Five reasons why Albertsons and Rite Aid are merging

Date : 21 February 2018

We look at the factors behind the plans of leading US grocery retailer, Albertsons, to merge with Rite Aid, one of the country's largest drugstore chains.

Annual sales in excess of $80bn

Albertsons is one of the leading grocery retailers in the US, operating over 2,200 stores and almost 1,800 in-store pharmacies. By merging with Rite Aid, which operates over 2,500 pharmacies, following the sale of 1,932 stores to Walgreens Boots Alliance, it will significantly expand its geographic presence, provide it with new growth levers and create a platform for stronger financial strength. The enlarged business is expected to generate sales of around $83bn annually, from a network of almost 4,900 stores, including 4,345 pharmacies.

Source: Rite Aid

An improved food, health and wellness offer

The deal will enable Albertsons to create an integrated health and wellness offer. It plans to rebrand most of its existing in-store Albertsons pharmacies to Rite Aid, while existing Rite Aid stores will continue to operate under this banner. It will also provide an opportunity to significantly improve the food and grocery offer at Rite Aid, which has lagged that at its key competitors, Walgreens and CVS Pharmacy. Albertsons will also gain access to Rite Aid’s Pharmacy Benefit Management Company and EnvisionRxOptions, enabling it to expand its reach across higher-value pharmacy customers by offering specialty pharmacy services. These will become more important over the next five to seven years given the on-going shift to an ageing, but active population.

Aiming to grow private brand penetration to 30%

The merger of Safeway and Albertsons in 2015 transformed the company's private brands program, helping to grow sales to around $11bn annually. It now has the opportunity to build and expand on this through combining brands such as O Organics and Lucerne, with Rite Aid’s private brands in health and wellness, including B4Y and Daylogic. This is an area of relative weakness in the Albertsons private brands portfolio. The company envisages using Albertsons' brands to improve the grocery offer at Rite Aid, while using the Rite Aid brands to improve the health and beauty and general merchandise offer at its grocery stores. This reflects the strategy which Loblaw successfully deployed at Shoppers Drug Mart following its acquisition of the business in 2014. The long term goal is to grow private brand penetration to around 30%, up from 23% and 19% at Albertsons and Rite Aid respectively.

Deepen relationships with loyal, higher spending shoppers

The enlarged company is also aiming to optimise its combined base of 25m loyalty customers, with a focus on driving traffic across both businesses. As part of this, it will seek to capitalise on its enhanced data and analytics capabilities to drive new customer acquisition goals, launch new merchandising programs and generate demand forecasting. In particular, the deal should help Albertsons to deepen relationships with its most loyal customers and drive higher customer spend. Albertsons' pharmacy customers currently spend 2.5 times more on grocery items each week, compared to non-pharmacy customers.

Expanding ecommerce platform across both store networks

The company will also look to optimise its growing ecommerce business to offer same-day convenience across food and health and wellness. Albertsons plans on extending its store pickup program, Drive Up & Go, to 420 additional locations this year, up from 80 currently, while also doubling its recently launched partnership with Instacart to 2,000 stores by the middle of this year. Following its acquisition of meal kit company, Plated, last year, around 650 stores will offer the kits by the end of the year. Both these programs have strong potential within the Rite Aid network; the company plans on offering same-day front end and pharmacy delivery services and in-store Plated meals as part of the integration plan.

Delivering cost synergies of $375m

The business anticipates achieving annual run-rate cost synergies of $375m. These include $90m from expanded geographic coverage to improve supplier funding, $90m from growing the penetration of private brands and reducing the cost of goods sold and $40m from streamlining corporate and regional funding.

Terms of the deal

The merger is expected to close in the second half of 2018, subject to the necessary approvals. John Standley, current Chairman and CEO of Rite Aid will become CEO of the combined company and Bob Miller, current Chairman and CEO of Albertsons will serve as Chairman of the new company. The leadership team is expected to comprise of directors from both companies and will have dual headquarters in Boise, Idaho and Camp Hill, Pennsylvania.

Grocery retailers expanding their presence into the drugstore channel

As the focus on health continues to grow, there has been an increasing trend towards retailers acquiring drugstore chains to form a wider health and wellness offer. Loblaw acquired Shoppers Drug Mart in 2014 to become the leading drugstore and health and beauty retailer in Canada. It has driven strong sales performance at the drugstore chain through a number of initiatives, including improving the food offer and expanding its private label ranges into the stores. Also in Canada, Metro is currently in the process of acquiring Jean Coutu. 

Acquisitions to improve capabilities

The merger of Albertsons and Rite Aid is the latest in a number of deals in the US market as retailers aim to develop new capabilities and extend their reach. Strategic moves include Amazon's acquisition of Whole Foods Market, Walmart's acquisition of Jet and Target's acquisition of Shipt. Albertsons has also been active in this way, acquiring Plated last year to accelerate its efforts in the growing meal kit market. We expect to see further M&A activity over the next 12 months and new strategic alliances to form as retailers better position themselves for both current and future growth opportunities. 

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