Dr. Pepper Snapple Merger With Keurig – Impact on the Beverage Aisle

The merger of Dr. Pepper Snapple Group with Keurig Green Mountain, which was initially announced in January, was finalized recently. The deal creates the new publicly traded company known as Keurig Dr. Pepper, according to Bev Net is the 3rd largest beverage company in North America.

The merger is going to have a direct impact on the beverage aisle because the combined entity will be utilizing their respective strengths together to create unique delivery systems for the consumer in the future.

The beverage industry is another sector of the economy which is in a “grow or die” phase at this point. In my professional experience in the industry as well as my time covering mergers and acquisitions, the key factor in this segment of business is the distribution network.

That is the main determining factor behind why Coca-Cola and Pepsi dominate the beverage aisle at the grocery store: it is all driven by distribution and shelf space. The smaller brands have a very difficult time competing with the big players in this space because of the costs associated with distributing the product and gaining shelf space for the product.

The executives at the former Dr. Pepper Snapple Group were faced with having to grow in order to compete with the top two players in the industry. The deal with Keurig allows them to do precisely that, it grows their business and their market share.

The deal also includes Allied Brands which is a distribution network that will now be run by the combined Keurig Dr. Pepper which features 125 different brands. This collection of brands are a mix of beverage offerings that are either wholly owned, partially owned, or not owned at all by Keurig Dr. Pepper.

The news over the past five days is about which brands will be dropping out of the new Allied Brands distribution situation. The ripple effect left by these changes will have a definite impact on the beverage industry. Some brands will be promoted on a regional basis in a more visible way.

Conversely, some brands most notably Fiji bottled water will be leaving Allied Brands, according to CNBC, in order to start their own distribution network. The result of these changes will most certainly have a price impact on the consumer, especially if the new or spin-off brands from the Allied distribution network fold into smaller distribution agreements.

The combined strengths of Keurig Dr. Pepper could translate into lower prices or more advantageous bulk sale pricing for the consumer, but that remains to be seen. The single serve delivery system technology that Keurig has mastered could translate into some new concepts that integrate the Snapple iced tea beverage line or create some new innovations on the delivery of Dr. Pepper and its signature flavor.

The merger also helps both entities compete in a grocery channel that is being shaped by Wal-Mart and Amazon/Whole Foods. The persistent pursuit of low prices by Wal-Mart which they require of their suppliers can put the squeeze on profit margins. The combined Keurig Dr. Pepper now has the distribution and production capabilities to compete in a profitable way against the forces of Wal-Mart and Amazon.

It is in this perspective where the consumer will see enhanced value on their favorite soft drinks whether it is Dr. Pepper, 7UP, A&W Root Beer, or Snapple. The distribution of Keurig and their famous pods of all types and varieties and the Green Mountain Coffee products will all see a significant increase into the grocery channel. In addition, perhaps the drug store channel as well given the relationships that Dr. Pepper/Snapple/Allied Brands have developed over decades of time.

The other consideration here is that the combined Keurig Dr. Pepper company can now be an active player in acquisitions which will alter the landscape of the beverage industry. The combined publicly traded entity could target consolidations within the beverage industry, or could seek to enhance their delivery systems or packaging with a purchase of a smaller player in those industry sub-classes.

Keurig Dr. Pepper has a significant positive component working for them in the future: they have a very loyal base of consumers. The consumers in various survey data have identified as “fans” of Keurig and “fans” of Dr. Pepper. The new leadership team of the combined company will utilize new technologies through social media to build deeper relationships with those loyal consumers with cross-branding opportunities to grow revenue further.

The newly combined company features brands that are iconic in America: Dr. Pepper, Snapple, A&W, 7UP, and Sunkist. These brands have multiple products merchandised around them from tee shirts, cups, keychains, and more. They have an identity of their own and this merger promises that these brands will be relevant for a long time to come.

Keurig Dr. Pepper is the largest beverage merger in history and it will dynamically shape the future for the beverage aisle and provide new innovations to the delivery of beverages in an increasingly fast paced way of life for the consumer.

(some background information and industry data courtesy of Bev Net and CNBC)

Follow Up: Toys R Us Comeback / Mergers Roundup

In a follow up to a recent post, bankrupt Toys R Us may make a comeback under a new plan outlined by a former CEO of their company, Jerry Storch, who is working to revive the brand.

Mr. Storch, according to CNBC, has been in talks with Credit Suisse and Fairfax (the group which successfully bid for the Toys R Us Canada division) to put together financing and a strategic plan to bring back a “few hundred” Toys R Us stores. The chain had 800 locations in the U.S. that are all in the final stages of shutting down at this time.

The plan being formulated by Mr. Storch would include former executives from the company in a new leadership team. It would, according to reports, place Toys R Us and Babies R Us in the same physical retail space under one large floorplan. The original way that the company operated was with two separate physical retail locations for each of those brands.

This would streamline operations, shipping, and receiving. It would also streamline hiring and provide other cost controls which were lacking in the original version of the brand.

The former Toys R Us corporation will be holding the final piece of business before it fully dissolves: an auction for their intellectual property. That auction will be held next week, and Mr. Storch plans to win the auction so that he can utilize that intellectual property in the “reboot” of the brand.

This situation merits watching as the entire toy industry would benefit from some sort of presence from Toys R Us in the future. The impact of the revival of Babies R Us would be helpful to parents, particularly new parents, and toddlers throughout our country.

