Now that Rite Aid Corp. has decided to stay put in Southern California, the troubled drugstore chain could soon be facing stiffer competition.
Carlo Michelotti, chief executive of the California Pharmacists Association trade group, said competing chains are poised to consolidate or expand to challenge the 161 Rite Aid stores in L.A. County. He expects to see a flurry of mergers and acquisitions in which grocery store giants could scoop up drug stores just as Albertson’s bought the Sav-On and Osco chains as part of its $9.5 billion purchase of American Stores in June.
“There are lots of supermarket groups and chain pharmacies that keep looking at each other,” he said. “I don’t believe the chains today look to the competition being the independent pharmacies. They look at each other. If there’s a pharmacy chain outlet on one corner, then the other chains are looking at the other three corners to compete.”
The biggest player could be Walgreen Co., which entered the L.A. market for the first time four years ago with pharmacy-only stores. In the next five years, the chain plans to build another 150 to 200 stores in L.A. and Orange counties.
“Until now, we were testing the market and building name recognition,” said spokesman Michael Polzin. “That laid the foundation for us to move into the market with full-size stores.”
Another aggressive player is Longs Drug Stores Corp., which bought 38 stores in California from Rite Aid at a time when Rite Aid was considering plans to drop out of the West Coast market entirely. Two of those stores are in L.A. County, bringing its local total to nearly 20.
Michelotti believes Ralphs and Wal-Mart are also good candidates to expand the number of pharmacies they operate. Officials with those chains didn’t return calls.
Even independents are looking to expand. John Tilley, the owner of three Zweber Apothecary stores in Downey since 1984, is negotiating with Stater Bros. to acquire about 20 pharmacies that the grocery chain inherited as part of its purchase of 45 Albertson’s supermarkets this year.
“The consumers use us because they like our service, and they can talk to the pharmacist face to face,” Tilley said. “Our pharmacists try to take time to give those people personal attention. I think that’s what we do better.”
In the past few weeks, Rite Aid has been through a roller coaster of accusations from external auditor KPMG, followed by a Securities and Exchange Commission investigation, stock market plunges and executive changes.
The ride appears far from over. Analysts agree that nothing is certain for the drug store chain that many say tried to grow too big, too fast.
“At this point we’re in wait-and-see mode. There’s lots of things going on with the new team coming on board,” said Philip J. Muldoon, an analyst with McDonald & Co. Investments in Cleveland. “Now they have to see how big a hole they dug and how the new people are going to run the company.”
Pennsylvania-based Rite Aid established a presence on the West Coast last year by acquiring Thrifty Payless for $2.4 billion. A spokeswoman for Rite Aid would only say the chain no longer plans to sell any of its West Coast stores.
“We think there’s more value in stocking the stores and improving customer service,” said Sarah Datz, manager of public relations. She did say Rite Aid is still seeking a buyer for PCS Health Systems, a manager of prescription-drug benefits programs that Rite Aid purchased for $1.5 billion earlier this year.
Meanwhile, the decline of independent pharmacies has leveled off, leaving many in a better position to compete with major chains. Todd Denkmeyer, a spokesman for the National Community Pharmacists Association, said that for the first time in eight years the number of independent pharmacies hasn’t declined.
“The good news is, the decline in the independent pharmacies has pretty much stopped,” he said. “Now the worst ravages of managed care are behind us. We’ve already lost the stores that were not able to compete.”
