Friday, November 13, 2015

Walgreens-Rite Aid Deal: Elimination of 3,000 stores…REALLY?

At the end of October, Walgreens surprised many of us with its announcement that it had agreed to purchase Rite Aid in an all-cash deal for $9.4 billion. If the deal is approved, it would potentially increase the chain’s total number of stores by a whopping 50%, giving it a huge size advantage over CVS.

The 7,800-unit CVS announced earlier this year that it was buying approximately 1,700 pharmacies operated by Target. Despite that, CVS will still be at a distinct market share disadvantage against a potential Walgreens-Rite Aid chain of more than 12,000 stores. At the same time, one has to wonder how many stores Walgreens will have to close in the face of FTC antitrust scrutiny before the deal is approved.

So far, reported estimates of store closings range from 400 units (a figure from Credit Suisse) to as many as 3,000 stores (based on a recent Cushman & Wakefield analysis). As part of its due diligence process, Walgreens likely completed a detailed evaluation of Rite Aid trade area overlap with that of its own stores. Walgreens indicated that it would consider closing as many as 1,000 units in some combination of the two drugstore chains, but expects the real number will be closer to 500 stores. Whether anyone, including Walgreens, believes these estimates is another story.

The disparity among estimates compelled us to take a look at both Walgreens and Rite Aid store locations across our proprietary GRIIDTM territory - Eastern Massachusetts, Southern New Hampshire, and Greater Hartford- and examine just how much trade area overlap there is within these regions. The top section of the table below shows the number of Walgreens and Rite Aid stores in each of the regions in our GRIIDTM database, as well as the percentages of each chain’s total regional store count, and compares them with national figures. In order to assess the overall impact, we identified the number of Rite Aid locations in GRIIDTM regions within quarter-mile increments of Walgreens stores, out to 1.0 mile, as shown in the lower section of the table.

Before going further it should be noted that the ratio of Rite Aid stores to Walgreens is significantly higher in KeyPoint Partners’ GRIIDTM regions than it is nationally. There are 142 Rite Aid stores within GRIIDTM territory compared to 171 Walgreens locations, with Rite Aid representing 45% of the combined total. Nationally, there are 4,570 Rite Aid units compared to 8,051 Walgreens stores, equating to a Rite Aid share of 36% of the total count. Therefore it’s likely that we’d see greater trade area overlap between Rite Aid and Walgreens in these selected New England regions than these chains experience nationally. We adjusted for this difference when extrapolating our data to a national level.

In New England, only 13% of Rite Aid locations are located within a 0.25 mile of a Walgreens unit; but this percentage jumps to 26% at 0.5 mile and 49% within 1.0 mile. To adjust for the difference in national Rite Aid store concentration, a factor of 80% was appplied to these percentages to arrive at national percentage estimates. Aside from urban stores, drugstores generally draw shoppers effectively up to 2.0 miles or more. Although population density, traffic patterns, sales performance, profit levels, site characteristics, and the proximity of CVS locations need to factor into any strategic closing decisions, market areas for Rite Aid stores within a mile of Walgreens will overlap substantially with those of Walgreens. However, if our scaling of the GRIIDTM data to national levels is realistic, it appears that, strategically, there will be a minimum of 500 stores affected by the acquisition. After all, does operating two stores within 1/4 mile make sense?

While 3,000 closings seems grossly overestimated, there will be numerous other reasons to close stores besides proximity. Marginally performing stores, physically poor stores, lease expirations, and the like will all cause the number to rise. And when the FTC review of “monopolistic power” and the potential ability to raise prices is completed…well, who knows where the number will go? But if Walgreens really thinks they can set their cap at 1,000 store closings, they may have to think again.

Bob Sheehan, Vice President of Research

Company News

New Leasing Business: 501 Newton Street, a shopping center on Route 116 in South Hadley, MA. Don Mace is handling the assignment. New Employees: Sarah Adler joined the Ashburn, VA office at One Loudoun as a Property Operations Assistant. Sarah Burke joined the Plymouth, MA office at Colony Place as a Property Manager. Leng Ung joined the Burlington, MA office as an Assistant Property Manager. Kim Perry has been promoted from Assistant Property Manager to Property Manager in the Burlington, MA office.

National Retail News

Research firm Retail Metrics reported that US same-store sales in October declined by 0.2%, the seventh time in the last eight months that expectations have been missed. Retail Metrics had forecast a modest gain of 0.2% for the month. In September retail same-store sales rose 0.5%. The Commerce Dept. said sales rose 0.1%. Among retailers reporting monthly comp-store sales, L Brands was up 5%, Gap was down 3.0%, Rite Aid was up 1%, and Costco was up 1%. See our sales reports below.

