Walgreens Takes Manhattan and Other NYC Boroughs, Too
Walgreens announced yesterday that it had signed an agreement
to acquire privately-held Duane Reade from Oak Hill Capital Partners in a
cash transaction valued at $1.075 billion.
With 257 locations in the New York metro area, Duane Reade is the largest
drugstore chain in the city. Walgreens currently operates 70 Big Apple locations.
"Duane Reade is a compelling strategic acquisition
that will immediately provide Walgreens with a leading position in the largest
drugstore market in the U.S.," said Greg Wasson, president and CEO of Walgreens,
in a press release. "In addition, Duane Reade’s recent initiatives in urban
retailing, customer loyalty and private brand products support and accelerate
Walgreens’ strategy to enhance the customer experience in our network of
more than 7,100 stores across the country."
Walgreens plans to continue operating stores under the Duane Reade banner
at least initially after the deal closes. “With
Walgreens currently operating 70 stores in the New York City metropolitan area,
decisions will be made over time as to the best, most effective way to harmonize
the Walgreens and Duane Reade brands,” read the press release.
Duane Reade has undertaken a major initiative over the past couple of years
to remodel stores, launch a beverage and food line under the Dr. Delish label
and better serve customers with its FlexRewards program. The chain has also
had some success with in-store clinics manned by doctors instead of the nurse
practitioners found in Walgreens’ Take Care sites.
The Duane Reade deal follows other recent moves by Walgreens to build its
numbers through acquisitions. The company recently completed deals to acquire
chains including Eaton Apothecary in Boston and Drug Fair in New Jersey. It
is also in the process of finalizing a takeover of the Snyder’s chain in Minnesota.
Walgreens’ expansion through acquisition continues a trend
in the drugstore channel seen for many years. The chain’s primary competitor,
CVS Caremark, has achieved major store count gains by purchasing Longs Drug
Stores (2008) and Eckerd (2004). The struggling Rite Aid chain has also gone
the merger route to grow store count.
A piece by Dow Jones Newswires suggested that further acquisitions
of regional chains are likely to happen in the next couple of years. Among
those chains considered most likely to be acquired include Kinney Drugs, Kerr
Drug and USA Drug.
Discussion Questions: What is your
reaction to Walgreens’ purchase of Duane Reade? Separately, do you have
any concerns about the effects of consolidation in the drugstore channel?
I think this is a great merger of two similar cutting edge merchants in this channel. The new formats of Duane Reade, form and assortment as well as presentation, are as good as anything out there. Perhaps having a number of senior managers and merchants from the supermarket channel has helped them look at the shopping experience differently.
Consolidation is a bad term in my mind for this transaction. There are very few offerings in a classic drug store that nowadays cannot be found in a supermarket or mass merchant.
What we are seeing is shopping destinations being segmented, not necessarily the offering. The convenience of stopping at drug store, or local supermarket or wandering a mass merchant–all to get a prescription filled–may be more of a reflection of how we shop versus what we shop for.
Walgreens went a number of years with a somewhat arrogant attitude in which they were steadfast in growing the chain organically, as opposed to through acquisition. Obviously, that attitude has changed.
The Duane Reade acquisition is a smart one, and one that is not unexpected. DR has the best real estate in Manhattan, and no matter how much money Walgreens has, there was never going to be a situation where they were going to beat DR at the location game. So if you can’t beat them at their own game, simply buy them. Smart move by Walgreens.
While it is great that Walgreens claims to plan on leaving the Duane Reade name on the door for the time being, I think we will see that change within 24 months. New Yorkers like DR, and they tend not to love change. But Walgreens will want to make the change sooner rather than later.
Finally, as it relates to consolidation and being a monopoly, the fact is we still have three strong chains in the US with Walgreens, CVS and Rite Aid, so I think one would be hard-pressed to claim that this move was anti-competitive.
Walgreens played this one perfectly, and it is a BIG win for them.
The drug store segment is doing what comes naturally for a mature industry. This is no different than what has happened in retail and wholesale food. Without growth, the likely outcome is management replacement. Walgreens has historically built their own stores so they could have control. This is extremely difficult in high population cities. This only leaves acquisition as a route to growth.
Unlike some retail channels, like hardware and stationary, the local drug store is not easily replaced, but the name can be changed. Independent drug stores simply don’t have the buying power and merchandise expertise to compete with ever widening competition of supermarkets, club, and specialist formats.
It’s great to see Walgreens marching on with a long-term vision that breaks the insular model of old. When you are in Manhattan, Duane Reade “looks” much bigger than it is; however, there is no doubt that it will give Walgreens an insta-boost of presence in that highly-visible market.