Mergers Roundup

In other mergers and acquisitions news, the rumor that Kraft Heinz was looking to purchase Campbell Soup sent the share price of Campbell up significantly on Tuesday. The analysts on Wall Street, for the most part, feel that this merger does not make sense for Kraft Heinz or Campbell to do at this point.

The view of “the Street” is that Kraft Heinz needs to grow internationally and should focus their next acquisition on expanding their global business presence. The expense needed to purchase and recalibrate Campbell would be better used on a different purchase in the view of many analysts.

My own perspective is very different, in my experience in the food industry and having worked for a supplier to both those major companies, Kraft Heinz has some definite synergies with Campbell that would help both parties to grow. The expertise of Kraft and their distribution system could absolutely take Campbell in a whole new direction and create some great new product innovations for the consumer.

Furthermore, I think that Kraft Heinz can do both: they could purchase Campbell and still obtain a Mondelez or another company with a large international footprint.

The other aspect to watch here is that there are powers within Campbell that may not want to sell off the entire company, it may sell a piece to Kraft instead. This rumor is worth paying attention to because then the whole other area involved is what do you call the company? Do they part ways with the Campbell name that has been around since just after the Civil War?

Campbell is in disarray and has no CEO, the company is in need of a major overhaul and Kraft Heinz could be the right fit for them to ensure their survival.

ConAgra and Pinnacle Foods merged today in a deal worth somewhere between $8 and $10 billion depending on what report you access. That proposal came up quickly to the public (no doubt the behind the scenes channels have been at work here for a while) and it became finalized relatively fast.

This merger represents an aggressive push from ConAgra to keep expanding into the frozen foods area. They have made other smaller consolidation moves to support this new strategic growth area, but this Pinnacle move is a major gain by ConAgra.

I have watched ConAgra closely the last several months as they look to recalibrate their brand portfolio. They are chasing Nestle in the frozen food space, and this supports demographic trend data that reflects that millennial consumers are more likely to purchase frozen products.

Pinnacle has some other brands that make this move interesting from shelf stable products, and gluten free options because they purchased Boulder Foods recently who is a big producer of bread for those seeking gluten free alternatives.

The final merger rumor in the roundup today is the news of CBS and Amazon potentially joining forces. The news comes as a surprise to some, as no surprise to others, and as a “long shot” to still others with knowledge of that situation.

The “face value” of the proposal makes sense, Amazon needs more video content it is losing out to competitors for that reason. CBS has some of the most watched TV content in the mainstream broadcast categories, and would be the most cost effective merger target. CBS wants to merge with someone in “new media” to survive in the new TV landscape.

The acquisition of CBS would be the largest deal Amazon would have done to this point, if it does indeed ever come to fruition. The roadblock is the court activity surrounding the lawsuit between CBS and their parent company, National Amusements, (which I have covered previously on Frank’s Forum) over the Viacom merger.

The general industry sentiment is that CBS is going to have a hard time winning that suit to get out from under National Amusements in order to negotiate their own deal for acquisition.

The alternative way this could go is that the situation gets so acrimonious between CBS and their parent company (we are basically there now) that National Amusements may choose to sell off CBS. They would then take that money and invest it either into Viacom and their other holdings or make a series of other smaller moves to restructure their holdings.

The CBS – Amazon potential, in my view, has some merit to it. I still maintain though as I have for a while now that CBS is still more likely to become part of Verizon. That could be a very good merger for both parties involved.

These and other mergers will be covered as the summer rolls on. I can express one sentiment most will agree with me on: I am rooting for Toys R Us to come back for the next generation of kids.

Follow Up: Court Allows AT&T – Time Warner Merger

The merger proposal seeking to join AT&T and Time Warner has been surrounded by controversy almost from the time it was first announced. This proposed merger of a telecommunications and media distribution giant and one of the largest media content creation companies in the world has been the subject of several prior pieces on Frank’s Forum.

The blockbuster $85 billion merger was being held up by a lawsuit brought by the Department of Justice over anti-trust concerns. The government was very concerned about AT&T’s ownership of DirecTV and the impact that the merger with Time Warner would have on the costs for rival cable companies to carry channels such as HBO, CNN, TNT, and TBS.

The government was pushing for certain conditions such as having any disputes over high cable prices in light of the AT&T – DirecTV connection be directed to 3rd party arbitration to determine a fair judgement on price. The other condition centered upon blackout rights.

However, the judge in the case, Judge Leon, approved the merger without any conditions attached. The judge viewed the case strictly in terms of a vertical merger between two companies with different core strengths.

The precedent in anti-trust suits very often favors vertical mergers versus horizontal mergers. Some recent examples of horizontal mergers of two entities in the same type of industry are Office Depot and Staples and Walgreens and Rite Aid, both of those mergers failed due to anti-trust concerns over pricing of office supplies or pharmaceuticals, respectively.

The next steps for the government are unclear. The judge, Judge Leon, asked the Department of Justice to not appeal or seek a stay on the decision. His basis for this request is that both sides have spent an exorbitant amount in the case in legal fees and court fees in the “tens of millions”. The view of the court is that AT&T and Time Warner do not compete with one another currently and that the same opinion will be found by another court proceeding.

