March 20, 2012
Walgreens Buying Rite Aid Doesn’t Add Up
First off, let me say that I’d be shocked if Walgreens ever made a bid to acquire Rite Aid. I’d be even more amazed if a deal to combine the two companies was ever approved by regulators.
So, let’s take a step back. As analysts are want to do, Edward Kelly of Credit Suisse put it out there that a deal between the drugstore chains might make sense. After all, Walgreens took a hit when it failed to reach an agreement with Express Scripts and now needs to make up some of its shortfall.
Rite Aid, for its part, probably would want such a deal. The drugstore chain has a lot of stores and more than its share of under-performers. It has struggled for years to achieve profitability and carries a lot of debt on its books — much more than Walgreens, although that debt would become Walgreens’ if a deal was reached.
On the plus side for a merger, the combined companies would have increased purchasing power and the means to realize savings by eliminating duplicate jobs and redundant facilities. Mr. Kelly, according to a New York Times report, puts the savings at somewhere between $400 million and $650 million.
Mr. Kelly, as Seeking Alpha reports, believes that the combined company would only need to divest around three percent of its more than 12,500 stores to gain approval from regulators.
BrainTrust
Recent Discussions
Discussion Questions
Does a Walgreens acquisition of Rite Aid make sense? What would you do if you were running Walgreens? What if you were running Rite Aid?
Poll
Can’t see where this makes sense for Walgreens. Might help Rite Aid if debt load was as high as reported.
If I was Walgreens, I am not sure I would be interested in an acquisition play. If I was Rite Aid, it might be a plan. Consumers would lose since store overlap would cause hundreds of store closings. This impacts local jobs, pricing and options for consumers. Walgreens is focusing on building out its assortment to include fresh food and other items not traditional to the drug vertical. I love Walgreens new store in Chicago and NYC and can see this format expanding. That is a great place for them to focus.
Make sense for who? Sure if you are Rite Aid it may make some sense, but then again, so does getting acquired by CVS. Walgreens would gain locations but, at least where I live, many of those locations would become instantly redundant since there seems to be at least two drug stores at every major intersection.
Obviously, cost could swing the balance, but the bottom line is that if I were running Walgreens, I’d keep doing what I was doing and hope that Rite Aid eventually collapsed.
Obviously, Walgreens is still smarting over the loss of the Express Scripts business, which has had a dramatic impact on its sales and profitability. In addition, CVS has gained at Walgreen’s expense. The threat of CVS and the need for organic or inorganic growth seems to be driving this action.
Rite Aid represents some real baggage and culture issues for Walgreens. Assuming Walgreens can deal with these issues, as well as get regulatory approval, the removal of a key competitor may better equip them to deal with CVS and the other retailers moving into this competitive space.
If I were running Walgreens, I would concentrate on growing Walgreens; first and foremost, finding an answer for Rx.
If I were running Rite Aid I would concentrate on selling to Walmart. Or DG. Or Tesco. Or Apple. (Hey, don’t laugh — that’s where all the money is!)
In my opinion the merger works well only if Walgreens ends up running the entire operation.
The acquisition of Rite Aid would make little sense for Walgreens. They are not simply in a race with CVS to have the most stores. Walgreens already has a national presence. Rite Aid would bring more baggage and poor performing stores than complementary market strength.
The acquisition of Duane Reade was a strategic move to gain a strong position in the New York market. These are the kind of moves that make sense for Walgreens.
I think an interesting aspect of any hypothetical merger would be how it would affect the development of a loyalty program within Walgreens. Although Walgreens is apparently well along in the development process, Rite Aid has already rolled out its Wellness+ program, and likely has built up significant assets and expertise in the process.
For CVS, the ExtraCare program is a major competitive weapon against Walgreens. I have little doubt a combined Walgreens-Rite Aid would have its own competing loyalty program, but I wonder whether it would look more like ExtraCare, Wellness+, or something entirely different.
What does Rite Aid offer except locations? As far as I know, Rite Aid’s technology for data management is not superior. If Walgreens does not need the locations, what value would they get from the deal?
In my view, a WMT and RAD merger could only serve investors of RAD stock and RAD-leased real estate. There is no incentive for Walgreens, CVS, or Walmart to take on that kind of debt. Rite Aid would stain their balance sheet, credit rating, their brand, and tack on additional liability in the form of poorly located excess real estate.