Walgreens will benefit from Duane Reade’s already-underway store experience upgrades which should allow Walgreens to fold Duane Reade into its CCR transformation initiative without a hiccup.
With such a big price tag, this is a fairly courageous move as CVS and Walmart crank up the pressure and Walgreens waits patiently for its restructure to take hold; however, it demonstrates Walgreens’ intention to be a long-term contender in the drug channel. With the Duane Reade acquisition, Walgreens will seem to “own” New York and the boroughs. Nice way to crank things up and differentiate.
Not at all surprised by the purchase. There will be several acquisitions across the board in the next 2-3 years as retailers who have declining sales look for other sources and renewed revenues.
The critical component of this acquisition will be how Walgreens executes the merger. Many companies make good acquisitions but fail in the merging and in creating an effective acquisition model. The work has only just begun for Walgreens.
Consolidation is inevitable. If it is performed well, they will grow and prosper. If it is done poorly the companies will open up the market to others who have a better operations model. Consolidation is not the only threat to chain drug stores; the larger threat is the invasion of their territory by the grocery store market and retailers such as Target, Wal-Mart, etc.
Any manufacturer doing business with the Big 3 Drug Chains will tell you that 2009 was a tough year in terms of contract negotiations, private label expansions, SKU reductions and “margin enhancement.” 2010 is looking to be no easier. These 3 chains (even “struggling” Rite Aid) now rank in the top 20 or 25 retailers in the world, depending on whose numbers you use. They are a powerful force in retailing overall, with a rapidly emerging impact in convenience food. It is no accident that we are beginning to hear manufacturers put Walgreens and CVS in the same sentence as Wal-Mart.
Walgreens can learn a lot from Duane Reade, which continues an innovation streak. Their continuing efforts to serve the urban customer have enabled them to enjoy near-exclusive control over their market. This acquisition feels like the Sears acquisition of Lands’ End–it will work well if the new owner changes NOTHING.
Sorry, this isn’t about M&A in retail’s drug sector.
I wonder if Walgreens went to school on Macy’s? Being headquartered in the greater Chicago area, Walgreens enjoyed a unique perspective on retail acquisition and subsequent conversion of stores.
While it makes old school sense to change names, I wonder in a customer-centric world if retaining the identity of a local and successful retail brand has become the smart move? With the shift away from broad based media, perhaps the efficiencies are no longer what Federated thought. Perhaps the shift to brand Walgreens for private label is a merchandise branding challenge and not an outlet branding challenge.
Will the market dictate the outlet identity?
DR, besides being a drug store is also the local grocery for most New Yorkers. The number of footfalls a typical DR store receives is much greater than those of a typical WAG or CVS store (outside of NY or mega city downtowns)–the merchandise mix needed is different and I’m sure, so is the profitability mix between front end and drug sales.
All in all, a sensible risk…WAG’s challenge now is 3 fold:
– Do an effective integration (This is relatively new to them)
– Ensure front end sales at DR stores don’t fall and take the learnings to other WAG Stores
– Increase pharmacy sales (drugs and health related screenings/products) at DR stores based on their immense experience.
This was a great real-estate play by Walgreens. It is very tough to acquire key retail locations in NYC and by purchasing Duane Reade they accomplished it with one move. This has to be one of the smartest acquisitions made in retail in the last decade. I am really surprised that there was not a bidding war.
Walgreens is a good company that I have done business with for more than 30 years. Walgreens will do a great job in the NY market.
What concerns me is that the U.S. drug store market has a serious lack of competition. I do not believe that this is a wonderful thing for manufacturers, entrepreneurs, and consumers, especially where front-end merchandising is concerned.
It’s getting to the point where “choice” will be very limited, not only for selecting which store to shop, but also in terms of product selection. The mega-branded companies will be fine but the more innovative, newer, small brands that consumers love, will be missed.
It was retailers such as Duane Reade, Longs, and other smaller regional drug chains that would tend to make room for the “new” and the “different.” Once these innovations would gain momentum then the larger drug chains would carry them.
In the last several years, DR has increased their operations and more importantly, their customer relations. Hopefully, they can continue. However, the bet is that, despite the idea of keeping the DR name, the Walgreens way of business will take over and New Yorkers will lose a very progressive retailer.
From a strategic point of view, the acquisition makes sense. With one stroke, Walgreens is a New York force. But, will 2+2=5? Not likely. More like 2+2=3.
