DRUG CHAINS, SUPERMARKETS GET MERGER PRESCRIPTION

CHAPIN CLARK

SEATTLE -- Current conditions in the retailing and health care industries are ripe for drug chain-supermarket mergers, according to a noted securities analyst.

Jonathan Ziegler, director of equity research at Salomon Smith Barney, New York, said such mergers are a natural given the increased market-share density, operational benefits and added convenience for consumers they would bring.

"Retail is all about convenience today, and these two industries go so well together," he said.

Following the recent flurry of acquisitions by giants CVS Pharmacy, Woonsocket, R.I., and Rite Aid Corp., Camp Hill, Pa., the chain-drug business is about as consolidated as it can get, Ziegler said.

"No one is talking about this yet, but when and if supermarket consolidation finishes, there might be opportunities for mergers between the two sectors," he said. "Every operator I speak to in the supermarket business wants to be in the drug-store business."

Ziegler made his remarks during a presentation at the Food Marketing Institute's Supermarket Pharmacy Conference, held here late last month.

Perhaps the biggest gain supermarkets and drug chains would realize by joining forces, Ziegler said, would be greater clout in negotiating payment terms with managed-care organizations.

"Having density in market share is really important," he said. "I can't emphasize enough this issue of bargaining power. The big boys have the bargaining power. It has to coalesce in national or at least large regional chains."

At the same time, Ziegler added, supermarket-drug store partnerships would yield cost savings through technology, as combined retailers would implement and operate software systems on a much larger scale.

Food-drug unions would also give chains access to prime real estate that otherwise would not be available to them, he said.

Ziegler noted there are signs the future he envisions may be at hand.

Of the decision, announced last November, by American Stores Co., Salt Lake City, and Longs Drug Stores Corp., Walnut Creek, Calif., to merge their pharmacy benefit management subsidiaries, Ziegler said, "I think that's an initial mating dance."

Ziegler also predicted that Walgreen Co., Deerfield, Ill., which already is in the convenience food business, will make a move to become a home-meal-replacement player.