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Mere months after finalizing its asset purchase agreement with Walgreens Boots Alliance Inc., Rite Aid Corp. is back on the M&A train — this time in the form of a merger with Albertsons Cos.
The news doesn’t come as a complete surprise: Rite Aid’s decreased debt made it a more attractive merger or acquisition target, and there exists an urgent need to differentiate within the supermarket channel. The deal, slated to close in the second half of 2018, will result in approximately 4,000 pharmacies for Rite Aid (pharmacies in Albertsons stores, excluding Jewel-Osco, will be rebranded as Rite Aid; stand-alone Rite Aid stores will remain) as well as a public market presence for privately held Albertsons — one that is made more attractive by Rite Aid’s pharmacy operations. In an age of increased channel-blurring, the pressure to remain relevant is real — and not without a complex combination of opportunities and challenges.
Kate Senzamici
The combined Rite Aid-Albertsons entity presents a rather novel food, health and wellness value proposition. Below are some predictions and challenges to consider for planning purposes.
• Pharmacy prediction: Expect Albertsons to leave the Rite Aid pharmacy operations alone over the next 12 to 24 months as Rite Aid leverages its new scope to reestablish old relationships.
The 23-month will-they-or-won’t-they journey between Rite Aid and Walgreens (which culminated with Rite Aid selling half its stores to Walgreens) caused Rite Aid to be excluded from many preferred pharmacy networks, while many managed care organizations (MCOs) awaited final words from the Federal Trade Commission. Now, with Albertsons, Rite Aid is part of a network of 4,000 pharmacies and better-positioned (though still well below CVS Health’s or Walgreens’ pharmacy count) to be proactive in its renegotiations with MCOs.
Rite Aid will be more attractive to pharmacy benefit management and health plan providers, which means that Rite Aid’s top priority during the transition will be dispensing and retaining its extremely loyal Wellness65+ shopper.
• Shopper prediction: An increased West Coast presence also will allow Rite Aid to double its Medicaid Part D lives, which so far number upwards of 500,000 for 2018.
With the addition of Rite Aid health services, not only will Albertsons’ shoppers age 65-plus receive elevated pharmacy services, but they will also receive a PBM in EnvisionRx, which could help protect their interests in branded/generic prescription drug negotiations. With Albertsons, Rite Aid will be on an easier path to activating its strategic initiative of growing EnvisionRx (a stated goal, but tough to generate organically). Additionally, specialty pharmacy capabilities will be broader-reaching under the combined Rite Aid-Albertsons, which gives Albertsons shoppers access to more health care services and allows the grocer to be more relevant in this space (important, considering specialty drugs will represent 44% of pharmacy industry revenues by 2020).
From a shopper perspective, increased pharmacy access means more opportunity to reach a wider shopper base. For example, Kantar Consulting ShopperScape data indicates that while only 8% of Albertsons shoppers get their prescriptions filled at Rite Aid, the pharmacy over-indexes with Generation Y Albertsons shoppers (10% fill prescriptions at Rite Aid). This could provide a welcome and necessary opportunity for Albertsons to boost its relationship with this demographic.
• Digital prediction: Expect increased front-store conversion six to nine months after the deal finalizes, as Rite Aid shoppers immediately benefit from Albertsons’ omnichannel initiatives.
Albertsons has made investments in food delivery and pickup services (Instacart, Plated, Drive Up & Go), which also carry over to enhance Rite Aid’s front store and prescription delivery — thus providing increased access to food, health and wellness solutions. Conversely, the integration of Rite Aid’s health offering into its existing omnichannel capabilities boosts Albertsons’ right to compete with the likes of Kroger Co. and Amazon.com.
A range of omnichannel as well as Rite Aid’s presence in a supermarket format also provides shoppers with a wider choice of shopping modes, with quick-trip and one-stop shopping opportunities that ideally are better tailored to meet shoppers’ needs. Assuming successful integration of Rite Aid and Albertsons’ respective loyalty programs (a combined base of 25 million loyalty customers), more data will mean more analytics to improve assortments, promotions and targeting.
• Execution prediction: Expect executions to be a challenge, as front-store suppliers navigate two very different cultures.
Since it’s difficult to execute pharmacy well, one must question whether adding more intricacy to an already complicated organization will bode well. Though Albertsons has a history in pharmacy, including some industry veterans within its leadership, integrating the Rite Aid pharmacy enterprise will prove difficult — especially at a time when both entities have been facing declines in comparable-store sales and have struggled to compete within their channels. Additionally, Rite Aid’s generic drug purchasing through the WBAD (Walgreens Boots Alliance Development) group purchasing organization — a condition of the asset purchase agreement with WBA — will likely have to be renegotiated and may not apply across the full Rite Aid-Albertsons enterprise.
Finally, from a shopper perspective, low brand recognition will likely be an issue: Right now 16% of Albertsons shoppers also shop Rite Aid, so there will be work to do to get Rite Aid buy-in in Albertsons’ core markets.
Overall, this combination makes strategic sense — especially for Rite Aid, which would have struggled to legitimately compete with CVS and Walgreens on its own — but the real test will be putting theory into practice, especially as more retail players race to partner, reinvent and differentiate across channels and industries.
Kate Senzamici is principal analyst at Kantar Consulting.
