Albertsons and Rite Aid combine to create food, health and wellness giant

Discussion
Photo: Wikipedia/M.O. Stevens
Feb 20, 2018
George Anderson

Albertsons and Rite Aid have announced a definitive merger agreement, thereby combining one of the largest supermarket chain store operators in the U.S. with the drugstore chain.

Albertsons, which is privately owned by a group led by Cerberus Capital Management, will exchange shares and/or cash for Rite Aid’s common stock in the deal. The combined companies are expected to be valued at roughly $24 billion.

John Standley, the current chairman and chief executive of Rite Aid, will become CEO of the merged companies. Bob Miller, the current CEO and chairman of Albertsons Cos., will become chairman.

All told, Albertsons and Rite Aid will operate around 4,900 locations with 4,350 pharmacies and 320 in-store clinics across 38 states.

Management at Albertsons and Rite Aid believe the new company will be a force to be reckoned with. In terms of footprint, the new company will be ranked first or second in two-thirds of metro areas within the U.S. It will be ranked first or second in 70 percent of pharmacy locations. The company sees particular opportunities for growth on the West Coast and Northeast where its respective brands are well established.

“We have always put our customers first and our combination with Rite Aid will enable us to even better serve the pharmacy customer by providing fully integrated one-stop-shop for our customers’ food, health and wellness needs,” said Mr. Miller. “I have long known the excellent management team at Rite Aid and we share a singular focus on superior customer service and a clear vision and strategy to become the favorite local supermarket and pharmacy to shoppers in every neighborhood we serve.”

“This powerful combination enables us to become a truly differentiated leader in delivering value, choice and flexibility to meet customers’ evolving food, health and wellness needs,” said Mr. Standley. “The combined platform positions Rite Aid to capitalize on our pharmacy expertise and expand and enhance our pharmacy footprint.”

The new company sees opportunities to leverage synergies across loyalty programs at its respective chains. Combined Albertsons and Rite Aid have a base of 25 million active participants in rewards programs.

DISCUSSION QUESTIONS: What do you see as the positives and negatives of combining Albertsons Companies and Rite Aid? What will this combination mean for competitors, vendors and consumers?

Braintrust
"While conceptually this all makes good sense, whether this will be successful or not will come down to how management executes."
"With CVS buying Aetna and Amazon getting into health providers, this merger has a tough integration ahead of it."
"It’s a logical combination of categories, although neither Albertsons nor Rite Aid would be considered “best in class” as separate entities."

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17 Comments on "Albertsons and Rite Aid combine to create food, health and wellness giant"


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Mark Ryski
BrainTrust

This is a classic consolidation play that makes reasonable sense. Grocery and pharmacy are a natural combination and I expect that there will be lots of opportunity to rationalize expenses and streamline the merged entity. But while conceptually this all makes good sense, whether this will be successful or not will come down to how management executes. Not only will integration take time, it will be extremely complicated given the size of the respective enterprises. Ultimately, a successful combination will be good for consumers by providing a broader product offering, neutral for vendors and bad for competitors.

Phil Chang
BrainTrust
Phil Chang
Retail Influencer, Speaker and Consultant
2 months 1 day ago

It makes sense to put these two together, but the merger took a long time to do. Unfortunately, during that time, the competition had a chance to do something different. With CVS buying Aetna and Amazon getting into health providers, this merger has a tough integration ahead of it.

While distribution and breadth of stores will help, this integrated group is going to have to solve how to deal with CVS/Aetna and Amazon/Berkshire/JPMorgan, while figuring out how to actually integrate Albertsons and Rite Aid into a single entity.

Lyle Bunn (Ph.D. Hon)
BrainTrust

2018 is the year of the retail merger/acquisition driven by operational optimization and a blended customer service strategy. The mega-category of healthy living makes the most sense given that spending is recurring with the purchase of essentials and a huge upside potential related to discretionary spending. Product mix and customer experience will be the weapons of brand-building.