Some feel that the judge is right on point with this decision on this case. The other sentiment is that the conditions should have been attached to the decision to protect the consumer from hiked cable prices.

In my view, I maintain that the judge neglected to recognize the connection with DirecTV and the potential for the Time Warner properties in the cable television realm could be manipulated to make an unfair advantage for DirecTV. This becomes a bigger issue when certain customers cannot have a satellite dish where they reside. It could result in them paying more for cable or premium channels such as HBO.

The domino effect from this merger will impact potential merger opportunities in the works right now which have been featured on this blog in the past. The big story of the day on Wednesday is the impact this merger decision will have on the Comcast proposal for the assets of 21st Century Fox.

Comcast had stated publicly that they would not get involved in the bid for Fox unless the court gave the green light to AT&T in this case. Comcast was seeking to avoid a protracted lawsuit. The wild card here is that should Comcast make a bid for Fox, the government could get involved because they are both in the same business. The court could see a case for the government because it will be viewed as a horizontal merger, which could become a long slog in the courts for Comcast.

Disney and their bid for Fox has a slightly different perception because they view Disney as a content creator and entertainment company which does not have any expertise in delivering telecommunications services or with cable equipment. They are seen as having a potentially easier path to potentially obtaining Fox.

The stock price outlook for Comcast has been slashed by major investment banks and fell to about $30 per share this morning. This signals that if they do make a play for Fox and get in a bidding war with Disney, they will eventually have to buy back shares. The maneuvers have a direct impact on the valuation of the company.

This merger also brings new traction for CBS and Verizon as a potential opportunity to join forces in the future. CVS also gained from this decision because they are seeking to buy Aetna and this court decision on Time Warner proves that CVS has some viable evidence that this play for Aetna can be seen as a vertical merger opportunity.

This mega merger will make AT&T a much larger player in the media landscape which also brings to the forefront the battle between “old media” versus “new media”. The reality is that if old media outlets do not join together they will be destroyed by the new media giants such as Amazon, Google, Netflix, and Facebook.

The other reality is that the court looked at this merger with the perspective that cable television services will have to drop prices in order to compete with new media so they are going to allow it to move forward.

The next big prospective M&A prospects are Fox and CBS. The Viacom scenario was a disaster and CBS is looking to move forward to partner with someone else to gain competitive traction as other entities are getting larger.
The effects of this merger will be felt for a long time to come. The way that AT&T handles the marketing and promotion of the former Time Warner channels when they are provided to other cable TV providers such as Fios, Comcast, and Dish.

The domino effect on the other mergers in play right now will also create conditions where the precedent could be difficult for the government to try to protect against the anti-trust implications involved.

In the end, this merger sets the stage between old media versus new media and how that will play out will have a definite impact on the American consumer.

Follow Up: Larian Ditches Bid To Buy Toys R Us

In a follow up to earlier posts here on Frank’s Forum the news on Tuesday is that billionaire Isaac Larian has ditched his bid to buy Toys R Us. The bid would have saved some of the store locations in the once-iconic chain and would have saved some of the several thousands of jobs being lost in the liquidation.

The original offer was believed to be made for around $675 million and the negotiations broke down when the court refused the offer on the table. Larian also found out this week that his bid to purchase the mammoth toy maker, Mattel, has also failed.

The toy industry is bracing for a U.S. industry landscape that does not include Toys R Us, which averaged $11 billion in toy sales which is a 50% market share of the $22 billion domestic toy business. Mattel and Hasbro have both seen tremendous losses in value since the announcement of the liquidation of Toys R Us.

Hasbro spent money in recent days to purchase the Power Rangers brand name and retail rights. The other toy manufacturers are quickly adjusting their distribution patterns and working with brick and mortar retail giants such as Wal-Mart and Target, which are both increasing their toy orders.

The emergence of toys in other more obscure regional chains will increase as well to fill the void left by Toys R Us. The major players mentioned earlier and Amazon will also be working together to grab larger pieces of the pie in the industry space.

Meanwhile, the last of the Toys R Us store locations are winding down their operations to close in the next few weeks. The future for the Toys R Us brand is completely unknown at this point, if there is a future at all. The bid from Larian was the only major bid for the business that is even known to be out there and that has fallen apart. The entry of another group of investors is certainly plausible but the amount of capital it will take to reinvent the brand and create a significantly better customer experience are two big mitigating factors in my view which could doom the brick and mortar presence of the brand.

The one viable potential opportunity for Toys R Us to get a reboot is if it is purchased by one of the major toy brands, such as Hasbro. The major toy makers have a great deal to lose in the reality of Toys R Us leaving the U.S. toy industry space. Mr. Larian, as I previously wrote about believes that the toy industry will collapse without Toys R Us. These toy makers have a big stake in the situation and could decide to try their hand at rebuilding the brand.

The other alternative is that Toys R Us will be purchased by another entity to be used as an online only retail presence. In my perspective, I have felt since this news broke on the liquidation of the once-dominant chain, that this route was the most likely scenario for the future of the brand. The shifts in the retail space toward the online shopping experience could make a lot of sense to an investment group or private equity group.

The Toys R Us name still has a value and a consumer visibility that would translate well into a strictly online presence. The potential investors would be far more likely to go that direction than to take on the significant costs of rebuilding a brick and mortar chain. The sad reality is the loss of jobs, and that is why I was rooting for Mr. Larian to be successful in his bid.

