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Rite Aid woes caused by too much, too fast; CEO: In putting his stamp on the drugstore chain founded by his father, Martin L. Grass strained family relations and precipitated his downfall.

THE BALTIMORE SUN

Martin L. Grass seemed to have it all: He led one of America's top drugstore chains, lived among the horsy set on a 10-acre estate in the posh Green Spring Valley, earned $1 million a year, and was chauffeured back and forth to work each day in a $3 million helicopter.

His wealth earned him prominence in arts and health circles, as he gave generously to numerous charities. He was featured in Business Week and Fortune magazines, praising his stewardship of Rite Aid Corp. and enhancing his standing on Wall Street.

It was never enough.

Grass wanted his regional drugstore chain's name to be known across the United States as the corner drugstore -- a bigger, better version of rivals such as CVS and Walgreen's.

But he tried to do too much, too fast -- buying drugstore chains, closing old stores as he opened new ones, and loading up on debt. As he engineered the growth, he unwittingly engineered his downfall.

Last week, Grass was ousted, and the company revealed that it would have to go back and slash its profits for the past three years by a total of at least $500 million -- about half of what it earned.

Grass did not respond to repeated requests for interviews, and Rite Aid officials and board members declined to discuss Grass' sudden departure. But interviews with family members, associates, retail consultants and Wall Street and industry analysts point to Grass' fall as the result of an overly aggressive race to dominate the industry.

Grass mistakenly went from a conservative plan to a wide-open attack, they said. And it cost him.

"They were winning Super Bowls but not beating the other team by 40 points -- what's the problem?" said Roger Grass, criticizing his elder brother's shift in the company's strategy. The brothers have been estranged in a feud over the business their father founded 37 years ago.

In Martin Grass' wake is a struggle for power and wealth that left a family fractured and the company's ability to survive in question.

Friction in the family grew out of Grass' ascent from president to chief executive and chairman in 1995.

In the fall of 1994, Rite Aid founder Alex Grass decided to elevate Martin, his eldest son, as the heir apparent to lead the company. The next February, as Martin Grass stepped into the CEO slot, he decided that wasn't enough -- he wanted the chairmanship, too.

While his father was traveling on a plane home from a trip to Israel, Martin Grass was engineering a coup that demoted his father to chairman of the executive committee.

"He and I have not been very close since the changeover took place," Alex Grass said in an interview last week.

The change in leadership brought a change in strategy. Instead of slow, measured growth, Rite Aid developed an appetite for growth by any means: gobbling up rival chains, swapping strip mall stores for bigger, stand-alone neighborhood stores. Under Martin Grass, the regional Rite Aid wanted to go national.

As a start, he announced plans in 1995 to buy Revco D. S. Inc., a 2,100-store chain based in Cleveland. The stores were a match geographically, in size and in the products they sold. Grass boasted to insiders that it was a "done deal."

The Federal Trade Commission thought otherwise.

Worried that Rite Aid would have an East Coast monopoly, the FTC said it would only approve the deal if Rite Aid shed a significant number of stores.

For Grass, from a financial standpoint the deal no longer made sense. But its failure was an affront to his pride.

Like a spurned lover, he announced a bigger takeover: Thrifty PayLess Holding Inc., a wheezing West Coast pharmacy chain. The price: $1.4 billion in stock and $890 million in debt.

The loss of Revco "absolutely motivated him to go out and do something else, to show he couldn't be undone," said a one-time associate. "That was the beginning of the end."

"It was ego-driven," said Roger Grass, asserting that his brother only bought the chain after he was denied the one he wanted.

Today, shoppers coast to coast know Rite Aid. Its stores are spacious and bright, with round-the-clock drive-through pharmacies, shelves of faddish herbs and vitamins, and coolers with sodas, milk, eggs and frozen pizza.

But the brightness conceals a near-fatal level of debt, $5 billion, the $500 million in falsely booked operating profits, and perhaps a ticket to the auction block.

The acquisition of Thrifty was ill-conceived. Thrifty's stores were dumpy, losing customers, and generally far bigger than those Rite Aid knew how to manage.

Roger Grass said his brother bought Thrifty for all the wrong reasons. "It was on the rebound from not being able to get Revco," he said, describing Thrifty as "a chain of mishmash, B Kmarts with a pharmacy."

