Walgreen Grows in Graceland

The Mississippi Delta was shining like a National guitar yesterday when Walgreen announced the acquisition of prescription files and certain other assets from 17 USA Drug stores (Ike’s and Super-D) in the Memphis area. Read the press release.

Well, it didn't take long for one of my recent predictions to come true. In Walgreen Grabs Duane Reade: What It Means, I wrote that smaller drugstore chains are tempting targets for the big chains. The regional chains are trying to play the game of the nationals, but without the infrastructure or bargaining ability versus third-party payers.

I've a reason to believe we all will be seeing...more consolidation.

Walgreen has more than 70 stores and about 50% of the pharmacy market share in Memphis, so a file buy makes the most sense. Organic growth is time consuming given the inertia of consumer behavior. Most people refill their prescriptions or fill new ones at the last pharmacy they used. The consumers most likely to switch to a new pharmacy are, by definition, less loyal, and hence less valuable, than the consumers who do not switch. Attempts to gain market share with low prices are very hard, with the notable exception of Walmart's growth since 2006.

Keep in mind that the other potential buyers are on the sidelines right now, so cash-rich Walgreen could grab a lot of share in 2010.

• CVS Caremark (NYSE:CVS) has been an aggressive acquirer and pretty successful integrator of retail pharmacies over the years. I suspect their investors will demand progress on Caremark and full integration of Longs before supporting any major acquisition activity.
  
  
• Poor ol' Rite-Aid (NYSE:RAD) is looking to shrink further. It's down almost 350 stores since the Brooks-Eckerd acquisition in 2007. Not that they asked me, but I think Rite-Aid needs to get much smaller.
  
  
• Walmart (NYSE:WMT) has very little history with acquisitive growth in the U.S. market, so it would be a radical, high-risk move. Possible, but unlikely.
  

Interested readers should check out More Regional Drug-Store Deals Seen After Walgreen's Duane Reade Buy, which features some additional comments from your friendly neighborhood blogger.