Accelerating Retail News

Rooms to Go cut the ribbon last month on the largest retail furniture store in the Southeastern US. The newly built facility in Dunn, NC comprises app. 1,450,000 s/f on 120 acres and houses a state-of-the-art Rooms to Go, a Rooms to Go Kids/Teens, a Rooms to Go Outlet Center, and a distribution center...Nordstrom Rack plans to have 300 locations open by 2020. There are currently 188 Nordstrom Rack stores...Dick’s Sporting Goods Inc.  opened 5 new stores in IL, IA, WI, WA, and CT. These stores expand Dick’s store base in the US to 640... Wegmans plans to build a store in Lancaster, PA, the chain’s 87th store, in The Crossings at Conestoga Creek, a planned mixed-use project development. Wegmans currently operates 86 stores nationwide... ALDI plans to open 45 grocery stores in Southern CA by July 2016, as part of a five-year plan to open 650 new stores nationwide by the end of 2018. ALDI operates more than 1,400 stores in 32 states...Hudson’s Bay Company is launching an off-price spin-off of the Lord & Taylor department store called Find @ Lord & Taylor. The first store will open this month in a 35,000 s/f former Loehmann’s space in Paramus, NJ. HBC is hoping to expand on its success with its other off-price concept, Saks Off Fifth...Bridgestone Corp. agreed to buy the Pep Boys retail chain for about $835 million. The acquisition is slated to close at the beginning of next year. Bridgestone operates more than 2,200 tire and automotive centers across the US, and Pep Boys has more than 800 shops. The merger will create the world’s largest chain of its kind...Century 21 Department Store will open an approximately 70,000 s/f, two-level store at Green Acres Mall in Valley Stream, New York, on Long Island. Century 21 operates 9 stores in the New York region and 1 in Philadelphia... Key Food Stores confirmed its successful acquisition of 23 stores in the A&P bankruptcy auction, and said it will operate 2 units as corporate stores. The new stores will grow Key Food to 212 units... Walgreens Boots Alliance is in advanced talks to acquire Rite Aid in a deal that could be worth as much as $10 billion. The deal would bring together the No. 1 and No. 3 retail pharmacy operations under one roof, with more than 12,786 stores and more than $67.1 billion in pharmacy revenue. WBA is willing to unload up to 1,000 stores in order to win regulatory approval, about 8% of the combined company’s 12,700 US stores; however, the company may potentially have to close many more locations (as noted in our Commentary)...Kohl’s plans to open 5 - 10 new stores in a smaller 35,000 s/f prototype, aimed at underserved areas. Kohl’s also plans to open 10 - 15 stores dedicated to its proprietary Fila brand in outlet malls across the country. Additionally, the retailer will open two more Off-Aisle by Kohl’s locations in 2016...O’Reilly Automotive plans to open 210 new stores next year. The company is also on track to open 205 new stores by the end of 2015. O’Reilly Automotive, Inc. operates 4,523 stores in 43 states...Starbucks intends to open 1,800 new stores globally during fiscal 2016, with licensing driving a large portion of the growth. This includes 700 stores in the Americas (half licensed)... When Dollar Tree acquired Family Dollar earlier this year, the company agreed to divest 330 Family Dollar stores to satisfy federal regulators. The acquiring company is a newly created portfolio company of the private equity firm Sycamore Partners which will operate those 330 stores as Dollar Express stores. Sycamore Partners’ portfolio includes Aeropostale, Coldwater Creek, Hot Topic, the Kasper Group, Nine West, Talbots, and Torrid. The combination of Dollar Tree and Family Dollar created a retailer with nearly 14,000 locations nationwide... Bob’s Discount Furniture is planning a big push into the Chicago market. Bob’s will open stores in Skokie, Burbank, Orland Park, Villa Park and Aurora in February 2016. CT-based Bob’s has 64 stores in the Northeast and mid-Atlantic....Amazon’s first permanent physical store has opened in Seattle. The store integrates offline and online book shopping...Victoria’s Secret will open a 64,000 s/f store next fall on the corner of Fifth Avenue and 51st St. in NYC, in a space formerly occupied by Forever 21...Shareholders of the Charlotte-based department store chain Belk approved the $3 billion sale of the company to private equity firm Sycamore Partners. Belk is the nation’s largest family-owned-and-operated department store, with $4 billion in annual sales at almost 300 locations in 16 Southern states....Tommy Bahama opened a three-level, 19,200 s/f  flagship in Waikiki, the brand’s eighth location in Hawaii... Jamba Juice Inc. has launched its 2016 multi-unit development packages in existing and new markets in Philadelphia, Maryland, Washington, D.C., Virginia, and Florida, part of a plan to add 500 new stores by 2019. Jamba Juice has 601 franchised stores and 206 company-owned stores... Texas Roadhouse plans to open 25 to 30 locations, including 5 of its Bubba’s 33 restaurants, 1in 2016... Macy’s and Luxottica signed a deal to open up to 500 LensCrafters optical retail centers inside Macy’s. Macy’s and Luxottica already have a deal which put 670 Sunglass Hut’s in Macy’s stores. The first LensCrafters will open at a Macy’s location by April, with 100 slated to open by the end of the year... Cabela’s expects to open 7 stores next year and no more than that in 2017. Cabela’sis on track to open 13 stores and had announced or identified 11 stores for 2016 and 6 for 2017. It has been reported that Bass Pro Shops is eyeing Cabela’s for acquisition.

