Walgreens and Rite Aid to make one very big drugstore company
Walgreens Boots Alliance has reached a deal valued at $9.4 billion to acquire Rite Aid, bringing together two of the three largest drugstore chains in the U.S.
While it’s likely the two companies will be required to sell off stores to satisfy the antitrust concerns of federal regulators, the combination of Walgreens (8,200 stores) and Rite Aid (4,600) should outnumber CVS Health, which currently operates 7,800 stores. CVS and Target announced a deal this summer, subject to regulatory approval, that would place the drugstore chain’s pharmacists behind the counters in 1,660 of the mass merchant’s stores.
"Our complementary retail pharmacy footprints in the U.S. will create an even better network, with more health and wellness solutions available in stores and online," said Stefano Pessina, executive vice chairman and CEO of Walgreens Boots Alliance, in a statement. "Walgreens Boots Alliance will provide to Rite Aid its global expertise and resources to accelerate the delivery of integrated frontline care, and to offer innovative solutions for providers, payers and other entities in the U.S. healthcare system. Finally, this combination will generate a stronger base for sustainable growth and investment into Rite Aid stores, while realizing synergies over time."
Rite Aid’s stores will initially operate under their current banner before being converted to Walgreens.
Photo: Walgreens Boots Alliance
- Walgreens Boots Alliance to Acquire Rite Aid for $17.2 Billion in All-Cash Transaction – Walgreens Boots Alliance
- Walgreens, Rite Aid Unite to Create Drugstore Giant – The Wall Street Journal (sub. required)
- Walgreens says will buy smaller drugstore rival Rite-Aid – Reuters
- Giant pharmacy merger: Walgreens buys Rite Aid in $17.2 billion deal – CNNMoney
- Will the Target/CVS pharmacy deal lead to a future merger? – RetailWire
Discussion Questions
What do you see as the pros and cons of a Walgreens acquisition of Rite Aid? How will the merger of the two chains affect the retail pharmacy business in the U.S.?
Poll
BrainTrust
Dick Seesel
Principal, Retailing In Focus LLC
Gene Detroyer
Professor, International Business, Guizhou University of Finance & Economics and University of Sanya, China.
Consolidation in the pharmacy industry parallels the same trend among health insurers — not to mention just about every other industry you can think of, from brewers to airlines. Whether the combined Walgreens/Rite Aid company can develop more pricing leverage from pharmaceutical suppliers is a different question, even though their store count now far exceeds CVS. Unless I’m mistaken, CVS (through its Caremark subsidiary) is a bigger player in the “pharmacy benefits” side of the industry, so Walgreens still has an opportunity to become a more vertical company in the future.
I hope that this merger is blocked by the government. Allowing it to go forward would put too much power in the hands of one pharmacy. The competition between Walgreens, Rite Aid and CVS has been good for consumers. A merger would probably result in higher prices for consumers through reduced competition.
Going to put a lot of pressure on CVS — I think that’s the key impact.
So how do you combat the Target/CVS deal? You buy Rite Aid. What else?
It is a good move for Walgreens, however there are many Rite Aid stores that will need to close and that means lost jobs again. There will only be three major drug stores left, Walgreens, CVS and of course Walmart. The supermarket pharmacies and Costco are also a choice.
A number of independents that are left may also see a bottom line improvement from those who were Rite Aid customers because they did not shop either Walgreens or CVS for one reason or another.
Time will tell, but all-in-all a good move.
Research into M&A suggests that the bigger the player and the more horizontal the acquisition, the greater chance of it failing, perhaps greater than 80 percent. The measure of failure is stock holder value, that is, the future value must be greater than the stock of the two companies would have been if they remained separate. A combining of big players changes almost nothing on the competitive landscape and if anything makes it more competitive.
The only way this deal pays off is if the new company makes more progress than the companies separated. I doubt if the competition will stand by and let that happen. The bigger the players, the bigger the response and ultimately the more pressure on the bottom line.
It would seem that the forces in play on both the pharma and the retail side of the chain drug channel are screaming for consolidation. From a consumer’s perspective, the natural tendency is to be wary on an oligopoly driving prices up. But as other panelists have noted, the increased clout of the combined entity may actual serve the customer well. We shall see.
Healthcare insurance, manufacturing pharma, and now retail pharma are being dominated by behemoths. My capitalistic, free-market “voice” tells me that none of this would be happening without the current level of government involvement, both internationally and now domestically. That same voice is telling me this is likely not going to end well for you and me.
