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Walgreens Boots Alliance Inc. is reportedly close to reaching a deal in its acquisition of Rite Aid, a rival drug store company. If the acquisition is approved, it would unite the first and third largest drugstore chains and the combined company would control nearly half of the US drugstore market.
Anti-trust issues notwithstanding, the deal makes a lot of sense as far as Walgreens strategy has been concerned. In 2012 the company made several purchases, including drug store chain USA Drug, expanding its domestic presence. In 2013 the company bought a stake in AmerisourceBergen to help streamline pharmaceutical distribution. In 2014 the company completed the purchase of Alliance Boots GmbH, a pharmacy and beauty company with a large European presence, giving it a greater access to global markets. Since this acquisition, Walgreens pursued a cost-cutting initiative by US$500 million, closing nearly 200 stores in the US.
In 2015 it appears that Walgreens will attempt to continue to gain leverage over all aspects of drugstore retail by shoring up it share in its domestic market by buying the third largest chain in the US. The merger is projected to yield several cost benefits, especially at a time when the healthcare landscape is changing quickly.
“A combination of the pharmacy chains would come amid waves of mergers in various corners of the health-care industry—from drug makers to hospital chains and insurers—as the federal health overhaul known as the Affordable Care Act and other developments pressure companies to lower costs, bulk up and increase leverage with suppliers.” –The Wall Street Journal
The merger illustrates the ongoing consolidation in the healthcare industry, and more broadly in the retail industry. The consolidation would enable the company to leverage its size with suppliers to offer lower prices for consumers, and therefore be better positioned amongst its competitors, primarily CVS.
“…pharmacies are fending off competition from mail-order prescription discounters, online pharmacies, wholesale retailers such as Costco and health clinics, among others. Consolidation gives the drug-store companies more leverage to negotiate with drug companies.” –USA Today
Considering the two companies’ sizes, the deal is expected to bring up antitrust concerns. More details of the deal are expected to be announced as early as Wednesday October 27, 2015.