Photos: Getty Images; Rite Aid
Rite Aid and Albertsons call off merger – what’s next?
Many have questioned the merits of a merger between Albertsons and Rite Aid since the two companies first announced their plans to do so back in February. Now, that the two companies have called off their deal, concerns about how the two will mesh are no longer relevant. What does remain, however, are questions about where the grocer and the drugstore operator go from here on their own.
Albertsons has been criticized for its plain vanilla approach and failing to stand out in an increasingly competitive grocery market, both in its namesake stores and for its Safeway chain. The company’s private equity ownership group led by Cerberus Capital Management has been criticized for failing to adequately invest in stores. Some saw the Rite Aid deal as nothing more than a smokescreen for management to continue neglecting its core grocery business.
For many of Rite Aid’s biggest investors, the deal offer from Albertsons simply wasn’t high enough for them to cast their votes in its favor. In the end, there was enough opposition to the merger for the drugstore’s board to determine it needed to go forward as a standalone company.
“We remain focused on leveraging our network of conveniently located retail pharmacies, our EnvisionRxOptions PBM and our trusted brand of health and wellness offerings,” said John Standley, chairman and chief executive officer of Rite Aid, in a statement. “We will continue building momentum for key areas of our business like our innovative Wellness store format, highly successful customer loyalty program and expanded pharmacy service offerings, as we also enhance our omni-channel and own brand offerings to strengthen our competitive position and create long-term value for stockholders.”
While Mr. Standley has expressed optimism about Rite Aid’s future, the drugstore chain faces an uphill battle as larger rivals CVS and Walgreens Boots Alliance have expanded store counts and made other moves to become more formidable. Walgreens acquired nearly 2,200 stores and three distribution centers from Rite Aid last year after a deal to take over its smaller rival ran into opposition from the Federal Trade Commission.
Amazon.com may further complicate matters for Rite Aid. The e-tail giant has been lowballing drugstores to gain share of the over-the-counter remedy market. Even more significantly, Amazon announced an agreement in June to acquire PillPack, an online pharmacy that delivers prescription medicines to customers in pre-sorted doses.
- Rite Aid and Albertsons Companies Mutually Agree To Terminate Merger Agreement – Rite Aid Corporation/Albertsons Companies Inc.
- Rite Aid, Albertsons Call Off Merger Amid Investor Opposition – The Wall Street Journal
- Will Rite Aid be of much benefit to Albertsons? – RetailWire
- Will Amazon’s PillPack acquisition disrupt the retail pharmacy business? – RetailWire
- Amazon lowballs CVS and Walgreens on OTC med prices – RetailWire
- Albertsons and Rite Aid combine to create food, health and wellness giant – RetailWire
- Did Walgreens and Rite Aid just work out a better deal for their businesses? – RetailWire
Discussion Questions
DISCUSSION QUESTIONS: What is your assessment of the challenges and opportunities facing Albertsons and Rite Aid now that the two will no longer merge into a single company? What’s the best path forward for each?
Poll
BrainTrust
David Naumann
Marketing Strategy Lead - Retail, Travel & Distribution, Verizon
Phil Masiello
Founder and CEO, CrunchGrowth Revenue Acceleration Agency
The simple truth is that they did not complete the deal because there wasn’t enough money in it for the investors. That’s truly sad. These two companies should be ashamed of how poorly the leadership is running them. Albertsons has done nothing to stand out from the competition. It remains tired with no clear identity and in no way gives customers a good reason for them to be loyal to their brand. Rite Aid isn’t much better, selling off 2,200 stores to Walgreens after a failed attempt at a merger. It’s all about money, lots of money and quick cash and that is killing many businesses today. I don’t see a healthy future for either company unless they invest in new leadership that will focus on building their brand with hard work, determination and, most importantly, time to let the company evolve into something the public will want to shop frequently.
I agree that leadership is failing these companies and needs to step up to differentiate and strengthen each retailer.
This was never a sensible merger.
Albertsons should stop playing corporate games to inflate its value ahead of an IPO. It needs to focus on the basics of retailing and improve its ailing store estate and invest further in areas like digital. It also needs to sharpen prices, especially at Safeway which has become ludicrously expensive (with no justification) relative to the market. Adding Rite Aid solved none of these issues and would have masked underlying issues and injected more complexity into the business.
Rite Aid arguably does need a partner. The sell-off of stores to Walgreens has left it vulnerable and means it will struggle to compete in terms of scale. Albertsons was not a sensible partner, but there are other grocers and players that may prove to be a better fit.
Grocery and drug store segments are hyper-competitive and Albertsons and Rite Aid are clearly not leaders or innovators in these industries. They both have an uphill battle. Albertsons needs to be more creative and innovative to become relevant or even survive. I suspect there may be other potential buyers eyeing up Rite Aid, as their future is questionable as a standalone brand now that they have sold about half of their stores to Walgreens. It wouldn’t surprise me to see Amazon or Alibaba look at Rite Aid as an acquisition target.
For Albertsons it’s all about continuing to invest in technology while seeking opportunities for innovation to better compete with the Amazons et al. of the retailing world. Bolting on a third-tier pharmacy like Rite Aid did not provide them with the strategic advantages necessary to justify upping the deal price.
