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Rite Aid/Eckerd deal likely won't be end of drugstore consolidation

Rite Aid/Eckerd deal likely won't be end of drugstore consolidation

Rite Aid Corp. began putting up banners on Eckerd drugstores it officially acquired yesterday after a months-long review by regulatory officials.

The antitrust investigation, which eventually led to Rite Aid agreeing to sell just two dozen of the 1,850 stores acquired, is unlikely to discourage the drugstore industry from looking for more instant ways to bulk up.

"I think the industry will continue to try to consolidate until it becomes so difficult to do so because of antitrust issues," said Mark Lilien, a management consultant with Retail Technology Group, based in Stamford, Conn.

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In the past year or so, not only did Camp Hill, Cumberland County-based Rite Aid work out the Eckerd purchase but Rhode Island chain CVS bought 700 Sav-On and Osco drugstores on the West Coast as well as pharmacy benefits manager Caremark RX. Illinois-based Walgreen Co. picked up the in-store clinic operator Take Care Health Systems, which is based in Conshohocken, Montgomery County, and has Pittsburgh-area locations.

And all that follows on years of closings and mergers that eliminated names such as Revco, Thrift and Phar-Mor.

"We believe the consolidation opportunity for the strongest drug retailers and pharmacy benefit managers is far from over," wrote William Blair & Co. analyst Mark Miller in a mid-May research note on Walgreens.

As large as traditional chain drugstores are becoming, combined they still accounted for less than half of the industry's $250 billion in pharmaceutical sales last year, according to the National Association of Chain Drug Stores. Supermarkets covered almost 12 percent and mass merchants another 10 percent.

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In places such as Pittsburgh -- where the combined Rite Aid/Eckerd now claims to be the market leader -- consumers still have options. Outside of chain and independent drugstores, customer choices include Wal-Mart, Giant Eagle or even mail-order pharmacies.

The prescription business is attractive for retailers for many reasons, including the regular store visits generated and the profits to be made both from the medicine and the mascara on the shelves nearby.

Consumers tend to get all their medicines at the same place and it is not uncommon for those over 65 to take three or four, said Mr. Lilien. In an effort to get people to change their habits, a number of mass merchants and supermarkets last year began offering a month's supply of certain generic drugs for $4. Traditional drugstore chains did not follow suit and their stock prices shivered as investors watched nervously.

Still, Mr. Miller estimated Walgreens has been transferring less than one prescription per store per day to operators with a $4 generic program at the same time its established stores were generating 15 new prescriptions per day.

It's not clear yet what will turn out to be the right formula for success, hence the experiments with in-store clinics, cheap generics and benefits management expertise.

Rite Aid is expected to have an easier time absorbing the Eckerd stores than the company that bought them just a few years ago. Canadian company Jean Coutu Group, which operated Brooks stores in New England, split the then-larger Eckerd chain with CVS when department store operator J.C. Penney decided to sell.

Company officials have said the resulting Eckerd/Brooks operation wasn't big enough in the United States to compete effectively. In addition, Mr. Lilien said the deal didn't overlap enough with that retailer's original base to provide real cost savings.

By comparison, many of the acquired Eckerd stores will fill in markets where Rite Aid already is strong. The two chains overlapped enough that officials have said they could close up to 200 more stores. Rite Aid has not identified those locations and has said it hopes to retain most of the Eckerd work force.

Rite Aid gave Jean Coutu $2.36 billion in cash and 250 million shares of common stock in the deal, worth about 30 percent of the retailer's voting power. Shares closed yesterday at $6.55, up 19 cents on the day.

The company expects a net loss for fiscal 2008 because of the expense of integrating the chains but it also expects to generate savings of $155 million over nine months. More cost savings are expected the following fiscal year.

In the next year and a half, Western Pennsylvanians will see signs changed in the Eckerd stores and buildings remodeled. Rite Aid, which plans to invest more than $1 billion to upgrade stores and distribution centers over several years, is hoping to make the transition so smooth that consumers feel no urge to try a competitor.

However, anyone with a pharmacy will see this as an opportunity for growth.

Giant Eagle is expected to try adding in-store clinics sometime this year and Walgreens has been steadily building its presence. The Midwestern operator entered the Pittsburgh market in late 2004 and now has 14 stores in the region. Three more are scheduled to open by year-end with another eight coming next year, according to a company spokeswoman.

Nationally, CVS has the largest network of stores with 6,200 locations, Walgreens comes in second at around 5,700, while Rite Aid is solidifying its third-place position by boosting its total to approximately 5,150.

Although federal regulators have allowed the acquisition to go through, the order is still subject to a 30-day public comment period and officials still could propose modifications.

Photo courtesy of Rite Aid
A worker hangs a Rite Aid sign at an Eckerd Pharmacy yesterday after the merger of the two drugstore chains became official.
Click photo for larger image.

First Published: June 4, 2007, 11:45 p.m.

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