Citing opportunities from meal kits and clinics to private label and omnichannel retail, executives from Albertsons Cos. and Rite Aid Corp. are bullish on potential growth avenues from their pending merger.
Rite Aid Chairman and CEO John Standley, who has been tabbed as CEO of the combined company, noted that the $24 billion deal would vault Albertsons-Rite Aid into the top five U.S. food and drug retailers, behind Walmart, CVS Health, The Kroger Co. and Walgreens Boots Alliance.
What’s more, he said, the new company would stand out from these competitors by being able to boast a presence in six key areas: freestanding pharmacies, fresh foods, pharmacy benefits management, click-and-collect and home delivery of groceries, in-store and subscription meal kits, and loyalty programs.
“We will be a unique combination of grocery and pharmacy that will be well-positioned to deliver a differentiated experience,” Standley said in the companies’ analyst call last week. “We will be the only grocer with stand-alone pharmacies. We will be the only drugstore with the fresh food and consumables expertise of one of the nation’s largest grocery companies. We will be able to utilize our integrated PBM, EnvisionRx, to drive lives into our stores and pharmacies, and we will have unique omnichannel capabilities with the combination of home delivery and Drive Up & Go for groceries, pharmacy delivery in our drugstores and meal kits available in-store and through subscription home delivery, a truly unique offering.”
The merger took a big step forward in late March with the expiration of the Hart-Scott-Rodino (HSR) waiting period. The transaction is expected to close early in the second half of 2018, pending approval of Rite Aid shareholders, regulatory clearance and other closing conditions. At press time, Rite Aid had not yet set a date for a shareholder vote on the deal.
Targeting the pharmacy customer
Together, Albertsons and Rite Aid would field 4,868 stores under 22 banners, including 4,327 stand-alone and in-store pharmacies, across 38 states and the District of Columbia, generating sales of about $83 billion and drawing more than 40 million customers weekly. The combined retailer would be No. 1 or No. 2 in market share in 66% of the metropolitan statistical areas in which it operates. Plans call for most Albertsons pharmacies to be rebannered as Rite Aid.
The companies’ chief target: the pharmacy customer, who tends to buy far more groceries per transaction and have a much bigger overall shopping basket than the average non-pharmacy customer, according to Standley.
“An Albertsons Rx customer spends $92 per week versus a non-pharmacy customer, who spends $24 a week, or 3.5 times more. If we take the pharmacy spend out of the equation, the pharmacy customer spends $66 a week in grocery compared to the $24 [of the non-pharmacy customers], or 2.5 times more,” he said. “So we can see how valuable this pharmacy customer is to the grocery network, and with 4,300 convenient pharmacies densely populated in the markets that we’re going to compete in, we’re going to have a fantastic opportunity to use this network to bring lives into our stores.”
Looking at the Rite Aid pharmacy customer, Albertsons President and Chief Operating Officer Jim Donald expects to make a splash in fresh foods and other perishables.
“I’ve toured through Rite Aid stores over the past few weeks with some of their senior management, and the opportunity to accelerate fresh offerings is big,” Donald told analysts. “Just for an example, fresh individual sandwiches, the lunch offerings near the front end, our own brand frozen entrees, Lucerne products from the dairy, O Organics to complement health and wellness, as well as our Signature lines.”
Meal kits, too, offer an intriguing possibility, executives said. Albertsons acquired meal kit company Plated last September and plans to have the kits in over 650 stores by the end of fiscal 2018. Meal kit subscriptions could be sold at Rite Aid stores and, in tandem with Rite Aid and its RediClinic subsidiary, future Plated offerings could include diet-specific meal kits for pharmacy or clinic patients with chronic health conditions.
Plated approval in national health plans also would enable doctors to “prescribe” the meal kits to the appropriate patients, and health-conscious Plated meals could drive growth in RediClinic’s popular Weigh Forward weight-loss program.