With this news I’m now truly worried about too much concentration in the chain pharmacy industry. We should be wary of this trend in any industry that consumers depend on — from airlines to banks to health care.
Merger deals like this serve shareholders first, shoppers second. Where choice is reduced, the value proposition is likely to disfavor the consumer.
But an upgrade of the acquired Rite Aid stores might be a boon for shoppers in the geographies that it serves. And there are still competitive alternatives available for filling prescriptions — including Walmart, Costco and many major supermarket operators.
The era of the corner druggist is surely over. Viva the era of cornering the market.
“Monopoly is business at the end of its journey” -Henry Demarest Lloyd, Wealth Against Commonwealth, 1894. Apparently there is little creative or original left to accomplish, leaving the final move to simply get bigger. InBev + SABMiller. Dell + EMC. Maybe time for a serious market “adjustment”?
The pros are obvious, however they are definitely acquiring a lesser company all the way around.
The cons in this case might just be strong enough to take pause.
Rite Aid locations are not up to Walgreens’ standard by any means. Likely at least 75 percent or more will require significant capital to bring them up to standard if they even choose to do so.
There are so many instances where they are in the same market that they are on opposing corners. The con in this instance will likely quickly become the local community that will have blight until thousands of locations can be sold. Rite Aid was taking themselves out. Walgreens simply accelerated the pace so they can do what they need to do to grow.
It will be, however, interesting to see what compromises are required to make the deal, or should I say get the deal through the regulatory and FTC process.
What do you want to be on the soon-to-be vacant corner in your community?
We should have seen this coming after the CVS/Target announcement. Walgreens had to do something, and this “something” is huge. But what are we starting to see with the giants becoming larger with little competition? We are seeing Staples taking over Office Depot, Bridgestone taking over Pep Boys and now this. It will definitely mean more people losing their jobs when the consolidation begins. Should we be seeing a red flag here?
Rite Aid has been a rumored acquisition target for years and Walgreens appears to have been victorious. But to the victor will come spoils.
Because our firm has been focused in the drugstore channel throughout our 35-year history, the results of this announcement will be watched — and responded to — very actively.
The US economy has been through phases of consolidation and deregulation over the past 40 years. The trend today is towards consolidation and I have to believe that competition will be lessened as result of a series of big mergers/acquisitions.
I also think an interesting question will surround Rite Aid’s participation in Plenti. Will Balance Rewards become a Plenti partner or will the combined firm go its own way in developing a customer loyalty strategy?
I agree with Frank (Beurskens). There’s something silly about the idea that we’ll benefit from a retailer becoming bigger because they’ll have more “leverage” against suppliers who also became bigger (chasing phantom efficiencies)…what if they’d all just stayed smaller?
That having been said, I think most people — correctly — view Rite-Aid as the also-ran in the drugstore triumvirate, and much like the dollar store consolidations, few will miss it.
This is certainly bad news for consumers, and patients at most risk. I wonder if this deal will go through as they want, with regulators on their case.
It’s hard to protest traditional drug stores trying to protect their flanks when non drug stores (Walmart, Target, myriad grocery chains, etc.) are increasingly filching their traditional pharmacy and health supplies business.
On the west coast, Rite Aid is very strong. Store conditions are far better than Walgreens and CVS and stores are busier. This is a very sad day.
Rite Aid has also aggressively been remodeling stores in the west to the “wellness” format and spending quite a bit of money redoing floors, lighting, etc. The stores look great, best in class.
I can’t wait for Walgreens to cut selection by 50%, install their super slow cash register system, and raise prices to their levels.
Big yawn here. There are a lot of reasons FTC should not consider the Walgreens/Rite-Aid merger as creating an anti-competitive duopoly. Every major supermarket chain as well as Target, Walmart, Sam’s Club and Costco essentially offer about the same number of traditional drugstore SKUs within their four walls, as well as operate a “pharmacy.” If a Walgreens/Rite-Aid merger makers Walgreens and CVS a duopoly, then certainly FTC should also deem Target and Walmart a duopoly.
In regard to prescription drugs, 50 years ago when I was a pharmacist there was virtually no insurance coverage and price competition was intense. I suspect that today the overwhelming number of prescriptions are purchased under some kind of insurance plan with a consumer copay that is the same for them no matter where they go. Price competition at the consumer level is no longer significant.
The FTC will probably spend considerable time on this for no other reason than they need to do that to justify their jobs. That’s what government agencies excel at.