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What will the Walgreens Boots Alliance/Rite Aid Merger mean to the Industry?

November 16, 2015

Consolidation has become the new norm in the retail industry, and it's easy to see why in the latest pair up. 

The more than $17 billion deal for Walgreens Boots Alliance to acquire Rite Aid gives the new retail team the power to take on rival CVS – which recently acquired Target’s pharmacies – and creates the opportunity to become a go-to spot for health care products and services alike.

In announcing the plans, the retailers said they will focus on health, beauty and wellness initiatives to make healthcare more accessible to more people – a strategy that includes in-store clinics that offer flu shots and health screenings.

What induced a merger like this?

A lot of things. For one, the impact of the Affordable Care Act and the evolving U.S. health care system has led to lower prescription PBM reimbursements while the increase of generic drugs is cutting into profitability for pharmacies. Walgreens Boots Alliance has a higher exposure to risks arising from low reimbursement rates but CVS can better manage the problem as it has a PBM business of its own. Additionally, competition is increasing with online pharmacies and other pharmacy operators to include mass retailers such as Walmart.

The ACA is not only impacting retailers -- it all started inside the healthcare supply chain first, and is now seeing its affect all the way to retail. The Wall Street Journal reported on October 27, 2015...

"Drug makers, hospital chains, health insurers and others have already struck some $427 billion of merger deals in the U.S. this year (2015), according to Dealogic, as the Affordable Care Act and other factors spur them to seek more leverage with their suppliers and cut costs."

A healthier Walgreens Boots Alliance & Rite Aid

This new movement toward a true health, beauty and wellness store model is done by advancing and broadening the delivery of retail health, well-being and beauty products and services. Drug stores are looking to make healthcare accessible to more customers and patients through an integrated front, while offering innovative solutions for providers and payers within the U.S. health care system.  

Walgreens Boots Alliance states that pharmacies will play an enhanced role as healthcare providers by offering integrated healthcare services with coaching, monitoring and reporting of outcomes. They will improve the overall health status of patients and customers, while supporting goals of providers and health plans, by delivering measureable results, improving quality of care and lowering overall costs.

If Walgreens Boots Alliance can increase the Rite Aid sales per sq. ft. to the Walgreens store average, which is 54% or $300 above Rite Aid's current sales per square foot, the generated volume would be $12.5 billion. 

How will they accomplish this?

Here’s 5 general merchandise and health, beauty and wellness opportunities that the new Walgreens Boots Alliance/Rite Aid can begin capturing in market share:

  1. Beauty: Walgreens and Rite Aid need to continue optimizing their beauty experience by expanding both premium and exclusive brands, adding expertise through beauty consultants, and enhancing the look and feel of beauty departments.
  2. Vitamins & Preventative Health Services: Walgreens will benefit from Rite Aid’s partnership with GNC, which allows Rite Aid to merchandise vitamins, supplements and other products via store-within-a-store format. This is all about a real opportunity to capture the benefits of in-store clinics of health care (now becoming self-care) for consumers.
  3. General Merchandise: There may be some de-emphasizing of general merchandise/consumables in favor of health, beauty and wellness, but the front-end has to provide margins. General merchandise can and should be distributed throughout the store where the consumer is influenced most with adjacent and relevant products. That’s where general merchandise shines. In the past the front-end has relied on a convenience model/pricing, but this has also come under pressure from value formats and others. So Walgreens and Rite Aid stores will need to look for a more disciplined front-end merchandising and promotional strategies utilizing data to customize products and offerings for each store. At the same time, Walgreens has taken opportunity to find white space, such as through its photo business.
  4. Exclusives: Both Walgreens and Rite Aid have ventured into offering exclusive products such as No7, Botanics, etc. and should continue doing so.
  5. Chronic Health Management: This has been a focus are for both Walgreens and Rite Aid by offering chronic health management services. Rite Aid through the Health Alliance pilot has partnered with local physicians and patients with regards to prescription compliance and complication avoidance, and this can carry over to the involvement of health and beauty categories. 

In addition to strengthening its general merchandise and health, beauty and wellness offering, Walgreens Boots Alliance will continue expanding its omni-channel experience through its Balance Rewards program and app. The company recently announced the ability for its customers to interact directly with physicians via a telehealth link on its app.

Efficient Supply Chain is also a must-do when consolidating the network of distribution centers in order realize efficiencies, which can also increase distribution frequency, offer differentiated/regionalization/selection and improve out of stocks. All of these reduce costs and working capital while improving customer experience across the front-end.

Overall, this new merger presents an exciting path for the two retailers. GMDC strongly values its relationship with Walgreens Boots Alliance and looks forward to introducing Rite Aid to its innovative mix of supplier and service/solution company members in 2016.