Features, Finance & Economics, Grocery and Food

Albertsons Goes Headlong into Health Care

Albertsons’ proposed buyout of the parts of drugstore chain Rite Aid that won’t be acquired by Walgreens flings the supermarket operator into the fast-changing healthcare industry — and has big implications for food sales as well.

Albertsons plans to acquire about 2,600 Rite Aid stores, while Walgreens will acquire about another 2,000, thus ending Rite Aid’s history as a standalone company. Walgreens had intended to acquire all of Rite Aid, but backed away from that after governmental pressure.

When the Albertsons/Rite Aid deal closes, Albertsons will become a behemoth with sales of some $83 billion and operator of about 4,900 stores throughout much of the country. Albertsons operates supermarkets under its own banner, plus 19 other brands. Albertsons will also be taken public when the deal closes, a goal long sought by its principal owner, Cerberus Capital Management. And the most important feature of the deal will be that Albertsons will become a far more important player in health care.

Health care as we’ve known it is on the cusp of major change. Congress will soon eliminate the individual mandate of the Affordable Care Act, which will probably lead many younger and healthier people to drop insurance entirely. That will leave insurance companies with older and less healthy people to insure, which may drive insurance costs upward by 18 percent, or more.

The net effect will be an increase in the number of uninsured people by at least nine million next year and maybe by many more in a few years. In short, many people will be obliged to seek less expensive health-care solutions such as doctor visits and hospitalization.

Here’s an overnight solution: As part of the Albertsons/Rite Aid deal, Albertsons will gain some 320 RediCare walk-in clinics. Those clinics offer expert advice and treatment for minor injuries along will immunizations and other health-care maintenance procedures.

The walk-in clinic is a burgeoning business right now, with other players such as Walgreens and CVS expected to increase their numbers dramatically soon. Both of those drugstore chains are also doing much to reposition for a re-engineered health-care future. CVS is buying Aetna insurance and Walgreens has considered ownership of a wholesale prescription-drug business.

Beyond that, there’s the potent triumvirate of Warren Buffet (Berkshire Hathaway), Jamie Dimon (J.P. Morgan) and, of course, Jeff Bezos (Amazon). They plan to form some sort of health-care venture aimed at lowering costs and improving outcomes for their employees. The way that will be accomplished remains nebulous, but the hope is that the number of employees involved will set in motion changes that will cascade to other people, even those not employed by the three. Should other companies join the consortium, the spillover effect will increase. With enough participation, that could reach critical mass and even more upside realized. Of some relevance, Berkshire Hathaway owns a substantial part of a drug-manufacturing company and has long been in the casualty insurance and reinsurance business.

Now, let’s return to the fact that Albertsons is primarily a food retailer. Will the Rite Aid deal improve Albertsons’ prospects for increased food sales? In the main, it seems sure that the deal will increase customer traffic to Albertson-owned supermarkets. Increased traffic equals increased sales. Albertsons will be well positioned to establish RediCare clinics in its supermarkets and add them to stand-alone Rite Aid stores. Albertsons once owned Skaggs Drug Stores, some of which remain under its ownership, and it has many in-supermarket pharmacies. So, it has a good running start.

Albertsons could also augment Rite Aid grocery departments with its own high-margin private brands. Also, grocery-distribution efficiencies for the drug stores should be well within grasp.

However, the deal may not be an unmitigated win for Albertsons. When Albertsons is taken public, and if all goes according to how such things generally go, Cerberus will extract a handsome profit from IPO proceeds, larding Albertsons with debt that will be challenging to service, let alone retire. Several supermarket chains have come to grief after such refinancing.

Nevertheless, Albertsons’ repositioning for a rapidly changing future offers something of a model and inspiration for many legacy retailers facing rapid change.

And that means just about all of them.

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