The next five to six weeks will be critical to the future of the Toys R Us brand, in that time period another bid could emerge, or the business may be sold off in pieces until there is nothing left but the memories most of us have from our childhood. It is a sad narrative that those memories could not be passed on to future generations.

Follow Up: Toys R Us Buyout Bid From Larian Revisited

The fallout from the liquidation of the iconic toy retailer, Toys R Us, is back in the news cycle. The news about a week ago was that billionaire toy retail brand owner, Isaac Larian, the man behind the Bratz franchise; placed a bid to purchase about 270 stores in the former Toys R Us chain plus their operation in Canada.

The bid was rejected by the courts that oversee the liquidation of the once premiere toy retailer because they deemed the valuation was too low. The court and the management of Toys R Us have an obligation to get the best value for their creditors in selling the business. They deemed that the offer from Larian was not the best value they could obtain at this point.

In the past couple of days, Larian is back in the news stating that he will put another bid into play for the U.S. stores that he has targeted that are viable for his new concept for the rebooted brand.

Larian was outbid for the Canadian operation of Toys R Us by another investment group. His new bid is focused on saving a portion of the U.S. stores, would involve retaining the U.S. corporate headquarters in New Jersey, and would save between 7,000 and 10,000 workers according to CNN Money.

Toys R Us originally had 735 stores and 31,000 workers in the United States and the potential liquidation of the chain is already showing signs of impacting the toy industry in a deleterious manner. Hasbro, according to CNN Money, has just reported a 16% drop in sales based on the absence of Toys R Us from the equation.

Mr. Larian has a theory that the job losses at other toy companies and vendors that marketed products with Toys R Us will be significant if the company is not rebooted in some form. He has a vision for the company where each location will be renovated to be a type of “mini-Disney World” in each neighborhood. The visits to the store will be very experiential for the children and their parents and family members.

This plan may sound great on paper especially because it addresses some of the core issues behind the precipitous decline of Toys R Us; customer feedback in recent years centered on the shopping environment being cold, sterile, and not inviting. The renovation of the stores and the focus shifting to one of experiences and interactivity is necessary to breathe new life into a once prominent brand.

However, that plan will have to overcome some barriers, namely a brand that has been tarnished by underperformance and a liquidation proceeding. It is similar to any brand that struggles or fails the public perception of that brand is very powerful. The public could have made a decision in their mind about Toys R Us based on past experiences which will be difficult for Mr. Larian and his group to overcome.

The perception of the consumer public has doomed many other brands throughout the course of history. In the case of Toys R Us the brand does have value because it is the only retailer which focused solely on toys. The Larian group or whomever gains the winning bid for the brand has to refocus their business around the core niche of toys.

The unfortunate reality is that it is going to take a great deal of time and money to bring back Toys R Us in a form that will be relevant and competitive in today’s consumer marketplace. The competition from Target, Amazon, Wal-Mart, and other online retailers is very fierce. Those are the barriers that any rebooted form of Toys R Us must be ready to contend with in the future.

The demise of Toys R Us was a very sad side effect of a much larger issue that faces retailers today: the consumer today has different expectations from a brick and mortar shopping experience than they did even five years ago. Toys R Us in their original form could not afford to change with the times due to the debt load they were carrying on loans from private equity investors.

The potential for Mr. Larian or the next group to submit a bid to reinvent the brand should have one central theme: they can be the niche “go-to” place for toys. This is an important attribute in an increasing focus on specialization. They can be the experts on toys and the showcase area for people to experience toys. It can still be a place where children can go to dream.

The next few weeks will be critical in the future of the Toys R Us brand in the U.S. and the decisions made will then take several months to determine the progress or the chances of success for the revamped concept. In my own personal view, if the reboot of the store experience fails, I still stand behind the idea that the brand has definite value as an online only presence. This is substantiated by the visibility and nostalgia components of the brand and the connectedness with a variety of age demographics.

This is just another chapter in what could be a long story: whether it will be one of redemption is what time will reveal.

Amazon Targeting Expansion Into Healthcare

Amazon announced a partnership with Berkshire Hathaway and JP Morgan to provide better healthcare for the employees of the three respective American corporate giants. The details of the exact parameters of the newly formed joint venture are unclear. It appears that the partnership will not be to form a healthcare company to compete with major health insurers.

However, the announcement certainly shook up the industry: from Wall Street to Main Street, everyone was talking about this news on Tuesday. The prospect of these three companies getting involved in the evaluation of costs is a daunting set of circumstances for the healthcare industry.

In addition, Amazon is rumored to be targeting expansion into the pharmaceutical area. The online retail giant filed for pharmaceutical licenses in a handful of states back before the holidays, but it is unclear whether they were related to the medical devices which they already sell on their site.

The strategy and route for Amazon into this space is through this partnership with Berkshire Hathaway and JP Morgan. The stakes for certain retailers or interested parties in the pharmaceutical industry could be very significant. The other side of the situation is the protection of patient records should Amazon start peddling prescription drug delivery services.

The potential for misdirected prescription abuse is also at stake here should Amazon enter the prescription drug space. This is all transpiring amid the backdrop of a prescription painkiller abuse epidemic in America.

Those are just some of the ethical issues presented in this situation. The business implications are also significant with the “Big Pharma” companies falling somewhere in between the distributors and the retail drug chains. The sentiment within the pharmaceutical manufacturers is that the potential entry of Amazon into the industry would be a welcome turn of events because it would provide greater competition.

