Walgreens, Rite Aid combo to spread drugstore health kick

Walgreens will use its $9.41 billion takeover of rival Rite Aid to spread its philosophy on making drugstores destinations for customers looking to stay healthy or buy beauty products.

The nation's largest drugstore chain also is expected to flex its beefed-up negotiating muscle to wring better deals from drugmakers and other suppliers. But experts say those discounts won't automatically trickle down to consumers.

In fact, customers may not see a huge impact on their wallets if this deal goes through. But they will likely see some store closures or name changes and fewer brand choices after Walgreens Boots Alliance Inc. adds the nation's third-largest drugstore chain to its portfolio.

They also may see more clinics in Rite Aid Corp. stores and more products like vitamins and supplements aimed at keeping them healthy, as the sector continues to stretch well beyond simply filling prescriptions.

All the major drugstore chains — Walgreens, CVS Health Corp., and Rite Aid — have been revamping their stores for the past few years to make them bigger providers of health care products and other services. They're trying to appeal to customers who want to do more one-stop shopping and take advantage of the vast network of stores that the chains have built.

Drugstores also are shifting to serve the aging baby boom population and its health needs, as well as the growing number of people who are shopping around more for health care instead of simply visiting their family doctors. And they're fending off competition from grocery chains and big retailers like Wal-Mart that have added thousands of pharmacies to their stores and offer steep discounts on some drugs.

CVS, in fact, is partnering with the retailer Target Corp. to run its in-store clinics and pharmacies.

All this competition, plus the growing mail-order business for prescriptions, is expected to keep the pharmacy market fragmented even after this deal closes.

Walgreens said Tuesday after markets closed that it will spend $9 per share in cash for each share of Camp Hill, Pennsylvania-based Rite Aid, which runs about 4,600 drugstores in 31 states and the District of Columbia.

That deal, on the surface, would create a drugstore behemoth that runs more than 12,700 stores in the United States. That amounts to about 64 percent more than the next largest competitor, CVS, not counting that company's still-evolving partnership with Target.

But Walgreens will likely have to shutter some nearby locations to keep the stores from cannibalizing sales off each other. The company also may have to close hundreds of outlets to ease federal regulatory concerns about competition. That will depend on how the deal changes the competitive balance in individual markets.

Once a Walgreens-Rite Aid deal closes, the company will likely hold "a bit of a beauty contest" with suppliers to see who can give them the best deals on products sold in the front of their stores, or the area outside the pharmacy, said Paul Keckley, who studies health care issues as managing director of the Navigant Center for Healthcare Research and Policy Analysis.

"They have more leverage over suppliers the fewer suppliers they deal with," he said.

For the consumer, that means that the chain's surviving stores may wind up carrying fewer brands going forward, maybe three different kinds of soda instead of five. But it likely won't translate to lower prices. Those products don't offer a lot of profit for drugstores in the first place so there isn't much room to cut prices.

The chain also will try to negotiate better prices on drugs, starting with generics, and consumers may start to see some breaks here. But prescription prices also can depend on insurance coverage and whether a drugmaker is motivated to lower its prices to fend off competition from competing treatments.

Walgreens announced the Rite Aid deal less than a year after polishing off its acquisition of European health and beauty retailer Alliance Boots, which runs the biggest drugstore chain in the United Kingdom. That combination created Walgreens Boots Alliance Inc., which operates more than 13,100 stores in 11 countries.

Walgreens and Rite Aid expect their combination to close in the second half of next year.