Is Bigger Better?
By Faye Brookman, special to GMDC
There’s no stopping the big from getting bigger. Indeed, merger and acquisition activity is more than maintaining its pace this year and the number of transactions itself is robust, to say the least. According to a recently released report from The Food Institute, there were 173 merger and acquisition transactions in the food industry alone in the first half of 2006, with another 46 pending. This level of activity could mean over 400 food industry mergers and acquisitions completed during 2006, well above the 323 that were completed in 2005.
And the newest acquisition development is CVS’s announcement this week that it is now picking up Caremark Rx, a pharmacy benefits management company, making the Rhode Island-based chain a major player in that market.
But is the compression of the industry a good thing? Some say yes; others a resounding no. In just the past year, there have been mammoth deals including those of industry manufacturing companies such as Johnson & Johnson’s purchase of Pfizer and Procter & Gamble’s deal with Gillette. Most recently, the retail world was shaken up by Rite Aid’s announcement it plans to buy Brooks-Eckerd.
On both sides of the retail equation, the urge to merge is motivated by the need to yield the most power. The most vivid example is Rite Aid and Brooks-Eckerd. When Rite Aid realized it needed more stores to effectively compete with industry movers and shakers Walgreens and CVS, the chain decided it was time to hit the acquisition trail. The addition of the 1,858 stores elevates Rite Aid to about 5,000 doors and $27 billion in sales, putting the chain closer to CVS and Walgreens — not to also mention Wal-Mart, which every retailer in American must face.
Indeed, economies of scale drove the deal, according to Mary Sammons, president, chief executive officer and now chairman of Rite Aid. “Adding these stores to our company gives Rite Aid scale comparable to our major drugstore competitors, and we believe this enables us to compete more effectively in a highly competitive business,” she said.
Even small regional players have been just about all snapped up. Just this year, Walgreens nabbed Happy Harry’s and Medic while CVS took on the Albertsons’ drugstore operations.
Manufacturers, increasingly working with larger retail entities, may find their bargaining position not as strong as before. Smaller vendors may find it harder than ever to get a shot at the big chains. And, with fewer retailers to call upon, manufacturers may require smaller sales forces. This change in market dynamics has been underway for some time and will likely continue.
The manufacturing mergers — sometimes fueled by the larger and more powerful retailers — put new pressures on retailers. Bigger suppliers can demand more shelf space. Some retailers wonder if larger vendors stymie new product development while squeezing out opportunities for small or regional chains. Many buyers believe healthy competition among many suppliers keeps categories fresh.
Discussion Questions: Will mergers and acquisitions
ultimately hurt or promote the industry? Will regional and local businesses
find their prospects of survivability reduced even further? What will they have
to do to survive and prosper? Will the consumer benefit?