Rite Aid Buying Brooks, Eckerd from Jean Coutu
Rite Aid is about to get a whole lot larger.
The company announced an agreement to purchase the Eckerd and Brooks drugstore chains from the Jean Coutu group for $3.4 billion in cash and stock.
Rite Aid takes over the business following Jean Coutu’s failure to integrate the chains. Jean Coutu purchased 1,540 Eckerd drugstores from J.C. Penney two years ago but has failed to make a go of it.
Mary Sammons, president and CEO of Rite Aid, addressed the integration issue in a press release announcing the deal. “Successfully integrating these stores requires a strong infrastructure like the one we have built at Rite Aid, with information systems and a supply chain already capable of supporting a significant increase in the number of stores,” she said. “We believe the stores will also benefit from our proven front-end merchandising programs, innovative advertising and promotion programs, successful pharmacy marketing initiatives, solid supplier relationships, state-of-the-art technology and strong field structure. With 70 percent of the acquired stores located in states where we already operate, we expect to leverage our systems, programs, best practices and executive management talent to improve profitability by achieving substantial cost savings and growing sales. We’ll also capitalize on our leadership team’s expertise in retail mergers and turnarounds and plan to make a significant financial investment to improve the acquired stores.”
Rite Aid’s plan to invest in improving stores is in line with Jean Coutu’s August 4 announcement it would invest $58 million to renovate and remodel 1,000 stores.
When the deal is closed (following shareholder and regulatory approval), Ms. Sammon will continue in her current position while adding the role of board chairman to her responsibilities.
She believes the deal will quickly make Rite Aid more competitive with industry heavyweights Walgreens and CVS. “Adding these stores to our company gives Rite Aid scale comparable to our major drugstore competitors, and we believe this enables us to compete more effectively in a highly competitive business,” she said.
Discussion Questions: How will the deal between Rite
Aid and Jean Coutu Group impact the drugstore landscape? What will it mean for
the now larger Rite Aid, its major chain competitors and independent drugstores?
- Rite
Aid Will Grow to Approximately 5,000 Drugstores as the Jean Coutu Group Agrees
to Merge All Brooks and Eckerd Stores Into Rite Aid in a Transaction Valued
at $3.4 Billion – Rite Aid/The Jean Coutu Group - The
Jean Coutu Group – Fourth Quarter and Year-End Results Reflect Improving Trends
in Canadian and US Sales – Jean Coutu Group
I’m a strong believer in the “two-per-channel” theory — that US retailing is moving quickly toward having only two major players in each channel. If Rite Aid wants to be a survivor, it will have to do something more to move out of the #3 slot.
Rite Aid will do fine with the Eckerd and Brooks stores if the price paid is reasonable. Jean Coutu paid $2.38 billion for the Eckerd stores (the gross price was $4.53 billion, but CVS took many of the stores and the mail order division for $2.15 billion). If the Eckerd stores are still worth $2.38 billion, are the Brooks stores worth $1 billion on top of that? Rite Aid will have some economies of scale and less competition. It’s not clear that Rite Aid has a great bargain, though. Although it briefly climbed from $4.40 to $4.75 yesterday, Rite Aid stock today is only $4.50 while Jean Coutu rose from $11 to $12.50. There is a saying in the auction business: sometimes the winner is really the loser.
History repeats itself. Consolidation down to two or three major competitors in the Walgreen/CVS/Rite Aid space is not surprising. Rite Aid will have its hands full (and bank accounts empty) with this combination, but it was almost a do or die for them. The 70% overlap with existing markets is good (assuming the overlap doesn’t mean stores across the street from each other) as they will be able to increase the value of marketing in those areas.
For the smaller regional chains, the combination won’t come as a surprise. As always, they will be faced with the issue of presenting a value proposition that separates them from the big players. Given the complexity (i.e., cost) of dealing with reimbursement issues (Medicare Part D) and some of the efficiencies and clout size brings to those issues, the pressure will be greater on the regional outfits.
The larger players also may have an advantage in the battle for pharmacists. They will offer some greater job security and probably more chances for promotion.
The next question is whether any of the big three will expand their locations through combinations with other retailers to build more powerful alternatives to Wal-Mart?
These acquisitions seem like a reasonable move and should be well received by the public. After all, we accepted Fox as a 4th major TV network in a relatively short period of time. The big test is how will they position themselves vs. the Big 2. Will they offer drive thru service, groceries and other similar items? Will they take a whole new approach? Should be interesting to follow their progress.
This doesn’t come as a shock to me, and as a previous comment suggested, this is a “must do” for Rite Aid. The challenge will be to pick up the pieces from the Brooks/Eckerd stores that have not been all that effectively integrated and attempt to minimize confusion among shoppers.
Mary Sammons is a very smart woman and has quite aptly guided Rite Aid out of rough waters. If she has enough money to do what is necessary to fully integrate the operation and bring some differentiation to the shopping experience (all while stockholders’ patience is being tested), I believe the merger will be a good one. If, on the other hand, CVS and Walgreens become more aggressive, gaining market share while Rite Aid “figures out their combined operation,” it could be a disaster.
If I’m a regional chain or an independent, I’m re-inventing my store right now. They need to recognize that they can be more nimble and very quickly implement a localized marketing and merchandising approach. This, too, could put pressure on the success of the new Rite Aid.