The translation there is that the pharma companies have been at odds with the PBMs (Pharmacy Benefit Managers) for years. The PBMs handle mail order prescriptions and they negotiate prices for the large insurance companies and for large corporations that have a bigger “say” in the benefits for their employees.

The insertion of Amazon into the equation is problematic for the PBMs such as Express Scripts, CVS Caremark, and United Health/Optum. They will have diminished leverage in negotiating pricing and other terms with the pharmaceutical companies because Amazon will essentially disrupt the way that game has been played. This is why the pharmaceutical companies have no problem with Amazon entering the space, the online retail behemoth is going to look to undercut the other players in the mix.

The potential entry of Amazon into prescription drugs will also hinder the prescription drug distributors, particularly the top three: McKesson, Amerisource Bergen, and Cardinal Health. Amazon is going to push back on them on price and that is going to squeeze their margins. The massive consumer base that Amazon will bring to the table and could command with greater potential for consumers to join Amazon Prime membership just for the prescription drug services will put these distributors in a tough position.

The entry of Amazon would shift the distribution paradigm as well. Their presence would shape the cost structures for that component of the industry. The benefits would definitely be reaped by the consumer because it will have a domino effect on the prescription drug pricing across the board.

The final area is the retail prescription drug channel, which if Amazon does indeed enter this part of the industry it could have a profound impact on the entire industry. The biggest players that would be at risk in that scenario are: CVS, Walgreens, and Rite Aid.

Those three companies have existed for decades by servicing customers through predominately brick and mortar operations where the customer or patient will pick up their prescription products. These companies have delivery services available in some markets as well.

However, Amazon would turn that part of the industry on its head, so to speak, and reinvent the way that patients would get their prescriptions. The concept of ordering a prescription online, or through a voice- controlled device such as the Amazon Echo, one would think would be a compelling option for consumers.

There is a definite argument for the convenience that Amazon would provide to someone who was feeling too ill to drive to the pharmacy to get a prescription. It is appealing to people with busy lives as well, who need maintenance meds for a given medical condition to eliminate having to run over to the pharmacy from their routine thereby saving that time.

The retail pharmacy chains mentioned earlier would certainly have to adapt in the advent of Amazon potentially entering that sector. The strategy to combat Amazon would be two-pronged, in my opinion, in order to create resistance to Amazon grabbing too much market share.

First, the retail pharmacy chains can tout that they can fill prescriptions in one hour or less. The order of a prescription through Amazon will take more time to fill, so if you are sick (and the fact remains that being sick is when most people see a doctor and need prescriptions filled) the traditional retail route is still the most effective method.

Next, is an adaptation of the retail pharmacy operation into a true omnichannel approach. This approach is key to the survival of essentially every traditional retailer with a brick and mortar presence moving forward. The CVS, Walgreens, and Rite Aid chains and others in a regional presence have to consider developing delivery in most every market they serve. They also have to develop some type of website portal that can handle prescription orders for delivery to the consumer. This would allow for a truly omnichannel approach.

The patient prescription history and personal data are already in their database so these chains can tout the security and trust they have established with the patient over a period of time. This could become their pathway to remaining relevant with Amazon actively competing in the channel.

The patient confidentiality issues which were raised earlier in this piece still have significance as Amazon weighs whether to enter the pharmaceutical space or not. The potential for prescriptions to fall into the wrong hands is an aspect of this situation that should be careful considered by the government with respect to Amazon.

Conversely, that argument can be made for the major retailers and PBMs that are currently active in the retail pharmacy channel currently. The way the systems function today certainly provides some openings for the potential for prescription drugs to be misused or used by someone other than the patient it was intended to help. The mail order supply could easily get into the possession of someone who has the propensity to abuse prescription pain medications, anti-depressants, or some other type of pharmaceutical product.

The “Big Pharma” companies seem at this point, from their public statements, to be largely unconcerned with Amazon entering the market. I can understand how some people might be confused by this position. However, when you consider how the industry functions, and through my professional experience in different roles within the pharmaceutical industry, I can attest that the “Big Pharma” guys only care about making money. Amazon will allow them to do that especially with the PBMs.

The PBMs must be concerned about retaining profitability should Amazon enter that area of the industry. The joint venture announced on Tuesday with Amazon, Berkshire Hathaway, and JP Morgan has the healthcare industry shaken up already.

In full disclosure, some reports have also speculated whether Amazon is announcing this partnership to “save face” because of reports that they make their employees who work there for a certain length of time and then leave the company pay back the amount that Amazon paid for the healthcare coverage for that particular employee.

This new partnership could integrate new technology into the sector with rumors that the three companies in the venture will have an employee web portal that will provide healthcare planning information to help reduce the cost of tests and other services for those on their payrolls. The other rumor is that they are going to launch a smartphone app that streamlines healthcare choices and explains the protocols for different procedures very simply.

It is clear though that Amazon wants to get into the healthcare and potentially the pharmaceutical space and that has put everyone from the major health insurers, to PBMs, to those involved in the pharmaceutical retail drugstore segments on notice that changes are coming whether they are ready for them or not.

Follow Up: Toys R Us to Close 180 Stores

In a follow -up to a prior article on Toys R Us entering Chapter 11 bankruptcy protection back in the Fall of 2017, the company announced on Wednesday that they will be closing 180 stores by April.

