In 2004, New York-based PE firm Oak
Hill Capital Partners saw an opportunity
to leverage the businesses’ assets and
monopoly in New York real estate,
and purchased the company for
$702 million, including debt (investing
$244 million in the purchase and
borrowing the other $458 million).
The debt-to-EBITDA ratio was 8.7x.
By the end of 2006, however, Standard &
Poor’s had downgraded Duane Reade’s
credit rating four times, leaving it at CCC.
The company was burning $20 million
in cash per year because of $53 million in
interest charges, company officials said
in a conference call November 9, 2006.
Bold, Immediate Action
Duane Reade had long had a love/
hate relationship with its customers,
who patronized the store because of
its convenience but were otherwise
highly dissatisfied with the brand.
They complained about the cluttered
stores and poor customer service; the
experience had even spawned a negative
website dedicated solely to grievances
with the brand. Duane Reade had until
that point expanded and maintained
its market position largely due to the
fact that it was a staple and ubiquitous
part of the New York landscape.
The marketplace was changing,
however, and the chain was becoming
weighed down by remaining static as
it continued to pursue a strategy that
was largely about real estate, not retail
and customer experience. Its tired
stores and lackluster service continued
to fuel, rather than counter, customers’
negative perceptions. National
competitors CVS, Walgreens, and Rite
Aid were beginning to accelerate their
expansions in the five-borough market.
Additional marketplace factors—like
decreasing profit margins on drugs,
rising labor costs, and the increasing
convenience of digital technology—
were putting even more pressure on
the already sinking organization.
A change in executive leadership in 2005
had led to fundamental improvements,
with the newly installed CEO tending
to the most critical basics: cleaning
up clutter in the stores, improving
merchandising, reducing inventory, and
stabilizing the organization amid the
economic downturn. Earnings improved
in the two-year period of new leadership,
from $42 million in 2005 to $64 million
in 2006 and then to $79 million in 2007.
The acquisition had seemed like a
typical opportunity to return a distressed
organization to efficiency through
financial engineering and improving
operations. But fixing the basics and
implementing only incremental
performance improvements wasn’t
enough. Oak Hill realized that Duane
Reade had to do something dramatically
different to fundamentally shift the way it
was viewed by its customers. The chain
needed to break ties with the past and
reexamine why it existed in the first place
and the role it could play going forward.
The Second Act
A new CEO, formerly the leader of
Canada’s largest food and general
merchandise retailer, took the reins
in 2008 to develop a strategic vision
continued on page 20