- Albertsons announced on Tuesday it was buying Rite Aid
- Albertsons contending with weak sales performance in the last two years, and struggling to keep up
When Albertsons announced on Tuesday it was buying Rite Aid, it touted a better ability to serve pharmacy customers as one of the deal’s many potential benefits.
But in Rite Aid, Albertsons, which operates grocers such as Safeway and Jewel-Osco on top of its namesake chain, is buying a severely diminished drugstore chain.
Even before the consolation prize of a deal last summer that saw Walgreens Boots Alliance buy 2,200 Rite Aid stores instead of the entire chain, Rite Aid was languishing. A debt-laden distant third behind Walgreens and CVS Health in the prescriptions market, Rite Aid has a market share only one third that of either rivals, according to Pembroke Consulting. And Walgreens wouldn’t go to all that effort to pick up anything but the best Rite Aid locations.
That deal, reached after U.S. anti-trust regulators scuttled the $9.5 billion acquisition originally planned, dramatically lowered Rite Aid’s debt load, taking it down to $3 billion or so from $7 billion. But it also shrank Rite Aid so dramatically at a time the pharmacy industry is only getting more competitive, giving large companies more clout to negotiate with drugmakers and other suppliers. With 2,500 stores concentrated in the Northeast and the West Coast, Rite Aid it is hardly a national chain anymore, and tiny next to CVS and Walgreens, with roughly 10,000 locations apiece.
Want to publish your own articles on DistilINFO Publications?
Send us an email, we will get in touch with you.
And both those rivals are looking to build on their leads. CVS, which already has an enormous pharmacy-benefit management market in Caremark, is in the process of buying insurer Aetna for $77 billion, while Walgreens Boots Alliance is reportedly looking at drug wholesaler AmericourceBergen.
Beyond that both chains have invested in improving their beauty and wellness products and remodeled many stores, something that was hard for Rite Aid to do, struggling with all that debt. Comparable sales of general merchandise at Rite Aid has declined for five quarters. CVS and Walgreens struggled on that front too, but at least their pharmacy businesses are thriving.
It is true Albertsons could help Rite Aid improve its food offerings. And Albertsons, which will rebrand its pharmacies at its hundreds of stores as Rite Aid, could turn that chain’s PBM unit into a bigger player and a platform for the future. But they are well behind their competitors. Albertsons executives said on a conference call in the morning that pharmacy customers spend more than twice as much on groceries per week as the average customer, and Rite Aid’s name could bring in new shoppers.
With Albertsons contending with weak sales performance in the last two years, and struggling to keep up with whatever Amazon.com has planned with Whole Foods Market and all the investments Walmart is putting into grocery pickup, it’s clear it needed a deal. What’s more, after twelve years of ownership by private equity firm Cerberus, including a 2015 IPO filing that was twisting in the wind, Albertsons had to do something. And this deal will make Albertsons a stock exchange listed company once again, allowing Cerberus to start exiting its investment. But picking up a drugstore chain that has stagnated for years and is now barely half its size of a year ago is a risky way to do that.
Date: Feb 20, 2018