The beleaguered toy retailer has been consistently losing market share and foot traffic due to stiff competition from Amazon, Wal-Mart, and Target. The Chapter 11 filing was due to a heavy debt load of $5 billion and the need to reorganize the company to emerge a more streamlined organization.

However, while most experts and industry analysts understood the Chapter 11 filing, and my prior article covered the necessity of the timing of the decision, consumer perception was that the chain was “going under”.

The chain had to file when they did for bankruptcy protection because they had to be able to pay the suppliers to get the shelves stocked for the Christmas and holiday season (where the chain makes 90% of their annual sales).

The plan backfired because they failed to market the promotional items properly during the holiday season, and the toy seller neglected to properly provide a concise and simple explanation of the Chapter 11 decision.

Therefore, in survey results from customers the top reason why the company struggled at the holidays was because the public perception was that the chain was going to close their doors, so any gifts for the holidays were perceived to be not returnable merchandise. This perception caused shoppers to avoid the purchase decision at Toys R Us and to purchase those gifts elsewhere.
The company made a statement Wednesday regarding the store closures and cited “operational missteps” during the holiday season as the reason behind the closings. The company now has to move fast to salvage the future of the entire chain.

The competition from Target, who has placed many of their store locations near current Toys R Us locations as well as expanded their toy product offerings, has definitely cut into the revenue capture for Toys R Us. This competition is heightened by aggressive marketing campaigns from Amazon and Wal-Mart that are convenient places for customers to get a wider range of products as well.

The main issue with Toys R Us, in the survey results from consumers, is that they are not easy to shop either in-store or on-line. The company has recognized that both of these areas are a major source of the downward spiral they find themselves within at this point.

The ability to succeed in retail today in an increasingly competitive marketplace is to be an easy place for the consumer to make a purchase. The products must be easy to find and priced to move, and the omnichannel approach: in-store, over the phone, store pickup for large items, and a robust on-line presence are all essential to survival.

Toys R Us is apparently struggling in all of these areas, and they have to hope that this decision today will be approved by the bankruptcy court. They have to hope that they can restore confidence in both the toy suppliers and the consumers. The company has to improve operationally and become aggressive in promoting in-store and on-line product offerings which create a sense of urgency for the customer.

The unfortunate reality of the announcement today is that most likely the chain will announce more store closings in the future. The strategy is to focus on their best performing stores or their best potential locations, which is the path that other retailers have taken at this point in their life cycle.

A personal note, here amidst all of this is my own memories of going to Toys R Us as a child, and getting so excited about a new toy or game that just was released. It was a place you could go and be happy because they sold toys and that nostalgia for a different time makes this article really bittersweet.

The resources I consulted mentioned a rift between the company and toy suppliers because Toys R Us was still giving out executive bonuses before they paid the suppliers, and they were behind on payments. The argument can be made for both sides of that situation: the company does not want to lose quality executives to competitors over a compensation gap, but you also have to pay your bills.

The consolidation of stores, especially the elimination of underperforming stores, is a logical first step. The unfortunate consequence is the lost jobs involved, which in their statement the company did not address the actual number of eliminated jobs. The company needs capital to run a more streamlined operation, so executive bonus pay probably should be suspended until they emerge from Chapter 11 protection.

In the end, as one who has covered the retail space and bankrupt companies in the past, this is a familiar pattern which usually results in the end of the chain in question. The biggest issue here with the potential demise of Toys R Us is that some industry experts maintain that the toy business cannot survive without the presence of Toys R Us. The validity of that analysis may be tested in the near future.

Gray Area: The CVS – Aetna Merger

The area of mergers and acquisitions is a key area of focus here on Frank’s Forum and that is what makes the CVS pursuit of purchasing and consolidating Aetna such significant news. The merger would be the largest transaction of 2017 (and we have had some tremendous M&A activity this year) and the largest health insurance merger in American history.

The price tag is astounding: under the terms of the current proposal CVS would obtain Aetna for $66 billion. The implications are of tremendous concern for several entities: health insurers, PBMs (Pharmacy Benefit Managers), other pharmacy retailers, drug companies, and most importantly: the consumer.

The potential combination of the second-largest retail drug chain and one of the largest health insurance providers in the nation is an alarming proposition. It has a feeling of a conflict of interest written all over it. The mainstream media and some other internet based news outlets have done an amazing job covering this emerging story and I encourage you to check out some of those related articles.

The thought process within some of the coverage in those outlets also corresponded with my first thoughts on this merger due to my understanding of the pharmaceutical network coverages through major insurance providers: higher costs for the consumer. This merger, should it clear all of the hurdles, would have tremendous implications on cost.

The consumer should have reservations because essentially this merger will translate to being given the following options: use a CVS location to fill your prescriptions for medications or use CVS mail order service for your prescriptions or end up paying a significant amount of additional money using a different option.

The retail brick and mortar locations of CVS are ubiquitous in certain areas of the country, but there will be some cases geographically where finding a CVS will be cumbersome for some consumers. That is a concern right off the top for the consumer.

The proposal clearly benefits CVS in providing them with a captive audience of consumers also has the ancillary benefit of fixing an issue most retailers are experiencing: reduced foot traffic in their stores.

