Walgreens & Rite Aid – Who Wins?

Shelley E. Kohan
Shelley E. Kohan
Vice President of Retail Consulting

Walgreens scraped one deal in favor of another Thursday, and in doing so will create the largest drug store chain in the United States, with over 10,000 locations and a store within 5 miles of the vast majority of Americans.

Walgreens announced on Thursday it ended its takeover play of rival Rite Aid following resistance from regulators and will instead buy stores, distribution centers and inventory in a new deal.

The original takeover deal, announced initially in 2015, was a $9.4 billion proposal for almost 4,600 Rite Aid locations, but was narrowed down to $6.8 billion earlier in 2017. If that deal had been approved by the FTC – which was highly doubtful – consumers could have faced higher prices across all stores irrespective of nameplate. Thursday’s new announcement states Walgreens will pay $5.175 billion in an all-cash offer for 2,186 Rite Aid stores, three distribution centers and all related inventory.

With the new agreement calling for Walgreens to acquire almost 48 percent of Rite Aid stores, Walgreens can now:

  1. Compete on a grand scale with CVS, its large rival in the drug store industry
  2. Allow for an optimization of its supply chain 
  3. Potentially improve overall margin with deeper supplier discounts
  4. Not be burdened with impact of the 4600-count fleet of many underperforming Rite Aid stores.

For these reasons, the current deal seems more favorable for Walgreens and puts them in the lead of store count with more than 10,200 locations versus CVS’s 9,600. Currently, 76 percent of the U.S. population lives within 5 miles of a Walgreens or Duane Reade, and this only increases with the newly acquired locations (again, if approved by the FTC). 

Rite Aid may have been better positioned with a complete merger, although trimming down their store count substantially allows them to move forward with a more focused strategy.

The question becomes if Rite Aid can sustain itself over the long run with a reduced fleet of stores. In other words, will this new deal give Rite Aid the opportunity to focus on improving the overall profit through its existing stores. It will undoubtedly be a tough toad – Rite Aid sales were down 3.9 percent in the first quarter, and compare unfavorably to increases at both Walgreens, up 5.3 percent, and CVS, up 3.0 percent.  

The pharmacy industry is healthy coming off a year with 5.8 percent year-over-year (YoY) growth compared to a 2.5 percent growth for retail overall. The five year CAGR for pharmacies was 4.2 percent, while the total retail sector had a 2.4 percent 5-year sales CAGR, reduced to 1.7 percent with automobiles removed.

Factors impacting sales and visit frequency in the U.S. pharmacy segment are government health care reform initiatives, the aging Boomer demographic segment, more widely accepted and available generic drugs and the increase of private label ready-made food available in these stores (Walgreens has really positioned itself well in this category). 

So, who wins from Thursday’s announcement? If the buy is approved by regulators, Walgreen’s appears to have upper hand initially.

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