“I can tell you the team can’t wait to work with the staff at Plated to create healthy meal choices for patients with polychronic conditions and those who are looking to better manage their disease state,” Rite Aid President and COO Kermit Crawford said. “So we think this, too, will play a key role in how we think about health care not only in the front of our stores, but also in the back of our stores.”
In grocery and health and beauty care, Albertsons and Rite Aid aim to raise private-brand penetration from 23% and 19%, respectively, to 30% as a merged company, which overall has a $12 billion own-brand portfolio. Leading the charge will be Albertsons’ billion-dollar brands — O Organic, Lucerne, Signature Select and Signature Café — as well as its other labels like Open Nature.
Standley pointed out that the private label customer shops more often and spends more. A heavy own-brands customer at Albertsons makes 13 trips and spends $415 per quarter, compared with 10 trips and $324 for a total-store Albertsons shopper.
“We will use Albertsons own brands in food and consumables to transform Rite Aid’s front end and create a truly differentiated organic and natural merchandising solution versus our drugstore competitors, and we will use Rite Aid’s own-brand expertise in GM and HBC to create the drugstore inside the supermarket experience at Albertsons,” he said. “This is incredibly important because, like a pharmacy customer, the own-brand customer is a loyal and profitable customer.”
For example, fruit and vegetables, cheese, meat, dairy, dry grocery, and bottled water and soda under Albertsons’ O Organics, Open Nature, Lucerne and Refreshe brands could be sold at Rite Aid stores. Meanwhile, Rite Aid’s private-brand health and beauty items — including nail care, first aid, lotions and over-the-counter medicines — could bolster Albertsons’ HBC offering.
“Now we have four billion-dollar brands. So we’re very, very excited around not only what these brands bring to us from a variety perspective, but how it creates a competitive advantage in the market,” said Shane Sampson, executive vice president and chief merchandising and marketing officer for Albertsons.
Boise, Idaho-based Albertsons also is putting the merged company on a strong footing to grow e-commerce. The retailer currently has 1,000 grocery delivery trucks with more than 1,200 drivers, and it plans to expand its Drive Up & Go click-and-collect program to 500 stores and double its Plated meal-kit subscription base and revenue by the end of this fiscal year. On-demand delivery via Instacart is slated to ramp up from over 1,700 stores now to 2,000 stores by the midyear, with revenue at a $400 million run rate by the close of fiscal 2018.
“Our target for this year is really to be a billion-dollar e-commerce business,” Sampson said.
To enhance the in-store experience, Albertsons also is developing scan, bag and go technology to speed checkout. For instance, the company reported in the analysts’ call that it’s piloting Amazon Go-style capability in select stores for a limited set of products, such as Plated meal kits and other prepared foods.
“We’re experimenting with Amazon Go-like technology today where, for example, somebody could come in and pick up a Plated order, it would know that you’re in the store, it would tender an order and you can leave outside of the checkstands,” Sampson said.
Overall, Albertsons and Rite Aid estimate incremental revenue opportunities of $3.6 billion with the merger. On the call, they said 65% of those opportunities stem from creating a preferred pharmacy provider network, rebranding Albertsons pharmacies as Rite Aid and cross-offering the retailers’ Just For U and wellness+ loyalty programs. That network also would include the 325 RediClinic and Albertsons clinic locations. The companies said they’ve identified another 200-plus Albertsons supermarkets that could accommodate a clinic.
Every additional 100,000 lives covered by pharmacy benefits drives $200 million in incremental combined grocery and drug sales annually, according to Albertsons and Rite Aid. And Standley sees room for more pharmacies.
“There are still 500-plus Albertsons stores without pharmacies, 200 of which are actually in California. So we have an opportunity there, I think, to potentially grow pharmacy by looking at some of those locations and see how they fit into the network and what they can do for us,” he said. “A market like Philadelphia’s another great example. There are a lot of Acmes that don’t have pharmacies, so putting that in with the Rite Aid stores could make a ton of sense.”