NEW YORK — Rite Aid’s plan to buy Brooks-Eckerd will have a trickle-down impact on the beauty industry.
Rite Aid, the nation’s third largest drugstore chain, announced Aug. 24 that it plans to buy Brooks-Eckerd in a cash and stock deal. The addition of the 1,858 stores elevates Rite Aid to some 5,000 doors and $27 billion in sales, putting the chain closer to the top drug operators, CVS and Walgreens. All stores will be remodeled and rebranded as Rite Aid, which could signal changes in the look of the beauty department.
The deal is another chapter in the ongoing consolidation of the drugstore industry, where the mantra is that the big are getting bigger to not only compete with each other, but with gargantuan discounters such as Wal-Mart.
Just this year, Walgreens nabbed Happy Harry’s and Medic Drug, while CVS took over Albertsons’ drugstore operations. The compression of the industry started in the mid-Eighties when the mostly regional chains started merging to strike greater economies of scale.
Acquisitions reached a fever pitch in the Nineties and Rite Aid was one of the most aggressive, adding K&B Drug Stores, Harco Drug, PayLess Drug Stores and Thrifty Drug Stores to its roster after losing the chance to buy Revco Drug Stores at the hands of antitrust intervention. CVS stepped in and nabbed Revco, one of the first large buys for the chain, which proved the company easily could assimilate stores. Acquisitions helped both retailers gain critical mass.
Economies of scale also are driving this deal, according to Mary Sammons, president, chief executive officer and now chairman of Rite Aid. “Adding these stores to our company gives Rite Aid scale comparable to our major drugstore competitors, and we believe this enables us to compete more effectively in a highly competitive business,” she said.
The new locales dovetail nicely with Rite Aid’s existing markets, she added. “With 70 percent of the acquired stores located in states where we already operate, we expect to leverage our systems, programs, best practices and executive management talent to improve profitability by achieving substantial cost savings and growing sales.”
Sammons said Rite Aid will continue organic growth with its successful Customer World store design, which puts beauty front and center.
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With all mergers, there are ramifications across the industry. Most likely the buying staff at Brooks-Eckerd will be phased out over the next several months. That dismantles a beauty team that is well respected in the industry. Some already have found new positions within the industry. Rite Aid, of course, already has a top-notch beauty buying and merchandising department led by Judy Wray.
With fewer retail doors to call upon, there most likely will be consolidation of manufacturer sales staffs, too. Jack McAuliffe, the founder of The Beauty Handbook, thinks it could impact suppliers in other ways. “We might see more consolidation of vendors, too,” he predicted. Another source added that a bigger and more aggressive Rite Aid could mean suppliers will have to ante up and help Rite Aid reformat the stores it acquired. “They’ll be able to put the squeeze on suppliers,” said one manufacturer.
The pressure could especially be on for small beauty firms who have distribution in Brooks-Eckerd, but may face new standards to prove they belong in Rite Aid units. Industry sources said Rite Aid’s beauty departments are more productive than Brooks-Eckerd, and Sammons, in her remarks at the time of the acquisition, said one of Rite Aid’s first tasks will be to make Brooks-Eckerd stores more productive at the front end.
Some industry observers wonder if that move will further impact smaller manufacturers, who are already having a tough time getting shelf space. It can work the other way, too. Brands such as Del Laboratories’ N.Y.C. New York Color and Styli-Style could get more doors as part of the merger. The store shuffle also could be good news for Vital Radiance, which did not launch in Brooks and only in select Eckerd doors.
With both CVS and Walgreens pursuing European lines sold exclusively inside their doors, eyes point toward Rite Aid and whether it, too, might add similar proprietary offerings. In the past, Rite Aid has chosen to help launch a new brand on an exclusive basis for a limited time and then allow it to be rolled out. By doing so, Rite Aid doesn’t “own” the label and all of the marketing that goes along with that ownership.
There’s also the question of what will become of the European-style derm skin care centers operated by Brooks. Brooks was the first American drugstore operation gusty enough to make space for upscale skin care brands, such as Vichy, to be sold in a drugstore environment with trained beauty advisers. Industry consultant Allan Mottus expects Rite Aid will forgo the European centers. “They’ll concentrate on changing those stores to Rite Aid as fast as they can and the derm centers will be history,” he suggested.
But Philippe Patsalidès, general manager for the active cosmetics division of L’Oréal, thinks the opposite. “We are always continually looking for ways to expand our Dermo-Cosmetic Skincare centers and have had a very successful relationship with Brooks-Eckerd in the past. We look forward to exploring further growth opportunities with this new group,” he said.
Rite Aid is not a stranger to digesting stores, and Sammons said the systems and people are in place. Many in the business also think Rite Aid will shed some of the unprofitable stores.
As Brooks can attest, merging stores can be a challenge. That was the case when Brooks purchased 1,549 Eckerd stores two years ago. Brooks opted to keep the Eckerd name, a move some experts feel stymied the digestion. Assumption of the stores had been slower than expected, especially when compared with CVS, which quickly converted the Eckerd stores it purchased. CVS had no qualms changing the name even in cases such as in Ship Bottom, N.J., where there is now a converted Eckerd with the CVS logo across the street from an existing CVS.
Although Rite Aid has experience buying chains, there are those who wonder if its balance sheet is up to the challenge. Last week Moody’s Investors Service put Rite Aid’s ratings on review for a possible downgrade, and some analysts called the chain an underperforming and highly leveraged company. Seven years ago, Rite Aid was on the verge of bankruptcy after ambitious expansion and an accounting scandal that sent its former chief executive, Martin Grass, to jail.
As part of the deal, The Jean Coutu Group will become one of the largest shareholders of Rite Aid. Although some see the sale as a retreat from the U.S. market, The Jean Coutu Group founder said his company comes out looking good. “We started with one little pharmacy in 1969 and now we are one of the largest shareholders in the third-largest pharmacy in the United States,” Jean Coutu said during a news conference last week. Brooks-Eckerd’s Michel Coutu is assuming a role as co-chairman of Rite Aid. Coutu is long known to have a love of the beauty business and believes in the role of adding products and services that separate one store from the other. His vision will meet the productivity requirements of his new chain and the result could be a formidable new beauty department.