Decelerating Retail News

Fresh & Easy filed for Chapter 11 bankruptcy protection, its second filing in two years. The company closed 50 of 167 stores in March another 14 in July... Target will close 13 stores in the West, Midwest, and South in January, 2016.

New England Retail News

The site of the former Salem NH Liquor & Wine Outlet at in Salem, NH was sold for $3.9 million in a sealed bid sale coordinated by Nautilus Realty Group. The winning bidder was Emmett Horgan, owner of Rockingham Toyota of Salem. .. Tesla Motors plans to open its first store in Boston, at Prudential Center, the third MA retail location for the firm. Tesla has stores in Natick and Dedham, and a service center in Watertown. Tesla operates 159 sales and service centers worldwide... WS Development is buying the remaining 12.5 acres of the Seaport area, known as Seaport Square, for $359 million in a deal that is likely to accelerate completion of the new district, one of the biggest development areas in the city. WS plans to build offices, housing, and shops...Five Guys will open a new restaurant at the former site of Kelly’s Roast Beef in the middle of Allston. Five Guys currently has 1,300 locations worldwide, and 24 locations in Greater Boston... Jordan’s Furniture is building a 192,500 s/f store in New Haven, CT, its first in the state, that will feature a massive indoor rope course. The New Haven store, scheduled to open this December, will feature the largest entertainment area of any Jordan’s stores to date. The retailer currently operates five stores....The Golub Corp. opened its first Market 32 in Sutton, MA last month, the first supermarket in that community. The store is the fourth Market 32 to open since the company’s November 2014 announcement that it plans to develop the new brand across the majority of its 130-plus stores over the next 7-10 years. The first 3 were converted from Price Choppers and opened over the summer... Linear Retail Properties, LLC has acquired 745 South St. in Roslindale Village., a 4,600 s/f single-story property leased to Unleashed, Petco’s urban store concept...Saladworks has exited Ch. 11 bankruptcy and plans to expand along the I-95 corridor in MA, including up to a dozen new stores in Boston. The chain has 108 locations...Grass Fed, a burger-and-milkshake restaurant in Jamaica Plain, will open its 2nd location on Washington St. across from Forest Hills station. Grass Fed current location opened in 2012.

October Retail Sales

Notes: figures gathered from individual company websites, press releases, and Federal filings.  Not all companies report all figures; results not reported will be marked “n/r”. Quarterly results will be updated when available; quarterly figures are shown in italics. Figures from companies not calculated to one decimal point automatically received an ending digit of 0. 

Commerce Department

Sales at retail stores and restaurants rose just 0.1% from the prior month to a seasonally adjusted $447.3 billion in October, following two months of flat sales, the Commerce Department said. Retail sales were unchanged in September, down from an initially reported 0.1% gain.

Source: U.S. Department of Commerce -

Treasury Yields

Treasury Yield Sources:;

Consumer Confidence Index

The Conference Board Consumer Confidence Index®, which had increased moderately in September, declined in October. The Index now stands at 97.6 (1985=100), down from 102.6 in September. The Present Situation Index decreased from 120.3 last month to 112.1 in October, while the Expectations Index edged down to 88.0 from 90.8 in September.

Source: The Conference Board -

Purchasing Managers Index

Manufacturing expanded in October as the PMI® registered 50.1 percent, a decrease of 0.1 percentage point from the September reading of 50.2 percent, indicating growth in manufacturing for the 34th consecutive month. The October PMI is the lowest reading since May 2013, when the PMI also registered 50.1 percent. A reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent indicates that it is generally contracting.

Source: Institute for Supply Management - Manufacturing Report on Business -