term, but the right long-term investment • Concentrated exposure to regional economic conditions • Facing increased small box competition

  34. Up, Down or Sideways? The New Path to Partnership Full Steam Ahead Living on “Borrowed” Time MVI Planning Forum • “In the struggle for survival, the fittest win out at the expense of their rivals because they succeed in adapting themselves best to their environment.” • – Charles Darwin

  35. Today’s Retail RealityLiving on “Borrowed” Time • Turnaround of acquired stores taking longer than expected • Plan in place to address weakening operating trends, execution and credit metrics • Revamped management team focused on reducing costs and working capital to drive cash flow • Heavily leveraged, but last summer’s debt refinancing (though costly) bought some time • Liquidity “ok” for now, but secondary sources unreliable and options constrained…. Cash is King! • Amended A/R facility, albeit reduced and repriced • Should regain compliance with New York Stock Exchange • Primary banking and vendor relationships stable, management maintaining open lines of communication Source: Company reports, MVI research

  36. Can Rite Aid Shrink to Profitability?Growth Projections 2003-2013E Preservation - closing underperforming locations,optimizing resources and consolidating distribution network 1,726 (158) (105) 12 (45) 9 (18) 10 (22) (26) (33) Retail Stores USD Billions Source: MVI estimates; company reports

  37. Rite Aid’s Top Priority is Generating Cash Flow to Begin Deleveraging Adj. EBITDA and Margin Debt and Debt / Adj. EBITDA

  38. Debt Maturity Profile(Estimate effective November 29, 2008) USD in Millions • Effective November 29, 2008, Rite Aid reported USD6,347.7 million of debt and capital leases outstanding, excluding off balance sheet operating lease obligations with an estimated debt equivalent of approximately USD10 billion • Last summer’s debt refinancing, though costly, bought time to execute turnaround plan • Plan to refinance the revolver and tranche 1 term loan towards the end of 2009 / early 2010 • Refinancing expected to be a combo new revolver, term loan and senior secured notes • No other significant debt maturities until June 2014 Source: Company reports, MVI research and analysis

  39. Customer Satisfaction LevelsMonday Ad Outs – Off Shelf Financial Constraints Compound Operational Issues Source: MVI store visit

  40. Cash is King! Cash Flow from Operations Historical Gross Liquidity

  41. Monthly Same Store Sales Source: Company reports, MVI research and analysis

  42. Scale Helps, Doesn’t Fix Legacy Decisions or Structural Issues 900 in the West 4,000 in the East 3rd Largest Chain in the US with 4,900 Stores 138 81 38 71 69 674 165 46 19 80 296 583 277 147 239 1 43 7 (D.C.) 10 23 104 21 201 605 117 248 88 105 4,901 Stores in 31 States and D.C. 213 97 27 68 9% to 12% Store Base 6% to 8.9% Store Base 50% of Stores Located in 5 States, Lack Presence in Key Growth States 3% to 5.9% Store Base 0% to 2.9% Store Base Source: Company reports, MVI Research

  43. Segmentation Strategy High Volume Store Segmentation Example • Benefits of Segmentation • Enables key initiatives • Focus efforts where highest return is made • Maximize limited resources • Store Segmentation • Consumer/demographics • Urban/suburban • High volume/low volume • Growth potential • Earnings $200 million opportunity if Rite Aid achieves 7% EBITDA How many of the 4,900 stores are high volume vs. low volume? What is the chain wide opportunity?

  44. Rite Aid: Key Planning Considerations • Living on “Borrowed” Time… Balancing Financial and Retail Realities • No longer about managing for profitability • Plans must reflect risks and rewards • Make a friend in credit / finance • The Path Forward… Stabilization, Execution and Differentiation • On the ropes, next 3 – 12 months are pivotal • Must gain economies of scale and grow Rx scripts for survival • Focus on generics and PL will have a deflationary impact on top-line • Need to improve blocking and tackling to win her back • Variance across shopper and store base present challenges • One Size Does Not Fit All… Focused on Unlocking the Value of Rite Aid through Segmentation • Closing stores, consolidating DCs, cutting labor and expenses and unlocking working capital • Near-term pain necessary for long-term survival • THE WAY FORWARD: Tactical Defense and Execution

  45. Big 3: Key Planning Considerations • Walgreens: Balancing Growth and Re-Invention • More from the core, realignment of cost, culture and capabilities • Must improve the experience to grow basket – starts with shopper • Slowing growth shifts focus from square footage growth to optimization • THE WAY FORWARD: Partnership and Capabilities • CVS/pharmacy: Brand Extension and Adaptation • Put in a position to win, locked up share in key growth markets • Latest acquisition (Longs) will challenge the status quo • To gain share of wallet ($ and GP$) must capture share of values • Current climate will require more emphasis on traffic and value • THE WAY FORWARD: Alignment and Innovation • Rite Aid: Stabilization, Execution and Differentiation • Living on “borrowed” time… balancing new financial / retail realities • Must gain economies of scale, Rx script growth is a must for survival • Need to improve blocking and tackling to win her back • Focused on Unlocking the Value of Rite Aid through Segmentation • THE WAY FORWARD: Tactical Defense and Execution

  46. Global Headquarters: 245 First Street Cambridge, MA 02142 617.588.4116 blangan@mventures.com Brendan Langan Director of Retail Insight 47

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