Rite Aid and Albertsons Call off Merger – What’s Next?

By George Anderson, RetailWire

Many have questioned the merits of a merger between Albertsons and Rite Aid since the two companies first announced their plans to do so back in February. Now that the two companies have called off their deal, concerns about how the two will mesh are no longer relevant. What does remain, however, are questions about where the grocer and the drugstore operator go from here on their own.

Albertsons has been criticized for its plain vanilla approach and failing to stand out in an increasingly competitive grocery market, both in its namesake stores and for its Safeway chain. The company’s private equity ownership group led by Cerberus Capital Management has been criticized for failing to adequately invest in stores. Some saw the Rite Aid deal as nothing more than a smokescreen for management to continue neglecting its core grocery business.

For many of Rite Aid’s biggest investors, the deal offer from Albertsons simply wasn’t high enough for them to cast their votes in its favor. In the end, there was enough opposition to the merger for the drugstore’s board to determine it needed to go forward as a standalone company.

“We remain focused on leveraging our network of conveniently located retail pharmacies, our EnvisionRxOptions PBM and our trusted brand of health and wellness offerings,” said John Standley, chairman and chief executive officer of Rite Aid, in a statement. “We will continue building momentum for key areas of our business like our innovative Wellness store format, highly successful customer loyalty program and expanded pharmacy service offerings, as we also enhance our omni-channel and own brand offerings to strengthen our competitive position and create long-term value for stockholders.”

While Mr. Standley has expressed optimism about Rite Aid’s future, the drugstore chain faces an uphill battle as larger rivals CVS and Walgreens Boots Alliance have expanded store counts and made other moves to become more formidable. Walgreens acquired nearly 2,200 stores and three distribution centers from Rite Aid last year after a deal to take over its smaller rival ran into opposition from the Federal Trade Commission.

Amazon.com may further complicate matters for Rite Aid. The e-tail giant has been lowballing drugstores to gain share of the over-the-counter remedy market. Even more significantly, Amazon announced an agreement in June to acquire PillPack, an online pharmacy that delivers prescription medicines to customers in pre-sorted doses.

Discussion Questions:

What is your assessment of the challenges and opportunities facing Albertsons and Rite Aid now that the two will no longer merge into a single company? What’s the best path forward for each?

Comments from the RetailWire BrainTrust:

As far as Rite Aid is concerned, I just don’t think Amazon is the big player/threat. It’s definitely much more CVS and Walgreens. But Rite Aid has some fabulous/convenient locations in NYC so I could easily see it carrying on, just not at a huge size.

For Albertsons, threats are everywhere; Amazon, Walmart, Kroger, pretty much every other grocer in its neighborhoods.

The day may come when Rite Aid goes private. But not all retailers have to be huge.

I’m not quite sure what Albertsons should do. Probably freshen up everything about its stores and get click and collect working impeccably.
Paula Rosenblum, Managing Partner, RSR Research

Albertsons and Rite Aid are struggling in their format segments so its probably best that they both focus on how they can remain competitive in their respective industries. The merger would have been a distraction at a time when laser focus is required for a critical turnaround for both retailers. With that said, the idea of grocery plus RX seems to be a good play for brands that are looking for additional distribution channels and a partnership of both segments is a win for the consumer in their quest for all things convenient. However, Albertsons and Rite Aid are not ready for this type of move.

Albertsons should focus on identifying where their sustainable competitive advantages are in the current grocery landscape and how they can differentiate themselves as the competition heats up. Rite Aid should be focused on a category assessment of current offerings (suggest ready-made foods on a wide scale), their loyalty program (a bit too complex), their convergence of digital and physical and size formats.
Shelley E. Kohan, Assistant Professor, Fashion Institute of Technology

This was never a sensible merger.

Albertsons should stop playing corporate games to inflate its value ahead of an IPO. It needs to focus on the basics of retailing and improve its ailing store estate and invest further in areas like digital. It also needs to sharpen prices, especially at Safeway which has become ludicrously expensive (with no justification) relative to the market. Adding Rite Aid solved none of these issues and would have masked underlying issues and injected more complexity into the business.

Rite Aid arguably does need a partner. The sell-off of stores to Walgreens has left it vulnerable and means it will struggle to compete in terms of scale. Albertsons was not a sensible partner, but there are other grocers and players that may prove to be a better fit.
Neil Saunders, Managing Director, GlobalData

Grocery and drug store segments are hyper-competitive and Albertsons and Rite Aid are clearly not leaders or innovators in these industries. They both have an uphill battle. Albertsons needs to be more creative and innovative to become relevant or even survive. I suspect there may be other potential buyers eyeing up Rite Aid, as their future is questionable as a standalone brand now that they have sold about half of their stores to Walgreens. It wouldn’t surprise me to see Amazon or Alibaba look at Rite Aid as an acquisition target.
David Naumann, Vice President of Marketing, BRP

For Albertsons it’s all about continuing to invest in technology while seeking opportunities for innovation to better compete with the Amazons et al. of the retailing world. Bolting on a third-tier pharmacy like Rite Aid did not provide them with the strategic advantages necessary to justify upping the deal price.

As for Rite Aid, it is now on its own to find its way. Albertsons could have helped them on the path.
Richard J. George, Ph.D., Professor of Food Marketing, Haub School of Business, Saint Joseph's University

Albertsons’ challenges are quite apparent. They have no point of differentiation against brick-and-mortar competitors, online grocers and Amazon. The entire company has not progressed forward in a world where the consumer expects more from their grocery store, other than just low prices. In the end, they will go the way of Toys “R” Us.

Rite Aid needs to play catch up to the other drug operators. But with Amazon entering the prescription drug market, it is going to become a different playing field. I do not hold much hope for either company. I think both companies should seek to sell themselves to other operators.
Phil Masiello, Founder and CEO, Hound Dog Digital Agency

Read the entire story and RetailWire discussion at http://bit.ly/2w8B0g7

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                                                                         Mid-August 2018
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