What Walmart's rumored acquisition would mean for Rite Aid's West Coast operations

WHAT IT MEANS AND WHY IT’S IMPORTANT — If the rumors that surfaced last week about Walmart eyeing Rite Aid for a possible buyout turn out to be true, it would be one of the biggest stories of the year: Walmart would acquire the country’s third-largest drug store chain and more than double its U.S. store count.

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But the rumors — which so far, neither chain has commented on — raise at least one big question: What would Walmart do with 4,700 stores whose average size is 12,400 sq. ft., notwithstanding the good chance that the Federal Trade Commission would require it to give up many of them due to market overlap?

While known for its big-box stores, Walmart lately has expanded on the small-format front as well, notably with Walmart Express stores, which have an average size of 15,000 sq. ft. and at their largest are 30,000 sq. ft. Many of Rite Aid’s stores on the West Coast, some of which are as large as 20,000 sq. ft., could accommodate the format, and perhaps its 14,000-sq. ft. stores could as well; but its East Coast stores, which average about 11,000 sq. ft. and often are less than 10,000 sq. ft. would be too small to be anything except drug stores.

Other issues call the rumors’ veracity into question as well.

For years, analysts have suggested that Rite Aid sell off its West Coast stores, but while expressing openness to doing so if the right offer came along, it has basically said no. Despite they're not performing as well as their East Coast counterparts, the stores represent a big part of Rite Aid’s business, and selling them would mean abandoning an important region of the country.

Another issue is the company’s efforts to spur organic growth — particularly, the Wellness+ loyalty card program and such store segmentation efforts as the new Wellness store format — which have taken place under the leadership of president and CEO John Standley and chairman Mary Sammons. Standley was part of Sammons’ original recovery team at Rite Aid, and he engineered the recovery at Pathmark before that chain’s acquisition by A&P, but Rite Aid’s growth efforts don’t look like those of a company getting ready to put itself up for sale. This includes a new Wellness store in Newport Beach, Calif., which indicates a continued commitment to its West Coast business, not to mention a $300 million capital expenditure budget that includes $127 million for store remodels and merchandising initiatives and plans to remodel about 500 stores in fiscal year 2012.