Rite Aid to gobble K&B, Harco

Rite Aid to gobble K&B, Harco – Mergers Sweep U.S., Canada

Lisa I. Fried

CAMP HILL, Pa. — By agreeing simultaneously to buy 186-store K&B Services and 146-store Harco Drug, Rite Aid has positioned itself as a formidable force in the South and a more powerful retailer on a national level.

If the deal, which is valued between $325 million and $340 million–is approved by the Federal Trade Commission, it will be Rite Aid’s fourth acquisition in 13 months. The deal would boost Rite Aid’s annual revenues to more than $11 billion and its store count to more than 3,900 stores. This would put Rite Aid neck and neck with CVS for the position of No. 2 drug chain in store count and annual sales.

Slower acquisition pace

Since June 1996, Rite Aid has purchased Taylor Drug Stores, Concord Drug Stores and Thrifty PayLess, continuing a perpetual buying spree that has prevailed for many years. That stance will likely slow down, acknowledged Martin Grass, chairman and chief executive officer, as the number of acquisition candidates that would be appropriate for Rite Aid has shrunk enormously.

Two weeks before announcing his plans to buy Harco and K&B, Grass told Drug Store News that other than Genovese, Harco and K&B, there weren’t any chains among the industry’s 20 largest that he would consider buying, given the market share of the top 20 chains, an expected purchase price and the FTC’s antitrust concerns.

“In terms of acquisitions, there are fewer and fewer acquisition opportunities out there,” he said. “If there is someone with strong market share and the right size stores, we would be interested . . . but there is not much left.”

K&B and Harco are attractive to Rite Aid, he said, because they afford the chain a solid standing in the South, a market it has struggled with in the past. “The addition of two preeminent Southern drug store chains gives Rite Aid a strong regional nucleus of operations and establishes a platform from which to expand our business in this fastgrowing area of the country.”

New Orleans-based K&B operate on average 12,000-square-foot stores in Louisiana, Alabama, Mississippi, Texas, Tennessee and Florida. Tuscaloosa, Ala.-based Harco operates on average 10,000-square-foot stores in Alabama, Mississippi and Florida.

With this deal, Rite Aid, which operates 10,500-square-foot prototype stores on the East Coast and larger stores on the West Coast, will operate in four new markets, Florida, Louisiana, Texas and Mississippi. The chain would become the market share leader in Alabama and Louisiana.

Rite Aid recently sold four of its Alabama stores to Harco, leaving it with one store. If Rite Aid’s acquisition of Harco is approved, Rite Aid will get back its former stores in the state. The deal will also strengthen its presence in Tennessee, where it already has 40 stores, and place it back in Florida, which it exited in 1995.

Exiting Southern markets

Due to poor market share performance, Rite Aid has been exiting several southern markets. The chain agreed to sell all of its stores in North Carolina and South Carolina last year to Thrift Drug and had previously exited Florida.

In fiscal 1996, Harco had revenues of $258 million and K&B had annual revenues of $580 million. Rite Aid expects the addition of these stores combined with its southern stores in Georgia and Tennessee, to produce annual revenues of $1 billion.

Rite Aid has no plans to close any of the Harco or K&B stores, but the FTC could scrutinize the effect that the merger would have on drug store competition in the Mobile and Montgomery, Ala. markets, the markets in which the chains overlap the most. In Mobile K&B operates 12 stores while Harco operates 17. In Montgomery K&B operates six stores while Harco operates about 11.

Rite Aid plans to close the corporate headquarters of both companies, change the store banners to its own and will likely merge distribution centers, according to Grass. None of the corporate employees–320 at K&B and 105 at Harco–from either chain are expected to join Rite Aid.

Ambitious goals

Rite Aid expects to push up comp-store sales at both chains to the level of its East Coast stores, upgrade the front ends of the stores, replace all technology, enhance the in-stock position, open more freestanding locations and expand the seasonal mix, according to Grass.

In terms of comp-store growth gains, year-to-date Rite Aid’s same-store sales growth was 9.6 percent for its East Coast stores and 5.3 percent for its West Coast stores, according to Grass. Year-to-date, comp-store sales gains at K&B and Harco were 5 percent and 8 percent, respectively, he said.

While both K&B and Harco have made significant moves in recent years to strengthen front-end sales, neither chain is currently scanning chain-wide. In fact, only 22 Harco stores and 36 K&B stores have POS equipment.

The integration of these chains will be challenging for several reasons. Rite Aid is in the midst of integrating the largest acquisition in its history, that of Thrifty PayLess, and now it will have to integrate two more chains at the same time. Further, while Harco operates similar size and types of stores as Rite Aid, K&B’s units range from 5,000 to 28,000 square feet and stock a much broader mix of products than Rite Aid’s East Coast stores. Like Thrifty PayLess, they are deeper in categories including wine, beer and alcoholic beverages.

Regardless, Grass, who has overseen many acquisitions during his 19 years at Rite Aid is confident the chain can pull another one off successfully. “We continue to move forward on the integration of the West Coast [stores]. We are confident that our management team is strong enough and has the capability to do both,” he said.

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