We see pharmacies on every street corner -- and normally they're directly competing with one another. Now that Walgreens (NASDAQ:WBA) is attempting to acquire Rite Aid (NYSE:RAD), that could lead to some sticky situations with the company ending up owning stores that fight for customers in the same neighborhood.
Does an overlapping footprint mean the two retail pharmacy brands will step on each other's toes? Kristine Harjes and Michael Douglass tackled this topic and laid out their thoughts on the company's efforts as well as how similar issues were handled in the past.
Watch the full video by clicking here. A transcript follows the video.
Kristine Harjes: Of course, you run into the issue of seeing a Walgreens right next to a CVS, right next to a Rite Aid; are they really expected to keep all those stores open and also push up their productivity?
Michael Douglass: There are a couple of issues packed in there. First off, the issue of store cannibalization. When Rite Aid bought Eckerd back in '07 there was enormous store cannibalization and falling same-store sales. You actually saw Rite Aid reduce its count of stores until 2015.
Harjes: Anybody that remembers that history is throwing up a flag at this deal saying "Is the same thing going to happen again?"
Douglass: Right. The fact of the matter is, Rite Aid is certainly more concentrated in certain markets, whereas Walgreen does have a broader, national exposure.
Harjes: And international.
Douglass: And international with the Boots Alliance transaction, which was completed earlier this year. I think the other piece we have to ask with this Walgreens/Rite Aid transaction is: OK, Rite Aid has already been improving its store productivity through the wellness remodels and when Rite Aid released earnings a couple months ago, one of the things they talked about was that their wellness remodeled stores were outperforming on same store comps by something around 3.5 percentage points in growth.
That's an enormous amount. You have to wonder how Walgreens is going to improve those numbers. Is it going to be putting the wellness remodels out all across all Rite Aids? Currently it's about 41% of the store count. Is it going to take some of whatever Walgreens secret magic is and adding that on top of the wellness remodel? They might even take some best practices from the wellness remodels and bringing them over to Walgreens stores. It's not very clear, and management hasn't really done much to tell us specifically what they're planning to do.
Kristine Harjes has no position in any stocks mentioned. Michael Douglass has no position in any stocks mentioned. The Motley Fool recommends CVS Health. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.