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Albertsons and Rite Aid Were No Dream Team

Albertsons and Rite Aid Were No Dream Team

(Bloomberg Opinion) -- What do you get when you combine two retail also-rans? In the case of Albertsons Cos. and Rite Aid Corp., we're not going to find out.

The companies announced Wednesday night that they’re terminating their merger agreement, a decision that came after two proxy advisory firms had recommended shareholders vote against the deal.

It's an unfortunate outcome for the grocer and the pharmacy chain, because the pair would have been in modestly better shape together than they will be apart. They had identified $375 million in cost synergies, and their combined scale likely would've allowed them to flex more muscle in negotiations with suppliers. Each could've provided category expertise that might have helped the other.

Now, though, they are stuck solving their ample problems alone.

That's a tough task for Rite Aid, which has now managed the dubious achievement of failing to be acquired on two separate occasions within a few years. The first failed acquisition at least netted Rite Aid some cash: Walgreens Boots Alliance Inc. agreed to a smaller deal last year in which it acquired 1,932 stores for $4.4 billion. But this further decline in scale — the chain was already dwarfed by larger peers — has consequences. Rite Aid blamed a guidance cut delivered Monday in part on a reduced ability to purchase generic drugs at competitive rates. Amazon's entry into the market with its purchase of online pharmacy PillPack won't help.

Albertsons and Rite Aid Were No Dream Team

Rite Aid still has an imposing $3 billion debt load which, along with its size, will impair its ability to effectively compete with larger peers. Its pharmacy benefit management arm was seen as a possible growth driver and was cited by some as a reason Albertsons’s offer was too low, but the Trump administration is actively targeting the profitability of that business. The Albertsons deal may not have been a miracle fix, but it was at least a lifeline.

Albertsons, meanwhile, is left having to adapt to a post Amazon-Whole Foods world, in which supermarkets have turbocharged their efforts to defend their turf online. It's not that Albertsons has been inactive in this area; it recently acquired meal-kit company Plated and is on track to offer delivery from 2,000 stores through a partnership with Instacart. But I don't think anyone in the retail world would hold the company up as a digital force to be reckoned with.

Albertsons and Rite Aid Were No Dream Team

It’s clear that Rite Aid and Albertsons will struggle on their own. Still, don't get too wistful about what the deal could have meant for these companies' futures.  

Executives never presented a particularly clear vision for how their tie-up would drive more customer traffic. Sure, plans such as integrating their loyalty programs might have helped around the edges. Perhaps having the Rite Aid banner on the pharmacies in Albertsons stores might have brought some new customers to the grocer.

But putting their fleets under one corporate umbrella would’ve only done so much. Store location is incredibly important in the pharmacy and grocery businesses, and the merger would have done little to change their positioning on that front. And, increasingly, notching traffic and comparable sales growth is going to be an e-commerce and delivery game. If neither of these chains has been out front on that while flying solo, why should we expect they'd suddenly get the knack for it after a merger?

Merging two struggling companies provides breathing room, but it doesn’t magically provide a solution to daunting challenges.

To contact the editor responsible for this story: Beth Williams at bewilliams@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Sarah Halzack is a Bloomberg Opinion columnist covering the consumer and retail industries. She was previously a national retail reporter for the Washington Post.

Max Nisen is a Bloomberg Opinion columnist covering biotech, pharma and health care. He previously wrote about management and corporate strategy for Quartz and Business Insider.

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