Many retailers are dealing with reduced foot traffic due to a variety of factors, most notably the convenience of online shopping. This is a good segue to another driving force behind the CVS – Aetna proposed merger which is Amazon.

The online retail giant has been exploring for several weeks now whether to enter the prescription drug marketplace. Amazon has already been granted some preliminary licenses within this area, but I am not an expert on licensing requirements for prescription drug carriage across multiple states, for more information in that area I would suggest researching some of the great articles out there on the topic.

The industry experts insist that the hurdles for entry into the market are high for Amazon to attain. The ethical and procedural questions from a compliance standpoint will most certainly follow this new strategic direction for Amazon.

In addition, the recent legal changes to the policies regarding the dispensing of painkillers and opioid class narcotic drugs would be of particular scrutiny. The ramifications of Amazon carrying those types of products could potentially increase the rate of prescription drug addiction which the government is trying to curtail. Amazon has the two components needed to make this ultimately work: smart people and tons of money.

The convenience of filling your blood pressure medication from your Amazon Echo, your tablet, or your computer is enticing to some, and frightening to others. The “Amazon effect” has already impacted traditional retail channels, especially with their recent entry into the grocery channel with the purchase of Whole Foods, but where does it stop? Should Amazon be able to access prescription drug channels?

However, the case for a conflict of interest could also be made for CVS and Aetna. The merger of health insurance carriers and retail pharmacy chains also has been met with apprehension by some consumers as well. This type of arrangement essentially forces the consumer to use a particular pharmacy if they have insurance coverage from their job which is, in this case, through Aetna.

In fair balance, the other side of the argument would be made by those who have no problem with this merger by pointing out that many current arrangements are made between health insurance carriers, PBMs, and retail pharmacy chains. Some insurance carriers or their PBMs have relationships with Rite Aid, some with Walgreens, and some with CVS which create a “preferred provider” type of situation.

The implications for CVS to actually be the same company as Aetna run far deeper than just a strategic partnership. The potential for an approved bid for CVS to merge with Aetna, would have a domino effect on the retail drug business segment.

The nature of these situations and their impact on an industry segment would invariably begin the speculation of other similar potential mergers. Some examples could be Walgreens with United Health Group, Rite Aid with United or another smaller insurance carrier, and Jewel/Osco with Blue Cross Blue Shield.

The ramifications of a CVS merger with Aetna could change the way health insurance and prescription drug coverage is currently set up, it would have a dramatic impact on prescription formulary coverage, and result in potentially higher costs for the consumer.

The potential for Amazon to enter the prescription drug space is a whole other topic for debate on the potential for a wide range of potential ways that those products could be misallocated or abused.

The merger potential for the second largest retail pharmacy chains with one of the largest health insurance carriers compared to the largest online retailer getting involved in dispensing medications: in the words of the rock legend, Tom Petty, “I don’t know which one is worse”.

Oversaturation Point: The Uncertain Future Of Amazon

The financial news is buzzing with the analysis of the earnings reported from Amazon and the trendline toward potential trouble in the waters ahead. The recent acquisition of Whole Foods and the expenses on the balance sheet compared to the offset from the investor and the average consumer portends a future that is uncertain for the mammoth online retailer.

The question I find myself asking, from the perspective of one who has covered mergers and other financial news, is: has Amazon reached an oversaturation point?

The investment analysts on Wall Street are stating that investors are fatigued with the process of shelling out huge sums of money for Amazon stock shares. The consumer side of the business also seems to be displaying signs of fatigue as well. The company is starting to find out that it is difficult to grow your base membership business when the Prime subscription cost is $99 per year.

The question that Amazon should ask themselves is: should we put in place a tiered subscription structure to widen the potential consumer base of the business? The answer to that question will go a long way toward the determination of the future direction of their business.

The other solution they could determine is that they could market the Prime membership differently: instead of focusing on the $99 per year cost, they could break it out into a monthly cost. This type of marketing strategy might appeal more to a younger demographic and to families that are feeling the budget squeeze.

The stock value analysis of Amazon seems to indicate troubled waters ahead. The blue-chip stocks traded on the major indices all have “breaking points”. The averages for stock performance whether by month, by quarter, or the most common: the 52-week average; all provide a snap-shot of the financial picture around the given stock valuation for a company.

The “breaking point” on Amazon is a staggering figure of $925, according to industry analysts. That point seems to be approaching unless the trend lines change. The long- range forecast for the company, and the analysis around their balance sheets, suggests that the expenses stemming from the consolidations of Whole Foods and other businesses will impact their overall outlook.

The reaction from industry analysts and those within the financial markets has been mixed overall with respect to Amazon and their future path. These groups include a faction which maintains that the Amazon purchase and consolidation of Whole Foods will eventually have a negative impact on the company from both an expense and strategic perspective. The variables of external factors that could impact their profit margins now increased exponentially with the inclusion of a retail grocery business.

The reality is that no company is “bulletproof”, no company is immune to the outside forces driven from marketplace supply and demand. Amazon will still remain one of the most influential companies in the world, but everyone goes through a slump. The average consumer will still enjoy the convenience that their shopping experience provides, while another group of consumers will choose another site for their shopping, and still yet another group will shop primarily in brick and mortar stores.

In my view, Amazon is heading toward an oversaturation point. They should adapt, like any other business, with a strategy that addresses ways to reinvigorate their core customer base. They also need to determine ways that they can attract new customers in younger demographics both now and in the future.

