Location, Location, Brand
Walgreens’ recent acquisition of Duane Reade and Ahold USA’s purchase of the venerable Ukrop’s chain has put us in a reflective mood. First, these and some other recent acquisitions (Tops acquiring P&C Food) or attempted acquisitions (Albertsons announced offer for Bashas; Simon’s offer for General Growth) suggest that we might be beginning to see some real M&A activity after a fairly prolonged drought brought upon the freezing of capital markets. However, most of the acquisitions would be classified as “strategic” buys, retailers buying retailers, which suggest that the private equity guys still remain largely on the sidelines.
The notion of a “strategic” buy is really at the heart of what we’re musing about. On the surface, both acquisitions are simple enough to understand. They are real estate motivated—Walgreens getting access to 250 or so coveted locations in the densest market in the US and Ahold, through its Martin’s division, extending its store base in Virginia. However, acquisitions are rarely “simple”, as culture, format uniqueness and long ingrained shopping habits play a large role. In both of these cases, giant chains are taking over relatively small companies so the assumption is that the smaller companies will be quickly absorbed into the bigger firms’ brands and cultural folds.
As we dig further into the details, both begin to get interesting. Shortly after acquiring Ukrop’s, an announcement was made that the Martin’s name would become the main banner. This makes a world of sense from a synergy standpoint but also erases one of the most venerable names in food retailing off the map, not to mention an institution in their hometown of Richmond. Right or wrong, this is not a slam dunk decision but easily understood. Shortly thereafter, the first and highly unlikely culture test came into play—hereafter known as the great Girl Scout cookie incident. Seems that Ukrop’s has a long-standing tradition of allowing local charitable institutions to sell outside their stores--Ahold does not and banned the practice. The publicity that ensued (mostly negative for Ahold) is almost comical in scale but highly illustrative of the dangers of messing with culture. The much bigger deal ahead is that Ukrop’s, due to religious beliefs, never sold beer and wine and closed their store on Sundays. Again, Ahold is making a simple decision to reverse those sales killing decisions this Spring and it should theoretically yield almost an instant 20% sales gain. But, as the Girl Scout flop shows, messing with a brand is serious business.
The dust has yet to settle on Walgreens/Duane Reade. Again, on the surface, the locations Walgreens will secure are almost priceless and will allow for penetration in the New York City market that would be impossible to duplicate. A few short years ago, the Duane Reade brand (and stores) was in critical condition. Famously cluttered and with indifferent service, it was a brand New Yorkers loved to hate. But, the current management team has done a remarkable job of making over the chain. A new logo, stunning new store design, new private brand programs, an emphasis on higher end beauty and a re-dedication to customer service woke up Duane Reade (and was probably a significant contributor to the $1 billion + purchase price). So, now what? It would be an easy decision to turn these stores into Walgreens and gain instant synergy. Or, does Walgreens choose to let Duane Reade remain independent and perhaps be the template for urban stores? Whatever the decision, Caveat Emptor (let the buyer beware)—there is more to a Brand than meets the eye.