Following Rite Aid deal, Walgreens will focus on patient care and beauty

SAN FRANCISCO  — Two things will happen when, as many reports are suggesting, the merger between Walgreens Boots Alliance and Rite Aid is approved within the next week. Walgreens will bring to bear an augmented value to its health partners through a significantly greater market penetration. And that same national market heft will benefit the Chicagoland retailer as it breathes a little pizzazz back into its beauty offerings.

The new Walgreens network will total some 11,857 U.S. locations, which will be almost 25% larger than the store base of its nearest competitor CVS Health.

That larger store base means the partnerships Walgreens has forged with PBMs, including partnerships with Prime Therapeutics and Express Scripts, will be multiplied across a greater pharmacy network that extends into areas where the present penetration of Walgreens' existing store base is not optimal, executives told analysts at the 35th Annual J.P. Morgan Healthcare Conference during a "fireside chat" Wednesday morning.

"That's going to be very important in the future. It is important today but even more important in the future," said Alex Gourlay, Walgreens Boots Alliance co-COO. "It gives us a truly national network where we're able to offer national players, as well as local players, access to a chain of pharmacies."

"What [Rite Aid] brings to us is a better platform to develop our future strategy because we are relatively weak in the Northeast and the Southwest,” added Stefano Pessina, executive vice chairman and CEO Walgreens Boots Alliance. “The integration of the two networks, of the two companies, will create substantial synergies [on the] organizational side of the business but also procurement side of the business."

But it’s not just health, Pessina and Gourlay noted. Once the Rite Aid deal is in the books, the new retail entity will be looking to re-invent the beauty experience at retail, challenging the popularity of specialty beauty outlets like Sephora and Ulta Beauty with a retail store base that can plug into a much larger consumer base.  

“One of the reasons we did the merger between Boots Alliance and Walgreens is we could see very clearly that the [beauty] market was changing in the U.S.,” Pessina said. “People needed to have better access to health and beauty, and particularly to beauty,” he said. “Unfortunately, after the merger we didn’t react as quickly as we could have reacted … so now we are trying to catch up."

Pessina noted that the current model of department store beauty destinations is dated, which has given rise to outlets like Sephora and Ulta. “But the penetration that we can have everywhere in the country is much bigger, so over time we can play an important [role] in this industry because there will be a need for it, a need to bring beauty closer to the customers,” Pessina said.

And, it’s not like Walgreens will be starting from scratch with its acquired Rite Aid store base, Gourlay added. “The Rite Aid team [has] done a good job under the circumstances to take the business to where they’ve got it,” he said. “They’ve done some nice work on their front-of-store formats and they have also become a very efficient business, using working capital very well.”