The company continues to be a leader in both technology and convenience in the way we can obtain or consume a huge range of products. However, the Whole Foods acquisition has changed the overall public perception of Amazon into a type of “grim reaper” for American small businesses and the jobs that they create.

A stroll through your local Whole Foods store today will invariably include an “end cap” shelf space selling the Amazon Echo, which is a stark departure from what Whole Foods built their brand imaging around over the years. These types of changes could serve to alienate the core customers of the Whole Foods brand in the short term.

In addition, Amazon continues to grow, especially in certain states such as my home state of New Jersey. The first-hand accounts that I have been told about the negative quality of life impact that the Amazon distribution center expansion has had in the area outside of Trenton, are incredible. The constant rumbling of trucks and the increased traffic congestion and noise are just naming a few of those adverse impacts.

Those negative effects are followed by accounts of the working conditions at the New Jersey distribution centers as well as the corporate office roles which support those sites. The company culture has been exposed as one where the employees are pushed beyond their limits and that working conditions need improvement.

Amazon will have to contend with this image problem amid a rising tide of expenses as well as a potential stock sell-off if the share price drops below that breaking point. The oversaturation of Amazon in the marketplace has begun, the repercussions will have a significant impact on the retail industry space, the consumer, and the economy in the future.

Return To Football & Media Companies Protection Of Live Sports Content

The NFL preseason is already three weeks old, and college football will begin traditionally on Labor Day weekend; football is back and for many Americans that means that they have something to watch on TV again. The excitement for the start of both a new college football season as well as a new NFL football season is tempered by the continued movement of media companies to protect live sports content.

The trend towards eliminating cable television service, or “cord-cutting”, is gaining momentum each year as Americans look to trim the monthly expenses in order to pay for rising costs for other services, such as healthcare. The “cord-cutting” trend has been aided by the prevalence of streaming television products and platforms available to the consumer.

However, the consumer that is looking to still utilize “live TV” can do so through a few different pathways: HD antenna, streaming devices, and hybrid streaming services. The HD antenna is very simple: it attaches next to your TV and provides the broadcast channels within the mileage range on the box. The antenna would provide CBS, NBC, FOX, ABC, CW, and PBS as well as a few more local stations.

The antenna would provide you access to live sports broadcast on the national networks, and would not include any games broadcast on cable television. This option would work very well for NFL football, and some college football games. It would be of little use to obtain access to any other major sports, other than an occasional game.

The local baseball, basketball, and hockey games are almost exclusively aired on cable regional sports networks or on national cable sports networks such as ESPN or NBC Sports Network. This leads us to option two: streaming devices.

The streaming device route or Smart TV route can provide access to a huge amount of live sports content, but most of that content is not free of charge. The NBA, NHL, and MLB all have streaming “apps” but they require a subscription to access. The streaming device route can also support “live streaming” of certain networks but most of that would require either a cable subscription or another type of payment arrangement to access that content.

The hybrid streaming device route would be a DirecTV now, Sling box, or a few other smaller services that allow for the content available on a very large package of channels to be viewed in other rooms in your home. This would require a subscription and at least one box connected from either a cable or satellite provider. This route may also require the purchase of additional equipment.

However, this setup would enable access to a significant amount of live sports content. The other service is through Hulu which will feature a package of channels for $40.00 per month which would allow for live streaming of network and cable television, including live sports.

The networks pay such a high premium for the live sporting events that it is, in some ways, understandable that they have put in place certain measures to make it more difficult to stream the content without a cable or satellite subscription. The challenge will be in adapting their content providing platforms to attract other audience/fan base demographics.

The younger generation is conditioned toward streaming versus watching any regular television programming. The advertising around some of the streaming services and apps can be a bit misleading. Some of the sports related streaming apps will give you access to certain content for free and require a fee or cable subscription for access to the most important content: the live game or archived game broadcasts.

The NFL has partnered with e-commerce giant, Amazon, to stream 10 games this year as part of the Thursday Night Football package. This exclusive opportunity with the NFL and their coveted live game content cost Amazon $50 million. The broadcasts are free for all those with an Amazon Prime membership which runs at $99.00 per year.

This agreement with Amazon is different than the agreement they had last year with Twitter for the Thursday night games because Twitter streamed them live for free to everyone with an account, Amazon requires a Prime membership for access. It will remain to be seen if that will have an impact on live stream viewership, either positively or negatively.

The future of sports content on TV, and other content on TV is trending more toward a structure where the consumer will pay to have all sorts of content streamed on a customized basis. The consumer access to a broad range of content will require membership to a wide range of services, similar to the premium channel cable TV subscriptions currently (HBO, Showtime, Starz, Encore). It is important to note that whatever service or method you use it is like the old adage: “there is no free lunch”.

A good example of this trend is the decision by Disney recently to end their partnership with Netflix to start their own streaming service. This translates into a scenario where in order to gain access to Disney content you will have to purchase their streaming service. I think that many other major media companies are going to follow suit.

The return to football means some exciting weekends relaxing with family and friends. It conjures up memories of past football weekends with the big college games on Saturday nights, and the CBS games at 4 o’clock on the East Coast with the aroma of a home cooked dinner in the background.

It is time for many of us to watch TV again, and I hope that this piece informed you on the best options that you have to access this content. I wish you all a happy and safe football season.