Dive Brief:

• Albertsons announced it will acquire more than 2,500 Rite Aid stores for an undisclosed amount, creating a company with estimated revenues of $83 billion, according to a news release. The remainder of Rite Aid's stores — around 2,000 locations — will be sold to Walgreens Boots Alliance under an agreement reached with federal regulators, which blocked a full merger of the two companies back in 2015.
• The combined Albertsons and Rite Aid company, which will be renamed according to the Wall Street Journal, will operate around 4,900 stores and 4,300 pharmacies, along with 320 clinics. Albertsons' pharmacies will be rebranded under the Rite Aid name.
• John Standley, Rite Aid's CEO, will serve as chief executive of the new company while Bob Miller, Albertsons' current CEO, will be chairman. Under the cash-and-stock deal, Albertsons investors will own around 71% of the company’s stock, while Rite Aid shareholders will own the rest.

Dive Insight:

This move checks off a few very important boxes for Albertsons. First and foremost, it will allow the company to finally go public. The retailer, which is owned by private equity firm Cerberus Capital Management, has rapidly built scale through acquisitions and taken on significant debt in an effort to rally potential investors. It had a 2015 bid shelved, and was said to be making another run at an IPO until Amazon acquired Whole Foods for $13.7 billion.

Reports over the past several months linked Albertsons to a few major deals that ended up falling through. It had reportedly made a competing bid for Whole Foods, and tried to acquire Sprouts Farmers Market, as well. The number of meaningful takeover targets in the industry has narrowed for Albertsons, but in Rite Aid the grocer gains a strong brand in a sector that’s becoming increasingly important for supermarkets.

Pharmacy operations can strengthen customer loyalty for food retailers. Moreover, Rite Aid’s expertise in healthcare and clinic operations could offer opportunities for new services and new products at Albertsons stores. As consumers increasingly tie food consumption to health, grocers are hiring dietitians and establishing in-store clinics to create one-stop wellness destinations.

Rite Aid stores, meanwhile, could get a boost from enhanced food offerings under brands like O Organics, Plated meal kits and more. In recent years pharmacies have increased their grocery and meal offerings, becoming yet another competitor for consumers’ food dollars. With Albertons' e-commerce capabilities at its disposal, Rite Aid could become an online shopping destination for food and other products.

This deal also positions Albertsons to battle Amazon and Walmart. Amazon recently began offering Prime Now delivery from Whole Foods stores in four markets, and is weighing a move into the pharmacy business, reports note. Walmart’s pricing and e-commerce expansion has also put pressure on grocers to strengthen their positioning.

For all its potential upside, though, Albertsons' acquisition faces numerous challenges. Rite Aid has struggled against stronger competitors, and it’s not clear how the grocery retailer might improve its fortunes.

"Drug retailing has had its own challenges with reimbursement pressure and weak front-end sales as evidenced in Rite-Aid's weak profits over the last couple of years, and competing with much larger and more diversified drug retailers like CVS and Walgreens will be a formidable challenge," wrote Moody's vice president Mickey Chadha, in an email sent to Food Dive.

Albertsons has also posted tepid earnings in recent quarters as its 20 supermarket brands have struggled in an increasingly competitive environment. The company has made bold moves of late — it bought Plated late last year and announced a chain-wide expansion with Instacart — but it’s still far from clear if the company will be able to find growth, effectively fend off competitors and pay down its rising debt.