Walgreens Needs to Sell 650 Stores

by Raymond Pucci 0

Psst….want to buy a pharmacy store? How about 650 of them? Walgreens has them to sell. That’s the challenge that they are facing to comply with regulators who are contemplating final approval of the Rite Aid acquisition. According to the following article, this is turning out to be no easy task for Walgreens.

In order for its $17 billion deal with Rite Aid Corporation (RAD) to close, Walgreens Boots Alliance, Inc. (WBA) must meet regulatory requirements, which calls for either selling or closing up to 1,000 stores. The exact number of stores Walgreens is attempting to sell is 650, however nobody is biting. Regardless of this dilemma, Walgreens still expects its Rite-Aid deal to close in the second half of this year.

According to the New York Post, private equity firms are not interested in the aforementioned Walgreens stores because they don’t see those them as high quality prospects. This doesn’t mean Walgreens stores themselves are low quality, but it likely refers to poor locations, which is the most important factor for any brick-and-mortar retailer, including drugstores.

It has been reported that Walgreens and CVS Health Corporation (CVS) met with the Federal Trade Commission last week, and that CVS would buy some Walgreens stores as long as they were not in areas where they competed with CVS stores. CVS wants to avoid cannibalization. While it’s possible a deal like this could come to fruition, Walgreens would probably much rather have one buyer for the 650 stores it wants to sell.

If the Walgreens/Rite-Aid deal is approved, it would form the largest drugstore operation in the country, and that new company would have 46% market share. Therefore, you can’t rule out the possibility that CVS will up its offer and buy more than “some” Walgreens stores. However, this isn’t probable since the stores Walgreens wants to divest aren’t likely to be the best locations.

Along with the store divestment problem that Walgreens faces, other issues impacted by the Rite Aid acquisition are related to payment systems and loyalty programs. Both Walgreens and Rite Aid POS are NFC enabled and therefore accept mobile payments such as Apple Pay and Android Pay. However, each store has its own customer loyalty program, plus Rite Aid is a key member in Amex’s Plenti coalition loyalty plan. Payments and loyalty issues will be worked out in due time, but the vexing challenge for Walgreens will be unloading hundreds of stores into a market already oversaturated with empty retail space.

Overview by Raymond Pucci, Associate Director, Research Service at Mercator Advisory Group

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