"My brother is a very smart guy," he said. "The problem here is you can make one real bad decision and not be able to fix it."

The senior Grass, and others within the company, knew it was a bad deal, but none confronted Martin Grass. Internally, because of the West Coast chain's problems, Rite Aid was in big trouble. And yet, in 1997, Grass bought two more chains in Louisiana and Alabama, adding 332 stores.

The turmoil in the company mirrored the tribulations within the Grass family.

The Grass brothers rarely speak. It has been that way since their younger days, when both were advancing executives at Rite Aid. As Roger Grass recalls it, he and his brother plotted in 1988 to force out their father. The plan unraveled.

Roger Grass, believing he took all the blame and knowing he would never run the company, left Rite Aid that year. His brother has consistently denied that a plot existed.

Alex Grass, who speaks reticently about the goings-on at Rite Aid, remains on the board, and of late has been a cautioning voice, warning fellow board members that trouble loomed. But he has been careful not to counsel his son.

"I had hoped that since Martin had been in the business, and I had directed him for a decent number of years -- I had put my confidence in him -- that he would do the right thing. Unfortunately, it did not evolve as I had hoped," Alex Grass said.

This a difficult time for the father. He's sad for his son, and for the company, and vexed that his achievements as the builder of Rite Aid may have been erased.

After toiling to sell health and beauty products to grocery stores, Alex Grass opened a discount drugstore in Scranton in 1962.

Methodically, he opened more stores, and acquired rivals, assembling Rite Aid into a $5.5 billion company at the time of the boardroom coup.

Even today, Alex Grass yearns to have his legacy understood. He's proud of his reputation as a hard-driving, tight-fisted, get-the-results manager. He wants the accolades that come from starting with nothing and building a strong, profitable company. He's rankled by the consensus that his son Martin inherited a chain that had stalled, desperately needed freshening, and was being squeezed for profits. Indeed, after an interview with a reporter several years ago, to set the record straight, Alex Grass sent along an old annual report, his last as chairman of the board, and a note in red ink that outlined the expansion and modernization programs already in place.

Like a U.S. president who gets credit for an economic rebound stemming from his predecessor's policies, Martin Grass got all the credit for those initiatives. In business circles, and in such publications as Forbes magazine, he was lauded as the brash, young Turk who decisively shuttered outdated, strip-center stores in favor of the modern, stand-alone locations of today.

The Wall Street analysts bought in.

Analysts lauded the Thrifty purchase as a way to help Rite Aid emerge as a national retailer with more stores than industry-leader Walgreen Co. The speed at which Rite Aid grew -- while keeping store sales, total sales and profitability strong -- impressed analysts as well.

Today, analysts view the Thrifty purchase as a key misstep. They say Grass was on target with his strategies but unable to execute them well. In some cases, he added to the troubles by acquiring businesses with their own problems.

"He took on too much. It was a real aggressive plan he was trying to execute," said Eric Bosshard, a drugstore industry analyst with Cleveland-based Midwest Research.

But in Grass' defense, Bosshard said, he inherited a company with some weak, older stores.

"The little stores were losing market share rapidly," he said. If Grass hadn't converted them to bigger stores, the competitors would have stolen his customers.

Even in Martin Grass' heyday, not all the publicity was positive. He drew repeated media attention for legal battles with his neighbors, who objected to the frequent and noisy helicopter landings and takeoffs in their residential area in Baltimore County.

But Martin Grass has supporters. He has been an active member of the community, serving on several boards, including those of the Baltimore Symphony Orchestra, Johns Hopkins Medicine, the Philadelphia Chamber of Business and Industry, Baltimore Gas and Electric Co. and Tessco Technologies Inc.

H. Thomas Howell, a Towson lawyer on the BSO board, said he had read about the troubles spawned by Grass' helicopter before meeting the CEO.

"I was both pleased and surprised to see his persona was much more pleasant and outgoing than might have been assumed from reading about the controversy," Howell said. "I thought he was an extremely personable individual and certainly a very helpful contributor, in terms of both time and resources, to the Baltimore Symphony."

Michael G. Bronfein, chairman of NeighborCare, knows Grass through the BSO and their activities in The Associated: Jewish Community Federation of Baltimore. "He's quiet; he's not going to walk into a room and tell a zillion jokes being loud and gregarious, that's not him," he said. "But he certainly is a very likable guy."

