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Walgreens will focus on retail health care with Rite Aid merger

A customer enters a Rite Aid store in Detroit. Walgreens will use its takeover of rival Rite Aid to spread its philosophy on making drugstores destinations for customers looking to stay healthy or buy beauty products. (AP Photo/Paul Sancya, File)
A customer enters a Rite Aid store in Detroit. Walgreens will use its takeover of rival Rite Aid to spread its philosophy on making drugstores destinations for customers looking to stay healthy or buy beauty products. (AP Photo/Paul Sancya, File) (Paul Sancya / Associated Press)

The proposed merger of Walgreens and Rite Aid will leave just two giant drugstore chains in the Baltimore area and across the United States.

The more than $17 billion deal for Walgreens Boots Alliance Inc. to acquire Rite Aid will give the combined retailer the muscle to take on rival CVS — which now owns pharmacies in Target — and mail-order drug companies as well as become a go-to spot for health care products and services alike, analysts believe.

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But experts warn the merger could leave consumers with fewer choices, less convenience and little benefit from the expected synergies of more than $1 billion. The Rite Aid name eventually could disappear as overlapping stores close and the Walgreens name dominates.

In announcing the plans Tuesday, the retailers said they would focus on health, wellness and beauty, and making health care accessible to more people — a strategy that includes in-store clinics that offer flu shots and health screenings and treat earaches and sinus infections.

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Deerfield, Ill.,-based Walgreens said it plans to further transform Rite Aid stores at a time when all three big drugstore players have been remodeling stores to focus on such services and health related-products, tapping into needs of the aging Baby Boomers generation. The boards of directors of both chains approved the deal, which at $9 per share represents a 48 percent premium to Camp Hill, Pa.,-based Rite Aid's Monday closing price.

For Walgreens, "it's another plank in their march toward expansion in terms of taking more share of the U.S. market, as well as with recent international moves, to broaden the scope internationally," said Dan Caplinger, a senior analyst and contributor to financial services company the Motley Fool. "Certainly Rite Aid, as the No. 3, this is the logical way to compete more effectively with CVS ... and bulk up their assets."

The Rite Aid chain, which has been recovering from struggles during the recession and now runs nearly 4,600 stores in 31 states and Washington, operates 30 stores in Baltimore City and nearly 70 more in the surrounding area. Walgreens, a relatively newer player in the Baltimore market that operates 14 city stores and about 40 more in the region, has been expanding.

Walgreens acquired the United Kingdom's Alliance Boots in December 2014 to boost its store count to 13,100 in 11 countries. The retailer now accounts for 31 percent of sales in the drug store market, and would gain an additional 10 percent share with Rite Aid, according to IBISWorld. CVS alone accounts for 58 percent of the market.

The merger would leave two companies with 99 percent of drug store sales, while all others account for less than 1 percent. Those IBISWorld figures don't account for similar sales at other kinds of retailers.

Rite Aid will keep its name initially, said Ashley Flowers, a spokeswoman.

"Working together," she said, "decisions will be made over time regarding the integration of the two companies."

The deal comes at a time when the retail drugstore sector has been strong but facing growing competition — from pharmacies in mass discounters and supermarkets to mail order and online, said Howard Davidowitz, chairman of Davidowitz & Associates Inc., a New York-based retail consulting and investment banking firm.

Drugstores have competed largely on convenience — not price — but may be losing that advantage as mass discounters have expanded their locations and formats, he said

"This merger makes sense for both sides," Davidowitz said. "In the end, Rite Aid put themselves in a position to survive. The direction they're going in terms of health services is a positive one."

The retailers, for instance, want to bring in customers who would otherwise go to a doctor's office for services such as flu shots, he said.

That strategy, in particular appealing to patients with chronic health ailments, will help a combined Walgreens-Rite Aid stay competitive in the $263 billion pharmacy and drugstore industry, said Sarah Turk, a health care analyst for IBISWorld. Together, they can share the costs of expanding those services, she said.

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"Pharmacies and drug stores are going to become increasingly integral to patient care," Turk said. "Instead of patients going to a physician, a lot of them will rely on pharmacies to provide care."

That makes health care more accessible and brings consumers into the stores, Caplinger said.

But others see ill effects for consumers and small-business pharmacies.

The deal is especially worrisome because of the relationships between the consolidating retailers and pharmacy benefit managers, said George Garmer, a pharmacist and owner of two independent pharmacies in Halethorpe and Middle River.

CVS, which in June purchased Target's pharmacies, owns pharmacy benefit manager CareMark while Rite Aid earlier this year purchased its own pharmacy benefit manager, EnvisionRX, that would become part of Walgreens under the merger.

"They have become these mega-companies, and increasingly with that power they are able to convince pharmacy benefit managers ... to convince employers to restrict patients' choice of the pharmacy they go to and if they're allowed to even use an independent pharmacy," Garmer said. "The consumer is often penalized with a higher co-pay for going to independent pharmacies rather than one of the chains."

But Turk argued that the large drug chains need an alliance with a benefits managers to prevent being excluded from the manager's network.

"Owing a [pharmacy benefit manager] is key," she said. "You can offer relatively low-cost drugs but also have the profit if you can share it with the same interests."

Ultimately, such mergers do not benefit consumers, said Edgar Dworsky, founder of Boston-based ConsumerWorld.org, an online consumer resource guide.

"For the consumer it means several things, less choice, less convenience and probably not any lower prices," he said.

In situations where a Rite Aid and a Walgreens exist within blocks, Dworsky said, "clearly they're both not going to continue to exist after the merger, so where the consumer could comparison shop, go into one, then go into the other, you had that choice.

"There really isn't a third choice once Walgreens acquires Rite Aid," he said. "Two is not a big choice. With three chains, there's really no price war going on. What makes anyone think that with two chains it's going to be more competitive? Pricewise, I'm not expecting consumers to see any great savings."

Caplinger said he would expect to see some store reshuffling, but how that plays out will depend on requirements of antitrust regulators, who must review the deal.

"In areas where CVS doesn't play as big a role, you might have a shuffling of stores, some Walgreens or Rite Aids could end up being CVS," he said. Otherwise, "from a consumer standpoint, it's unlikely to be a real game-changer."

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