In the investment real estate world, there is a concentrated effort (propaganda) by sellers and brokers of Rite Aid-leased properties to convince the investor world that Rite Aid will be acquired by Walgreens, CVS, Walmart or any other retailer that might “stick.” As soon as an analyst “spills” out the notion of a merger, these real estate folks latch on to it as if it’s a valid rumor or likelihood, and attempt to spread the story in an effort to pump up and promote Rite Aid as a “potential” credit tenant, rather than BK candidate that they may be. The notion of a merger is, in my opinion, a “Hail Mary” for investors of RAD, at best.
It only makes sense if Rite Aid closed all of the losing stores first. This would allow Walgreens to close stores that don’t measure up to profitability. Walgreens’ management is far superior to Rite Aid’s, so it could work under the right circumstances.
A good deal of other more promising strategies exist for Walgreens, other than turning around Rite Aid. Location and convenience are major draws for pharmacy. As Walgreens looks to expand consumer engagement into the online world, continuation of their own brick & mortar expansion (which has been sound over the years), purchasing select regional players (limited field to be sure), etc., offers a far more promising path.
No need to tie up energy and resources in performing a turnaround.
Why would Walgreen accept the complexity that would come with such a deal? Redundant and slow performing locations; a huge re-hab and re-branding program for the stores that are left; billions in debt to pay down. I could think of alternative ways for WAG to invest $9 billion — how about filling in markets and modernizing its own customer-facing and loyalty practices?
Straight up buying some selected Rite Aid stores or DMAs might make more sense, if they can be pried loose. CVS would probably compete for some units too, as might several of the regional chains that remain.
Yes. More locations to make it easier for people to get their HBC and prescription needs met. This is a great fit for both companies, and if it only requires a 3% drop in storefronts, that is a small concession. Other than that, this is a great match for both companies and the retail public.
It just does not make sense. Walgreens has spent so much time getting a consistent base of stores (sure, there are differences in some markets like San Francisco) and grouping the stores into various “groups” to determine how to price and merchandise each store. Rite Aid with so many stores in odd shapes and sizes, is not consistent at all and its store base is not really “meshable” to the Walgreens model.
Walgreens has already bought Rite Aid Stores in certain markets such as San Francisco (city limits only) and S. Idaho. I would expect to see more of that.
Rite Aid just keeps closing stores. They have some good markets, their new stores are pretty nice, and most of my service experiences with them have been positive over the past 5-6 years (I certainly cannot say the same for CVS or Walgreens), but my view is of their west coast operation. It is my understanding the west coast of Rite Aid is radically different from the east coast.
More Discussions
How Timely Is the Planned Lowe’s Website Renovation Focusing on Personalization?
Is Lowe’s being timely with its website reno, and is it right to be placed as…Should Costco Be Opening Members-Only Gas Stations?
Is this the right move for the warehouse club?As Boomers ‘Age Out of Peak Purchasing,’ How Can National Brands Retain Interest With Gen Z?
According to a recent First Insight study titled “Is Gen Z Still Choosing Your Brand,” while…
Can’t see where this makes sense for Walgreens. Might help Rite Aid if debt load was as high as reported.
If I was Walgreens, I am not sure I would be interested in an acquisition play. If I was Rite Aid, it might be a plan. Consumers would lose since store overlap would cause hundreds of store closings. This impacts local jobs, pricing and options for consumers. Walgreens is focusing on building out its assortment to include fresh food and other items not traditional to the drug vertical. I love Walgreens new store in Chicago and NYC and can see this format expanding. That is a great place for them to focus.
Make sense for who? Sure if you are Rite Aid it may make some sense, but then again, so does getting acquired by CVS. Walgreens would gain locations but, at least where I live, many of those locations would become instantly redundant since there seems to be at least two drug stores at every major intersection.
Obviously, cost could swing the balance, but the bottom line is that if I were running Walgreens, I’d keep doing what I was doing and hope that Rite Aid eventually collapsed.
Obviously, Walgreens is still smarting over the loss of the Express Scripts business, which has had a dramatic impact on its sales and profitability. In addition, CVS has gained at Walgreen’s expense. The threat of CVS and the need for organic or inorganic growth seems to be driving this action.
