The Walgreens Rite Aid Deal Is All About Cost Savings According To Executive Consultant Susan McGalla
The healthcare industry is out of control. Consumers, the government and the healthcare industry know it is, but it may be too late to reign it back in. The Affordable Care Act is putting heat and pressure to the healthcare companies. The government is trying to lower costs, but there hasn’t been much progress in that regard. American pharmaceutical companies are still producing drugs that are considered outrageously expensive, and consumers, as well as drug store chains, are at a breaking point. In order to lower the cost of doing business in a market that is so one-sided, drug stores chains are getting together and trying to make a deal to get bigger than they already are.
Susan McGalla on facebook, an executive consultant from Pittsburgh, is acutely aware of the healthcare dilemma. As the director of strategy for the Pittsburgh Steelers, McGalla tackles healthcare issues all the time. McGalla was also president of American Eagle Outfitters and the CEO of Wet Seal before she decided to become a full-time consultant. McGalla is focused on the retail industry as well as other industries. When The Wall Street Journal report was first published about the Walgreens desire to acquire Rite Aid, she thought the merger of those giants made sense, but Susan McGalla also knew there could be some antitrust concerns as well.
Three drug store chains control the retail drug market. Walgreens on pittsburgh.cbslocal.com operates 8,200 stores in 50 states, and Rite Aid operates 4,600 stores in 31 states. The third drugstore chain, CVS, operates 7,800 stores in 44 states. When McGalla started to analyze the regions where Walgreens and Rite Aid operate, she realized that the antitrust issue could be manageable since there were only a few regions where the new chain would have a large presence.
The Northeast region of the country is one of those regions, according to Ms. Susan McGalla. Even though the new chain would be around 12,800 stores there are other companies like Walmart, Target, and Kroger along with food chains like Publix that operate and sell drugs in those the same regions, so there is plenty of competition in the retail drug industry, according to McGalla. Competition keeps prices in line. But as McGalla points out, the pharmaceutical companies control the prices, for the most part, and that makes it hard for drugstores to cut drug prices.
McGalla also said Walgreen would have to close about 10 percent of the Rite Aid stores because those locations are too close to existing Walgreens stores. The merger of these two drug retailers makes sense according to McGalla and other retail analysts because something has to be done to keep operating costs in line if the retail drug industry is going to remain profitable. The margins that drugstores work on in terms of drug sales are slim, so they try to compensate by adding more products to their retail assortment. But those products are usually priced higher than the stores that carry them by design like food chains and big discount chains.
The face of retail will continue to change because it is getting harder for retailers to produce the amount of profit that stockholders crave. The pressure is on not only to please consumers but also to make stockholders happy.