Walgreens-Rite Aid deal could lead to elimination of 3,000 stores

November 5, 2015, 6:13 PM UTC
CHICAGO, IL - MARCH 26: A display of colored lights change every few seconds outside a State Street Walgreen's on March 26, 2013, in Chicago, Illinois. Visitors to "The Windy City," the third most populous city in the United States, have had to bundle up due to an unusually cold spring. (Photo by George Rose/Getty Images)
Photograph by George Rose — Getty Images

If Walgreens buys smaller rival Rite Aid (RAD), the combined company may end up with far fewer stores than it bargained for, according to an analysis by real estate services company Cushman & Wakefield.

Last week, Walgreens Boots Alliance (WBA), the U.S. drugstore chain’s parent company, said it would buy its smaller competitor for $17.2 billion including debt.

The acquisition, which is likely to face heavy scrutiny from U.S. regulators, would result in a drugstore chain with 12,800 locations, barring closings and divestitures. That would make it much bigger than CVS Health (CVS), which runs the second largest chain by store count, with about 8,000 locations. CVS is in the process of buying Target’s (TGT) 1,700 pharmacies.

Earlier this week, Walgreens revealed in regulatory filings that its contract with Rite Aid allowed for the divestiture or closing of up to 1,000 stores, though the company said it expected the total to be less than half that amount. Walgreens runs about 8,200 stores, with locations in each state, while Rite Aid has about 4,600 stores in 31 states.

In his analysis, Garrick Brown, vice president of research at Cushman for the West Region, notes that Walgreens could close or sell 1,000 before the deal closes, and then shutter up to another 2,000 after.

Brown’s research found that there are 14 states where this deal, if left intact, would double Walgreens current store count; Michigan, Pennsylvania, and New York would have the highest concentration. By contrast, there is little overlap in other major markets like Florida, Illinois, and Texas.

Brown found there are 400 U.S. zip codes with four or more of either a Walgreens or a Rite Aid. So beyond what regulators end up requiring to give the deal their blessing, Walgreens may find all that overlap a problem.

“The post-merger Walgreens real estate imperative will be to minimize cannibalization,” Brown wrote, noting that there are countless Rite Aid and Walgreens stores standing right in front of each other in many parts of the country.

Rite Aid stores are likely to bear the brunt of the closings. “Who will win in those instances? In most cases, it will be the Walgreens location simply because Walgreens sales per square foot are typically higher.”

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