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Walgreens and Rite Aid Proposed Merger: The Blurring Lines Between Retail and Healthcare


In October, Walgreens announced plans to acquire Rite Aid in a deal that had been widely anticipated. The deal is most certainly going to reshape the retail market by creating a drug store giant with nearly 13,000 stores in the United States; as well, it foretells of the significant changes occurring in the healthcare market.

The way healthcare is delivered in the United States is undergoing a significant transformation in the aftermath of the Affordable Care Act, which is putting increased pressure on hospitals, insurers and drugmakers to lower their costs. As a result, providers are looking to move delivery of care closer to the intended receiver — and out of the high-cost hospital environment. Meanwhile, consumers are taking more responsibility for their healthcare choices and looking for convenience, easy access and better and more cost-efficient services.

And as the healthcare industry moves toward a more retail-focused model, one-stop solutions that provide healthcare, insurance and other related services and products are gaining popularity — and intensifying the competition — and in some cases “co-opetition” — between retailers and healthcare providers.

The Walgreens-Rite Aid deal comes amidst a multitude of strategic partnership drug and retail companies are forming in order to capture a bigger share of the healthcare market, which is expected to comprise 20% of the nation’s GDP in 2021.

In late 2014, Wal-Mart announced that it would partner with to provide healthcare insurance advice to consumers at half of WalMart’s 4,300 stores. Separately, in June 2015, Target Corp, sold its in-store pharmacies to CVS in a deal which may lead to other supermarket chains with struggling pharmacies to look for drug store partners.

Moreover, drug stores are not only competing with each other and now with retailers, but also with hospitals. In fact, Walgreens' latest announcement to transition its Healthcare Clinics to the Epic electronic health records platform to achieve better coordination and interoperability with health systems is a direct example of the company's strong focus on growing its clinic business.

A deal between Walgreens and Rite Aid will enable the joint company to realize increased synergies by consolidating stores in close proximity and will, as a result, drive up revenues per square foot — a key metric in negotiations with retailers. By one estimate, Walgreens may be closing some 3,000 Rite Aid stores because of the proximity considerations. If this happens, the winner will likely be Walgreens itself, as the foot traffic is likely to be directed to the nearest Walgreens location.

From a strategic perspective, achieving this kind of scale is likely to afford the combined company extra leverage in negotiations with suppliers that fill the front end of the store where the majority of revenues are generated. And by drawing consumers in by offering more competitive prices on the front end, Walgreens is naturally going to aim to lure them into buying other services while in the store.

Despite all the benefits outlined above, the merger will not be without its challenges. Even as consolidating real estate can drive cost efficiencies and increase leverage in negotiations, it also creates complexities. The new entity will have to decide what makes the most strategic sense from a real estate consolidation standpoint as well as determine and develop the brand identity of the merged stores.

Most importantly, combining the unique cultures (one—Rite Aid—with a bigger focus on smaller communities and the other — Walgreens — on large urban markets) of the nation's first and third largest drug stores will require a thought out communications and marketing plan, as well as strong leadership that has its ears tuned to the needs of both employees and customers.

All of this will have to happen as the merged entity works on building its position as a one-stop healthcare provider in multiple markets nationwide, defining relationships with insurers and healthcare provider networks and simultaneously attracting new customers.

Even with myriad challenges, the merger is a sound strategic step in an industry that is getting increasingly complex and multifaceted. And when all is said and done, the merger is bound to play a defining role in the evolution of the healthcare market and permanently alter the playing field in retail and healthcare industries.

Ted Vaughan is partner and national leader of the consumer business practice, BDO USA, a U.S. professional services firm providing assurance, tax, financial advisory and consulting services to a wide range of publicly traded and privately held companies.

Patrick Pilch is managing director and national leader of The BDO Center for Healthcare Excellence & Innovation, BDO USA.

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