Bob Amster
BrainTrust

The negative is that it will hurt competitors and, as Mark says, it will take a long time to achieve. The positive is that this merged company can become a dominant entity operating synergistic businesses feeding each other’s customers.

Herb Sorensen
BrainTrust
I have long hammered the fact that humans need only three things for survival: air, water and food. Air is widely available without cost, but water is often consumed in beverages; and then there is FOOD. And these obvious basic facts underpin the less obvious reality that grocery drives traffic at retail. Hence Walmart’s moves into supercenters in the ’80s ultimately led to them assuming the pole position in global retailing. That’s just background to my own realization that there is a GROWING third commercial leg to SURVIVAL: healthcare. Its impact is not as immediate as water and food, but in the long run it plays much the same role in survival. And especially with an aging population, healthcare and dispensers of it become significant and continuing drivers of TRAFFIC! (By the way, even drug stores, though 90+ percent of their profits come from prescriptions, use the rest of the store to DRIVE TRAFFIC!) After all, successful retailing is all about TRAFFIC and in the future I must acknowledge that there are three major drivers… Read more »
Dick Seesel
BrainTrust

It’s a logical combination of categories, although neither Albertsons nor Rite Aid would be considered “best in class” as separate entities. CVS has greater strength in pharmacy benefits management.

As to the food side of the business, Albertsons has many of the same challenges as its traditional rivals like Kroger: Are they ready for the impact of Amazon, the continued growth of Walmart and shoppers generally turning away from middle-of-the-road retailers?

Richard J. George, Ph.D.
BrainTrust

The positive is that it allows both players on the supermarket and drug sides of the business to enhance their impact in the market. However, it can’t be viewed in terms of the increased number of locations (stores and clinics). To be successful, the merger must enhance the lives of its respective customers. The key is a true integration of services rather than bolting on pharmacies to food retail. Time will tell if this is a real estate deal rather than a marketing deal.

Harley Feldman
BrainTrust

Albertsons/Rite Aid will compliment each chain — having a brand name pharmacy in each Albertsons and a draw for Rite Aid in each Albertsons. Their rewards systems will also be combined which should leverage additional customer interest. However, they should look at lessons learned at Target when CVS customers did not like the fact that the new pharmacies were located inside Target stores. The combination will help consumers that trust Albertsons/Rite Aid and allow one-stop shopping for groceries and pharmacy. It is also likely to set off further consolidation in the grocery/pharmacy market.

Ron Margulis
BrainTrust

There are several ways to look at this merger in a positive light, including real estate and interesting store format potential, expanded health and wellness opportunities and sheer volume. But there are a few negatives, including geography (it doesn’t give Albertsons full nationwide coverage) and e-commerce (neither retailer has a fully-baked offer).

Neil Saunders
BrainTrust

I went to Albertsons this weekend. The shopping experience was abysmal and I walked out with only a loaf of bread. From our customer data, my experience is not uncommon.

So sure, this acquisition will boost sales and profits, but it will not remedy the weaknesses inherent in other parts of the business. It is an exercise in masking problems, not solving them.

Beyond finding synergistic savings and seeking out some common-sense sales opportunities, I am not sure this deal is all that exciting. I certainly don’t buy the narrative that it allows the company to become “a truly differentiated leader.”

Indeed, Albertsons once had pharmacy expertise from both Osco Drug and Sav-on Drugs — however, it sold most of the stores to CVS. This deal just brings it back full circle.

Richard Layman
Guest
2 months 23 hours ago

When Albertsons acquired Safeway, it was touted as a way to acquire their private label and other merchandising and management expertise. Since, at least in the Safeway stores in my market, prices have increased significantly, they’ve eliminated self checkout in some stores, and the offer has deteriorated.

A few weeks back the Idaho Statesman (the newspaper in Boise) had an article about how the company is losing a lot of money because of debt service. Interestingly, this is a merger partly so that they can get Albertsons on the stock exchange again, without having to go through an IPO — I don’t see that substantively mentioned in any of the coverage.