When business segments get to the point of maturity and consolidation as Drug Chains have, the conventional wisdom says merge and acquire. It is the only place to look for “growth.” Rarely do these activities deliver positive results. While one of the big three was surely going to buy DR, this type of move is the start of the demise of Chain Drug as we know it. Every day there is a better alternative. The combination of Mass, Grocery and online will turn Chain Drug chains into dinosaurs.
The NYC real estate comes cheap for Walgreens and the first thing Walgreens has to do is make Duane Reade become competitive in filling scripts. If the number of prescriptions rises to anywhere near Walgreens’ average and the front-end sales remain steady, there will be a big payoff for Walgreens sooner than expected.
Retaining the Duane Reade name is a double edged sword, since for every New Yorker who eschews national chain stores just because they are national chains, there is a New Yorker who has plenty of gripes about Duane Reade (dark, dingy, cluttered, surly help, high prices etc.) but still feels compelled to shop there becasue the chain is ubiquitous. Many of the locations, as Walgreens probably already knows, were opened over the past decade when DR was fighting the invasion of CVS and Rite Aid.
This is the last major step prior to the demise of Rite Aid toward the drug store channel going the way of the home center/home improvement retail segment. The latter has Home Depot and Lowe’s and whoever is in third doesn’t matter. Rite Aid will hang on for another few years, but in a quarter century there will be only two companies operating in chain drug retailing.
The pharmaceutical arena, at retail, is loaded with competitors–they are traditional drug stores, grocery stores, discount chains, specialty operations selling HBA and some over-the-counter, and even c-stores in many locales. Alas, the independents continue to shrink/be absorbed.
This is a good move for Duane Reade, and an exceptional move for Walgreens. The winners will be New Yorkers, and the millions of people who pass through New York, and call Walgreens their hometown pharmacy.
Good to see Walgreens take the approach that NOT EVERY MARKET has to grow one store at a time.
This acquisition is a smart purchase by Walgreens. It allows for instant growth, a chance to expand their reach and increase their physical presence. Recessionary times are a great opportunity for stronger retailers to purchase or absorb weaker retailers, while offering opportunities for smaller retailers to grow, as they “fill-in” the gaps that the larger retailers do not focus on (unique products, local customer focus, home care, etc.). Everyone wins with this kind of scenario.
This was the easiest way to penetrate NYC. The locations that Duane Reade has are amazing and they could not logistically penetrate in any other fashion. Walgreens is also getting much more sophisticated about shopper marketing as well. Good acquisition, good philosophies.
“This is the last major step prior to the demise of Rite Aid toward the drug store channel going the way of the home center/home improvement retail segment. The latter has Home Depot and Lowe’s and whoever is in third doesn’t matter. Rite Aid will hang on for another few years, but in a quarter century there will be only two companies operating in chain drug retailing.”
Ten reasons why the above is untrue:
1. Walmart
2. Kroger
3. Safeway
4. Target
5. Supervalu
6. Ahold
7. Costco
8. Publix
9. H-E-B
10. Giant Eagle
And that’s just the chains. Independents under the Leader, Good Neighbor, Health Mart and United Drugs banners are another reason why the retail pharmacy business will be a whole lot bigger and more diverse than the home center channel, for many, many years to come.
People have been anticipating the sale of Duane Reade for many years now; to pretend it’s a harbinger of the end of times for the drug channel is not only a tad over-dramatic, it’s terrifically myopic. The modern retail pharmacy business is much bigger than just the pure-play drug store channel; it’s food, drug, mass and independents.
Walgreens over the years maintained a very low keyed presence with regards to the NYC market, plus its surrounding Boroughs, operating 2 Brooklyn locations and 3 or 4 Manhattan, They were not aggressive as was of Rite Aid in their heyday, opening locations across the street from other CVS and Duane Reade stores. Rite Aid had locations within blocks of each other. Walgreens were on the sidelines opposed to acquisitions.
Obviously, that has changed. The Duane Reade acquisition is a smart one; Duane Reade dominates the real estate game (market) in Manhattan and no matter how large of an operation Walgreens is, their continued success will be that of the the Duane Reade acquisition contribution upping their NYC store count and presence from Duane Reade’s 257 to 327 combined locations with Walgreens. No matter how much they try they just could not come close to the real estate holdings that Duane Read had leased and or purchased over the years. Smart move by Walgreens to Acquire Duane Reade.
Walgreens’ plan on leaving the Duane Reade name and stores intact as an independent entity but in my opinion, I believe we will see a change within 12 months. Walgreens would prefer to make the change sooner rather than later.