The Other Albertsons’ Acquisition

Discussion
Jun 05, 2006
George Anderson

By George Anderson


With practically all the media attention given to Supervalu’s acquisition of a large chunk of Albertsons, many have forgotten that others made significant deals with the grocer and drugstore chain themselves. Case in point, CVS Corporation.


With the drugstore chain’s deal to buy 700 standalone Sav-On and Osco stores from Albertsons, it now has 6,100 stores in 42 states and Washington, D.C.


The deal, as CVS sees it, is most important for the stores acquired in Midwest markets and southern California.


In a press release issued last Friday, Tom Ryan, chairman, president, and CEO of CVS, said, “We see significant, long-term strategic and financial benefits from the addition of these stores, and look forward to capitalizing on the many growth opportunities presented by this important acquisition.”


CVS has been able to grow through a series of acquisitions, including its purchase of 1,260 Eckerd stores from J.C. Penney back in 2004.


The company has received high marks for integrating the Eckerd stores into its system and Mr. Ryan is confident the same will happen with Sav-On and Osco. “Our highly experienced team is already launching our comprehensive integration plan, and we welcome the talented Osco and Sav-On associates into the CVS family,” he said.


While it has seen success through the acquisition route, some financial analysts believe the company will have to rely on organic growth to meet expectations in the future.


Stephanie Hoff of Edward Jones told Forbes.com, “I see few opportunities to make more acquisitions.”


Moderator’s Comment: How successful do you believe CVS has been with past acquisitions? Where does it go from here after buying Osco and Sav-On?
– George Anderson – Moderator

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9 Comments on "The Other Albertsons’ Acquisition"


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Jim Dickson
Guest
Jim Dickson
14 years 8 months ago

Walgreens will not lie down quietly. They will intensify their efforts to be the dominant national drug chain. CVS will have some brand equity issues as/if it attempts to change the names of Sav-On and especially Osco.

Mark Lilien
Guest
14 years 8 months ago

5 years ago CVS stock was around $28/share. Today it’s around $29. 5 years ago Walgreens was around $41/share. Today it’s around $43. These are two of the best run, most successful retailers in the world, yet their stock price appreciation has been minimal. And what will happen to both companies when the state and federal governments start tightening prescription fees the same way they’ve tightened hospital and physician fee schedules? Drug retailers make almost all their profit from prescriptions, not variety store merchandise and food. Isn’t it time for drug chains to halt their location growth? Why invest the capital?

Joseph Peter
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Joseph Peter
14 years 8 months ago

CVS will suffer in areas where Osco was branded along with a Jewel or other Albertsons store. Osco provided many grocery products branded by Jewel here in Chicago and provided produce, ready to make meals and deli products supplied by Jewel Food Stores. Since many Osco customers were able to pick up their favorite Jewel products, CVS will suffer when the customers lose this reciprocity with a grocery chain.

Michael L. Howatt
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Michael L. Howatt
14 years 8 months ago

Let the battle begin. I think the CVS vs. Walgreen match-up will be an interesting one for us to watch. It has all the flavor of a BoSox-Yankees series, with CVS now ready to challenge the long time leader. However, changing the Osco store names that are actually inside the Jewel stores could be a challenge.

Ben Ball
Guest
14 years 8 months ago

One thing to note is the boost these Osco/Sav-On units will get from being associated with CVS in terms of manufacturer support — especially OTC and HBA manufacturers. We have seen these stores immediately jump from “C or D” to “A or B” in terms of strategic priority as soon as they are disassociated from the poor performing (at least for HBA) Albertsons chain banner. This means more focus and resource and therefore a built-in growth factor for these units as part of CVS.

Being a Chicago suburbanite myself, I hear what “omnisuperstore” is saying about the downside of the disassociation of Osco from Jewel in the stand alone locations. My own “home-store” is a combo unit, but even it has been visibly suffering since Walgreens parked a stand alone corner unit (literally) in the corner of their parking lot. Overall I think this is going to be a win for the units CVS acquires.

Jason Brasher
Guest
Jason Brasher
14 years 8 months ago

It is interesting to see that CVS is perceived as picking up the Osco stores attached to the Jewel stores and that they would be expected to deliver items that those outlets sourced from the grocery channel.

My reading of the story finds that they only purchased “Stand-Alone” stores. If they are tied to a grocery store, as the Jewel-Osco format is, that would not be “Stand-Alone,” it would be a Combo store.

I think the interesting side to this is how the companies will work out such details as branding the stores and how to supply them since not all of the SuperValu stores have facilities to ship GM/HBC and prescriptions with out the facilities purchased by CVS. Sure, there are supply agreements in place. I doubt they outline the daily details of what will be stocked in the warehouses and how the service will be carried out.

It should prove an interesting challenge for all three of the companies involved in this deal. An interesting year to be sure.

M. Jericho Banks PhD
Guest
M. Jericho Banks PhD
14 years 8 months ago
There is a scientific principle that roughly states the following: As a body grows larger, the ratio of surface area to total mass grows smaller. In a balloon, the internal volume of gas grows faster than the “skin” area of rubberized latex. This is important to mammals, for instance, because smaller animals (with a larger surface area-to-mass ratio) must work harder to stay warm than larger animals with less surface area (which releases heat) per cubic inch of mass. For CVS, new stores represent the internal volume or “mass” of the body, and some of the components of the surface area are advertising costs, quantity buying discounts, and management costs. We call these economies of scale or “integration savings.” But unlike a physical body, the relationship of mass to surface area in a business acquisition setting does not change naturally, organically, or predictably. It must be managed. The key to success then becomes using an understanding of the relationship between mass and surface area and setting goals. Allowing the surface area of a business to… Read more »
James Tenser
Guest
14 years 8 months ago

CVS’ purchase of the Osco and Sav-On units is not exactly under the radar. I’ve heard several sharp observers refer to the deal recently. It sets up a two-horse race between CVS and Walgreens, as each endeavors to wallpaper the country with locations three miles apart.

For CVS, the usual business integration challenges apply – re-branding, re-merchandising, cultural issues and name recognition in new markets. Here in greater Tucson, where CVS had 10 stores to Walgreens’ 45, the addition of 11 freestanding Osco locations will help level the playing field somewhat, perhaps allowing some local advertising support.

Conspicuously quiet throughout all this has been RiteAid. With 3,300 stores in 27 states, it is a strong number three in the U.S. The way things have been going, one wonders whether CVS or Walgreens is big enough to swallow it.

Joseph Peter
Guest
Joseph Peter
14 years 8 months ago

To clarify:

The freestanding Osco stores in the Chicago area carry products from Jewel stores for their food mart. They are freestanding from the Jewel stores and thusly once CVS takes over, these stores will no longer provide Jewel food products to the former Osco, now CVS customer. The Jewel Osco combo stores are staying Jewel Osco, but being operated by SuperValu.

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