So yes, the companies aren’t market leaders. Potentially if they could make over Rite Aid stores to be more like Shoppers Drug Mart/Pharmaprix stores, not unlike the Walgreens flagship stores, that could drive some changes. But I just don’t see much in the way of innovativeness in the companies.

Mohamed Amer
BrainTrust

This new combination would have scored even higher before we entered the CVS-Aetna era. I view this as a good first step in a sequence of mergers and acquisition that establishes a solid foundation for a combined food and drug player.

I expect Cerberus Capital to make a second move to elevate delivered value and to level the playing field with CVS and any future moves by Walmart that take advantage of existing scale, while creating greater leverage for future drug costs and benefits.

James Tenser
BrainTrust

I think I get the financial motivation behind this deal, but it’s going to be a long slog for the merged company, I suspect. Rite Aid has been a distant number-three in the chain pharmacy business for years. Adding the supermarket pharmacy locations will fill in its footprint significantly (especially in Chicagoland), but it won’t quickly create the unified banner visibility of a CVS or Walgreens.

From the Albertsons/Safeway/Vons/Jewel-Osco/Star/Haggen/etc. side of the equation, there’s the challenge of too many banners, now about to be made more complex.

With those issues understood, this merger still seems like a creative way to challenge the hegemony of CVS and Walgreens. Rite Aid had no other apparent path to rapidly close that gap. Albertsons may view this maneuver as a way to pressure Kroger in sheer scale and score more higher-margin Rx business.

A cool 3D business chess match is happening here, but to me, the shoppers look like the pawns.

Craig Sundstrom
Guest

Rite Aid has long been a distant third among the “big 3” in drugs, Cerberus has always been loyal to a “strip and flip” model for its properties, and the neverending parade of ads I receive from Safeway proclaiming low prices suggests they are staying the course with the many Albertsons properties.

Positives I see for this will be that the bonuses received by management will mean a pickup in sales in the NY luxury condo market, which had been slowing; not much in it for anyone else.

Ricardo Belmar
BrainTrust

This is a very logical and complimentary combination designed to address an ever increasingly competitive market in both grocery and pharmacy. For both Albertsons and Rite Aid, there are many operational efficiencies and optimizations to be had with this merger. But the key to success lies in the execution. Competitors are not standing still and some, like CVS, are already moving ahead in their own direction. Albertsons and Rite Aid will need to move quickly and decisively to execute well or all the benefits will be overshadowed by competitors’ achievements.

Michael La Kier
BrainTrust

Smart move. The combination will strengthen the company’s negotiating power with manufacturers, better position them versus competition and has potential to better ingrate them with shoppers. It also positions Albertsons to enter many new markets based on the Rite Aid footprint as well as shore up their heartland.

Marie Griffin
Guest
1 month 30 days ago
All I can think about are the shareholders that may find release from the nightmare Rite Aid has been for almost 20 years. I was editor-in-chief of Drug Store News when Bob Miller became CEO of Rite Aid in 1999, just after its former CEO, Martin Grass, was tossed out for financial finagling that eventually landed him in federal jail. Before Miller arrived, Rite Aid stock had plummeted after the company issued the largest earnings correction in U.S. history. Miller and his successor Mary Sammons were able to restore credibility and keep the company alive, but the stock price never recovered. It was 15 years before Rite Aid stockholders thought they would finally be freed by a Walgreens Boots Alliance buyout, but the FTC nixed that. At the same time, on the other side of the country, Bob Miller came out of retirement to run Albertsons, a company that had emerged from its deathbed to become a force in the supermarket industry by acquisition. It’s interesting that Bob Miller is now “saving” Rite Aid in… Read more »
wpDiscuz
Braintrust
"While conceptually this all makes good sense, whether this will be successful or not will come down to how management executes."
"With CVS buying Aetna and Amazon getting into health providers, this merger has a tough integration ahead of it."
"It’s a logical combination of categories, although neither Albertsons nor Rite Aid would be considered “best in class” as separate entities."

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