Rite Aid represents some real baggage and culture issues for Walgreens. Assuming Walgreens can deal with these issues, as well as get regulatory approval, the removal of a key competitor may better equip them to deal with CVS and the other retailers moving into this competitive space.
If I were running Walgreens, I would concentrate on growing Walgreens; first and foremost, finding an answer for Rx.
If I were running Rite Aid I would concentrate on selling to Walmart. Or DG. Or Tesco. Or Apple. (Hey, don’t laugh — that’s where all the money is!)
In my opinion the merger works well only if Walgreens ends up running the entire operation.
The acquisition of Rite Aid would make little sense for Walgreens. They are not simply in a race with CVS to have the most stores. Walgreens already has a national presence. Rite Aid would bring more baggage and poor performing stores than complementary market strength.
The acquisition of Duane Reade was a strategic move to gain a strong position in the New York market. These are the kind of moves that make sense for Walgreens.
I think an interesting aspect of any hypothetical merger would be how it would affect the development of a loyalty program within Walgreens. Although Walgreens is apparently well along in the development process, Rite Aid has already rolled out its Wellness+ program, and likely has built up significant assets and expertise in the process.
For CVS, the ExtraCare program is a major competitive weapon against Walgreens. I have little doubt a combined Walgreens-Rite Aid would have its own competing loyalty program, but I wonder whether it would look more like ExtraCare, Wellness+, or something entirely different.
What does Rite Aid offer except locations? As far as I know, Rite Aid’s technology for data management is not superior. If Walgreens does not need the locations, what value would they get from the deal?
In my view, a WMT and RAD merger could only serve investors of RAD stock and RAD-leased real estate. There is no incentive for Walgreens, CVS, or Walmart to take on that kind of debt. Rite Aid would stain their balance sheet, credit rating, their brand, and tack on additional liability in the form of poorly located excess real estate.
In the investment real estate world, there is a concentrated effort (propaganda) by sellers and brokers of Rite Aid-leased properties to convince the investor world that Rite Aid will be acquired by Walgreens, CVS, Walmart or any other retailer that might “stick.” As soon as an analyst “spills” out the notion of a merger, these real estate folks latch on to it as if it’s a valid rumor or likelihood, and attempt to spread the story in an effort to pump up and promote Rite Aid as a “potential” credit tenant, rather than BK candidate that they may be. The notion of a merger is, in my opinion, a “Hail Mary” for investors of RAD, at best.
It only makes sense if Rite Aid closed all of the losing stores first. This would allow Walgreens to close stores that don’t measure up to profitability. Walgreens’ management is far superior to Rite Aid’s, so it could work under the right circumstances.
A good deal of other more promising strategies exist for Walgreens, other than turning around Rite Aid. Location and convenience are major draws for pharmacy. As Walgreens looks to expand consumer engagement into the online world, continuation of their own brick & mortar expansion (which has been sound over the years), purchasing select regional players (limited field to be sure), etc., offers a far more promising path.
No need to tie up energy and resources in performing a turnaround.
Why would Walgreen accept the complexity that would come with such a deal? Redundant and slow performing locations; a huge re-hab and re-branding program for the stores that are left; billions in debt to pay down. I could think of alternative ways for WAG to invest $9 billion — how about filling in markets and modernizing its own customer-facing and loyalty practices?
Straight up buying some selected Rite Aid stores or DMAs might make more sense, if they can be pried loose. CVS would probably compete for some units too, as might several of the regional chains that remain.
Yes. More locations to make it easier for people to get their HBC and prescription needs met. This is a great fit for both companies, and if it only requires a 3% drop in storefronts, that is a small concession. Other than that, this is a great match for both companies and the retail public.
It just does not make sense. Walgreens has spent so much time getting a consistent base of stores (sure, there are differences in some markets like San Francisco) and grouping the stores into various “groups” to determine how to price and merchandise each store. Rite Aid with so many stores in odd shapes and sizes, is not consistent at all and its store base is not really “meshable” to the Walgreens model.
Walgreens has already bought Rite Aid Stores in certain markets such as San Francisco (city limits only) and S. Idaho. I would expect to see more of that.
Rite Aid just keeps closing stores. They have some good markets, their new stores are pretty nice, and most of my service experiences with them have been positive over the past 5-6 years (I certainly cannot say the same for CVS or Walgreens), but my view is of their west coast operation. It is my understanding the west coast of Rite Aid is radically different from the east coast.