Photos: Fred’s Pharmacy, Getty Images
Is Fred’s up to acquiring 1,200 Rite Aid stores?
Recent reports suggest that the Federal Trade Commission (FTC) has yet to approve the merger between Walgreens Boots Alliance and Rite Aid over concerns that the companies’ plan to divest up to 1,200 stores may not work. The FTC is worried that Fred’s Inc., the regional discount chain that has agreed to buy the locations, may not be up to it.
Fred’s, which currently operates more than 650 stores primarily in the southeastern U.S., agreed last year to acquire 865 Rite Aid locations. When the FTC balked at the number of stores Walgreens and Rite Aid were divesting, the companies identified more than 300 others to sell. Reported concerns the FTC had about Fred’s ability to finance the deal, which were high when the store count was 865, have only increased.
The FTC is still smarting over a decision in 2014 to allow Haggen — a then 18-store supermarket chain with stores in Oregon and Washington — to acquire 146 stores from Albertsons and Safeway in Arizona, California and Las Vegas. As industry watchers know, Haggen was not up to the task. The grocer was forced to sell off most of the properties it agreed to acquire and filed for bankruptcy in 2015. Last year, Albertsons struck a deal to acquire the chain and the 29 remaining stores Haggen was operating in the Pacific Northwest. Today, there are fewer stores operating under the Haggen banner than in 2014.
Rick Hans, Fred’s CFO, told analysts on the chain’s earnings call yesterday that the deal, which is being completely financed with debt, was manageable. Fred’s would “have less leverage than the current Rite Aid today,” he said. “So, I think we’d be in a position to reinvest in stores to make them very competitive in their individual markets.”
While not substantiated elsewhere, the New York Post reported yesterday that Fred’s has been approached by “more than one prominent investor” willing to put money into the regional chain to make its deal with Walgreens and Rite Aid a reality.
Discussion Questions
DISCUSSION QUESTIONS: Will Fred’s acquisition of up to 1,200 Rite Aid stores likely be a success or failure if approved by the FTC? What do you think are the most important factors that will ultimately determine how well or poorly Fred’s does with its greatly expanded store count?
Poll
BrainTrust
Mark Ryski
Founder, CEO & Author, HeadCount Corporation
Dave Wendland
Vice President, Strategic RelationsHamacher Resource Group
While I admire the moxie of Fred’s management, I question their judgement. While acquiring a large block of stores like the one proposed is an effective way to rapidly expand, at a time when chains are closing stores it makes me wonder if Fred’s management really appreciates just how perilous this could be given the magnitude of the transaction. Walgreens isn’t divesting the best performing stores, naturally it’s giving up poor performing/low-potential stores, which could complicate what will need to be a massive integration process for Fred’s. There will be a long list of issues that Fred’s management will need to work through and this will be profoundly distracting and challenging for them.
We have seen this movie too often.
A 650-store chain trying to integrate 1200 additional stores can only lead to trouble. Fred’s will not have the infrastructure in place to absorb the stores. There will be a period of unstable store operations. This will lead to a decline in sales, lower margins and a struggle to pay the debt service. And then stores will be sold and the inevitable bankruptcy filing to leverage the landlords and leases.
As a business owner and entrepreneur, I believe in growth. But not growth at all costs.
This is an odd one. The question seems to focus on Fred’s financial ability to pull off the deal. I believe there is more to consider here: The pharmacy business. When I lecture about branding failures, I generally focus on three categories — banking, airlines and pharmacies.
The purpose of investing in a brand is to build preference. The desire is to make the brand sticky. Meaning, to foster loyalty that transcends location and simple convenience. (Think how far shoppers will drive to an IKEA as an example).
The pharmacy category has totally failed in persuasive brand building. Based upon the overwhelming evidence, shoppers will choose one brand over another simply because of the traffic pattern. How often do you see an intersection with three competing pharmacies on different corners of the same traffic light? What does that tell you?
What do the brands own? What do they mean? How sticky are the brands themselves? CVS is trying. I give them an A for effort. But this is a category lost in a definition of the category itself. Are they a convenience store? A prescription filler? An off-license? What are they and where in importance does the shopper place the brand?
So if Fred’s pulls this off they will be as successful as the traffic pattern dictates.
The important question here is NOT about deep financial pockets. It’s about BRAND.
Red flags everywhere. First, Fred’s doesn’t have the cash to buy the stores and must finance them. That’s scary. Fred’s is not that good and Rite Aid is even worse. I think Walgreens hand-picked a buyer they knew would fail the same way Albertsons picked Haggen. Reminds me of the move “The Sting.” It’s hard to believe that some lenders are actually willing to finance this deal.
First, the good news. Mike Bloom’s prior experience and proven credentials certainly provide firsthand knowledge of how to run a successful chain drug operation. The team that has been assembled and the advisers to Fred’s are suggesting they are up to the challenge. Size matters and this will definitely provide Fred’s with a larger footprint from which to negotiate and gain market attention.
Now the not-so-good news. Financially, I’m concerned about the ability for Fred’s to effectively renovate, rejuvenate and recover the investment in these potential 1,200 units. Furthermore, brick-and-mortar is not an easy business … and the formidable giants in this space have a sizable head start. And finally, as said by several of my esteemed BrainTrust colleagues, integration is not for the faint of heart.
I see much to be concerned about here. Not just financially, but let’s face it — a 650 store retailer is not going to have the internal business resources and IT resources needed to absorb twice as many stores on day 1. Given their current state, it’s unlikely they are prepared for this massive level of integration. They certainly can’t expect Walgreens to be giving them high performance stores either. Many challenges here. How many examples have we seen of successful brick and mortar explosive growth like this?
Seems like we already settled this issue: we wished them well but had our doubts (and the survey results indicate that hasn’t changed). As for the “investor(s),”call me cynical — but they may have a variety of motives beyond the merger’s “success.” (I’m not saying that’s necessarily the case only that such should be considered). At this point, the only way to see who was right is to make it happen and look at the results.