As for Rite Aid, it is now on its own to find its way. Albertsons could have helped them on the path.
Albertsons and Rite Aid are struggling in their format segments so its probably best that they both focus on how they can remain competitive in their respective industries. The merger would have been a distraction at a time when laser focus is required for a critical turnaround for both retailers. With that said, the idea of grocery plus RX seems to be a good play for brands that are looking for additional distribution channels and a partnership of both segments is a win for the consumer in their quest for all things convenient. However, Albertsons and Rite Aid are not ready for this type of move. Albertsons should focus on identifying where their sustainable competitive advantages are in the current grocery landscape and how they can differentiate themselves as the competition heats up. Rite Aid should be focused on a category assessment of current offerings (suggest ready-made foods on a wide scale), their loyalty program (a bit too complex), their convergence of digital and physical and size formats.
As far as Rite Aid is concerned, I just don’t think Amazon is the big player/threat. It’s definitely much more CVS and Walgreens. But Rite Aid has some fabulous/convenient locations in NYC so I could easily see it carrying on, just not at a huge size.
For Albertsons, threats are everywhere; Amazon, Walmart, Kroger, pretty much every other grocer in its neighborhoods.
The day may come when Rite Aid goes private. But not all retailers have to be huge.
I’m not quite sure what Albertsons should do. Probably freshen up everything about its stores and get click and collect working impeccably.
Albertsons’ challenges are quite apparent. They have no point of differentiation against brick-and-mortar competitors, online grocers and Amazon. The entire company has not progressed forward in a world where the consumer expects more from their grocery store, other than just low prices. In the end, they will go the way of Toys “R” Us.
Rite Aid needs to play catch up to the other drug operators. But with Amazon entering the prescription drug market, it is going to become a different playing field. I do not hold much hope for either company. I think both companies should seek to sell themselves to other operators.
Both Albertsons and Rite Aid are in poor positions within their particular business silos. Neither is strong enough or has the team in place to continue long term on their own. There are simply too many strong competitors. Merging would not have made either of them better or stronger. The bump in business by merging would have been insignificant. So calling off the merger now gives them the opportunity to find a company within their business models to merge with. That eliminates their problems and makes both stronger.
The Albertsons/Rite Aid deal was driven by market presence. Sometimes folks forget that localization of stores drives brand and brings a value to the market — especially grocery — even without other standouts. The fact that a store is down the street will prompt my purchasing there. The importance of location hasn’t diminished for grocery. Excepting Walmart or Target, most grocery chains are regionally localized. From a 2014 map — it’s a bit dated but not significantly changed, a majority of Albertsons presence is on the West Coast. Strengthening their drug store capabilities in the west and entering the eastern U.S. markets was certainly part of their goals.
The Walgreens/Rite Aid deal thinned out Rite Aid’s presence in the southern U.S. (and a bit in New York State), but overall the drug retailer still remains strong in the Northeast and West Coast. For Rite Aid rejecting the deal was the smart action to take, as it already had a strong California and West Coast presence. The impressions of vulnerability for Rite Aid are unfounded — they’ve decided to focus more on higher-income locations and are also flush with added cash from the WBA sale to grow their business across the thousands of remaining stores. On the other hand, Albertsons should be looking for other partners to expand their markets. I wouldn’t be surprised if they attempted to bring Rite Aid back to the table.
I clicked on the poll before I read the comments here and now I regret I didn’t select “Much tougher for Albertsons.”
Here’s why: With the Albertsons merger off, the slimmed-down Rite Aid now has an opportunity to focus on its higher-revenue markets and invest the cash from Walgreens in a refresh of its store concept and related health services, like walk-in clinics.
Albertsons, on the other hand, is a vast and mediocre operation, with a few gems (like some of the Safeway store brands) embedded within. Venturing into the health field with Rite Aid was perhaps viewed as an opportunity to re-set its valuation. Certainly there were few financial synergies to be gained, despite the claims.
So I believe the road ahead will be tougher for Albertsons. Maybe it should back away from the slick corporate maneuvers and refocus on the fundamentals of continually improving its stores and its shopper proposition.
Let me first state that I don’t think much was lost by calling off this merger: tho merger is an additive rather than multiplicative operation, still nothing plus nothing….
And while I personally don’t mind Rite Aid, but could never stand Albertsons, I believe the latter is in a stronger position: for one thing the food field is far more fragmented than the drug, and it’s easier, generally speaking, to compete against a number of (relatively) small competitors than two large ones; also, grocery is much more of an “anchor” than drug, and I have to think Albertsons has greater customer loyalty (reluctant though those shoppers probably are). I mean how many people spend any length of time in a drug store?
The Albertsons/Rite Aid deal was a merger of two below-average companies. As separate entities they both need to identify their target consumers and retool assortment and operations to differentiate themselves.
Rite Aid needs to grow through acquisition … either being acquired by another company or acquiring other smaller regional chains. A possible Amazon/Rite Aid merger would be a possible fit if both retailers decided to move in this direction. The true question is “where is the best value for the Rite Aid shareholder?”