A man of medium build and with a somber demeanor, Grass was nonetheless seen by many as "someone with a high degree of self-assuredness," said the one-time associate, who declined to be identified. "I'd rather call it arrogance. I think he didn't have the ability to have a meaningful conversation with you. He would always look through you or beyond you, like he wasn't really interested in what you had to say. He had this feeling that money could buy you anything, that money can take care of anything."

By last year, Grass was talking up a five-year plan to double Rite Aid's stock value -- then at roughly $30 -- ring up sales in the $22 billion range and start dotting the international landscape with Rite Aid signs. Today, the company has sales of $13 billion. The shares closed Friday at $9.625, down from a 52-week high of $51.125.

Also last year, Rite Aid announced it would buy PCS Health Services, a pharmacy benefits manager, from Eli Lilly & Co. for $1.5 billion.

Grass had planned to pay for the purchase largely through the sale of stock to the public. But a series of missteps and damaging revelations cropped up this year, driving down Rite Aid's stock price, sparking the attention of the Securities and Exchange Commission and making the secondary offering impossible.

Instead the purchase was funded with debt, making the company even more leveraged.

Rite Aid's troubled 1999 started with a Wall Street Journal article that detailed how Rite Aid leased land that was owned by Rite Aid's principals or close associates. Those lease relationships had not been disclosed to investors.

In February, also in response to a Journal article, the company announced that an internal investigation had found that Rite Aid was doing business with suppliers that were at least partially owned by Rite Aid officials or their family members, including Alex Grass and his two sisters.

In March, suppliers accused Rite Aid of taking too many deductions on their bills -- basically accusing Rite Aid of claiming merchandise was damaged when it wasn't.

In the same month, Rite Aid said its earnings would fall short of analysts' expectations of 52 cents a share and be more in the 30- to 32-cent range. In fact, earnings were reported at 28 cents per share, and proved to investors again that Rite Aid couldn't deliver on its promises. That same month the SEC began reviewing the company's books after Rite Aid filed documents with the agency related to a stock offering designed to raise money to cut debt.

In June, the company announced it would restate earnings for fiscal 1999, 1998 and 1997 -- but only by a total of about $26 million.

Last month, the company announced it would cut 330 jobs. Also last month, Florida's attorney general filed charges against Rite Aid accusing it of charging noninsured customers more for prescriptions than it charged those with insurance.

This month, Rite Aid said it expected a net loss for the second quarter, which ended Aug. 28, of nearly $68 million. At that time, while still at the helm, Martin Grass also said the company would try to sell 200 to 300 of its stores on the West Coast.

After his ouster last week, the company said it would restate its earnings for the previous three years, shaving pretax profits by about $500 million. It also said earlier years would also be affected, though it's not clear by how much.

The company remained mum on the restatement. Spokeswoman Sarah Datz said only, "We made our own decision to restate, partially based on discussions with the SEC."

Rite Aid also said recently it would seek a buyer for all or part of PCS. And California leveraged-buyout specialist Leonard Green is putting $300 million into Rite Aid in return for a 9.7 percent stake in the company.

If successful, that will go a long way toward repairing the damage.

Analysts agree that what Rite Aid needs to do is unload PCS and use the proceeds to pay down its debt. The company also needs to shed its unprofitable stores and get back to a leaner, cleaner organization. It's already selling some of the stores acquired in the Thrifty deal -- mostly those that were large-format and outside Rite Aid's sphere of management expertise. The company said it was trying to sell about 300 of the 1,000 stores it took on in that deal.

But many analysts think that bankruptcy looms, and perhaps a sale of a big slice -- or even all -- of Rite Aid to another company.

"The perception that [Martin Grass] is gone is probably helpful in general for investors. He did not do a good job managing the growth," said David Novosel, an analyst at Banc One. "He was at the helm, maybe others are responsible too, but it happened under his guidance."

These days, Alex Grass is more deeply involved with some of his new, smaller, ventures -- and with several philanthropic organizations -- than he is with Rite Aid.

Even so, he's wistful when he thinks about what has happened to his company.

"It has saddened me quite a bit," he said. "It's saddened me because I've seen people who have worked so hard to build this business -- they've been hurt."

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