Walgreens is set to acquire New York-based drugstore chain Duane Reade in a $1.08bn (£662m) deal that includes the assumption of the latter’s $475m (£293m) debt.
Subject to receiving regulatory approval, the deal will catapult Walgreens into a leading position in the city, adding 257 stores to its 70 existing locations there.
Given the time and property costs associated with building a market-leading chain organically in the metropolitan area, it’s easy to see why Walgreens has opted for the acquisition.
The drugstore giant expects to make savings of about $125m (£77m) in three years, and to achieve this will hope to reap significant operating synergies from the deal. As such, most of Duane Reade’s corporate office functions can be expected to go.
There is another pleasing aspect of the deal for Walgreens. At the same time that it is readying for a push into fresh and convenience foods, Duane Reade is already reasonably well advanced in this sector, launching its own range of private label foods and also radically overhauling its in-store convenience foods areas.
This, as well as key areas such as loyalty marketing and urban store concepts, could be ripe areas for Walgreens to generate rewarding reverse synergies.
Perhaps most intriguing is whether Walgreens will keep to its promise that the stores will retain the Duane Reade brand.Walgreens’ long history of acquisition and conversion would suggest that it may be tempted to eventually backtrack on this pledge. This time, however, you have to wonder whether it wouldn’t be a good idea to stick with such an iconic brand for New Yorkers.
A strong pointer to the fate of the brand will be whether Walgreens allows Duane Reade to continue with its store remodelling programme. Stung by criticism that its stores were dark, cramped and poorly merchandised, Duane Reade is rolling out a new concept with more convenient and intuitive store layouts, improved lighting and a new appealing private-label range.
The deal also represents a poke in the eye for rival CVS in the two-way battle for national store network supremacy. Now, with very few sizeable regional drugstore chains left standing, attention will turn to the ailing third-place national retailer Rite Aid. It wouldn’t come as a huge surprise if parts or the whole were swallowed up by its larger rivals. Walmart may even be interested, given its stated ambition to ramp up its presence in urban markets.
Matthew Stych, research development manager, Planet Retail.
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