Big-time mergers and acquisitions are everywhere these days. Massive companies like American Airlines and US Airways are (still) merging. In the beer world, Anheuser-Busch (Budweiser, etc.) is buying SABMiller (Miller Lite, etc.). And now, it looks as though two major pharmacy chains will join forces to compete with CVS Health, leaving us two major choices in the drugstore world. So what does the $17 billion Walgreens-Rite Aid deal mean for us as consumers?
First, a quick background. Walgreens is the largest pharmacy chain with about 8,200 stores. CVS is currently second with approximately 7,800, and Rite Aid follows third with roughly 4,600 locations. If Walgreens does purchase Rite Aid as projected, the two major brands would form the market leader with nearly 13,000 stores. By comparison, this is more than three times the number of Wal-Marts in the United States.
Walgreens and CVS currently have market capitalizations of more than $100 billion. Rite Aid is much smaller. In their respective recent fiscal years, Rite Aid’s revenues were $26.5 billion, while Walgreens’ were $76.4 billion, and CVS Health’s were $139.4 billion.
Why Walgreens Wants Rite Aid
Many people don’t realize how enormous – and global – Walgreens has become. The company acquired the United Kingdom’s largest pharmacy chain, Alliance Boots, in December of 2014 to and created Walgreens Boots Alliance Inc. The company now has a presence in 25 countries, including roughly 13,100 in 11 countries.
But the retailer currently accounts for “only” 31% of the sales in the U.S. drugstore market, while CVS accounts for 58%. CVS will also ideally add revenues after completing its acquisition of 1,600 Target pharmacies (still in the works). Rite Aid would offer an additional 10% market share to Walgreens. This is critical as more and more individuals – from families to busy single professionals to seniors – rely on drugstore pharmacies and retail clinics for not only for prescriptions, but for treatment of minor health complications, preventative health care, chronic ailment aid, flu shots, immunizations, and more.
And clearly the pharmacy/drug pricing factors are a motivator. The pharmacy and drugstore industry is a $263 billion market. Sitting in the middle of this massive expenditure are pharmacy benefits managers (PBMs) – administrative companies who are responsible for paying and processing drug claims and dealing with the drug companies. CVS owns their own PBM (CareMark), and Walgreens would own one as well through the Rite Aid acquisition (Rite Aid purchased the PBM EnvisonRx earlier this year). As with anything in business, the ability to cut out a middleman is key for profits, as Walgreens would attempt to negotiate drug prices as a forward-thinking strategy.
Will the acquisition go through? Isn’t this an antitrust violation? According to an interview with Audrey Guskey, an associate professor of marketing at Duquesne University, yes to the first question, and no to the second. She thinks that Walgreens and Rite Aid will argue that consumers have tremendous amounts of choice for drugs and even health care services, including CVS, grocery stores, independent pharmacies, big-box retailers like Wal-Mart and Costco, and mail-order services.
One requirement that regulators may have, however, is the elimination of some stores in states where there is substantial overlap between the two retailers, such as California, New York, and Massachusetts.
What the Deal Means for You, the Consumer
All of the drugstore chains have committed themselves to being more active in your health care management. Grocery stores such as ShopRite, Giant, and Kroger have also joined in this movement.
By offering additional health care services, mental health care services, expanded vitamins and supplements, telemedicine, and senior care, you and your loved ones will have additional options for and access to health care.
Convenience is something that more and more people have come to not only rely on, but expect. A world in which you can visit a local pharmacy to see health care professional for about your sore throat, get your child a sports physical, fill a drug prescription, and pick up NyQuil, tissues, and orange juice all at once is very attractive to many people.
If the new Walgreens-Rite Aid alliance is forced to close stores due to overlap in certain cities, regulatory mandates, or both, there will be fewer locations and thus fewer choices for consumers.
With store closings also comes less convenience. If the Rite Aid down the street from you is sold off, you may need to travel to the Walgreens a few miles or a town away. This will be more important in the more highly populated areas.
Also, there is no guarantee that prices will be lowered, as is the case with some mergers. Even if drug prices are negotiated to be lower in the long term, there are many factors that would impact whether these prices are passed down to us as consumers.
To Be Determined
Walgreens has said it plans to keep the Rite Aid brand, at least for now. But if there is a change in branding, most industry experts think that Rite Aid stores would become Walgreens, not the other way around.
Depending on your loyalties, from geography to coupons to rewards cards, whether this merger is beneficial to you will only be understood after some time.
Retail Clinic Landscape
Currently, Walgreens’ Health Clinic retail clinics (a little over 400 locations) and and Rite Aid’s RediClinics (about 60) are unquestionably chasing CVS’ MinuteClinics (1,000+).
While Walgreens has focused on establishing alliances with hospitals and health systems to boost its retail clinic presence, Rite Aid expanded and added branding after its purchase of Texas-based RediClinic in 2014.
After a merger, Walgreens-Rite Aid as a combined company could pose more formidable competition to MinuteClinic. But this remains to be seen given the potential forced closings of locations in cities where there is overlap.