The significance of CVS’ latest buy

25 May 2020 — Mass Market Retailers

As the coronavirus began making headway into the U.S. in early March, CVS announced its acquisition of Schnucks pharmacy. At first blush, this acquisition seems to serve as just another footnote in the pursuit of incremental market share. CVS will acquire 99 in-store pharmacies from regional Midwest grocer Schnucks Markets, thereby increasing CVS’ footprint of 10,000 stores across the country by 1%. But, looking more closely, CVS’ strategy is revealed as expanding its reach to bring greater long-term benefits for customers and for our country — especially now when we are grappling with the short- and long-term effects of COVID-19.

Schnucks’ decision to shed its pharmacy business follows other retailers that have recently either scaled back or sold off their pharmacy businesses, including other regional grocery retailers like Raley’s, Stater Bros. and Lunds & Byerlys. In the era of declining margins, increasingly restrictive customer access and growing prescription distribution through non­retail channels, it is not surprising that these retailers have decided to pull back on their pharmacy businesses. And it is not just the regional retailers that have struggled. In their respective sectors, only Walmart and Kroger Co. operate significant pharmacy operations, and yet both sit firmly in the single digits for market share.

While CVS’ acquisition of Schnucks’ pharmacy business is the first acquisition by a retail pharmacy of a grocery chain’s pharmacy business, it mirrors CVS’ much larger acquisition of Target Corp.’s pharmacy business in 2015. It also seems to be copying the blueprint set by Walgreens and Kroger’s increasing in-store cross-pollination. Given the last two decades of horizontal consolidation and the continuing shift to online shopping, there are limited opportunities to physically replicate capturing customers. The underlying value in this move is that it represents a different approach to serving the customer in two very significant ways.

Meet customers where they want to be met

Major U.S. retail pharmacies, such as CVS and Walgreens, are the global standard bearers for their industry. No other retail pharmacy businesses are as expansive — in products and services sold, digital sophistication, and sheer footprint of stores — in their ability to reach their customers. However, one of the distinctive points that CVS has come to acknowledge is that not all customers want to be reached in the same way, and therefore it must strive to reach customers in the manner they prefer.

While thousands of convenient, freestanding locations appeal to many shoppers, other customers prefer combining pharmacy shopping missions with those that require trips to Target and Schnucks. Given the relevancy of these complementary sectors, it provides greater insight into new and existing customers for CVS.

While the scale and approach are widely different, the strategy is similar to that of Amazon in the myriad businesses that it has invested in so heavily. Its acquisition of Whole Foods Market, development of Amazon Studios and purchase of Pillpack may not be to take over the grocery, film and pharmacy industries (at least not yet) but to forge new and deeper connections with customers in order to better understand and serve their needs. The value to CVS of the Schnucks pharmacy acquisition is not in revenue, but the further extension of touchpoints to customers and greater insight.

Transform the business for the good of the customer, and now the country

At no time in recent history has health been so singularly at the forefront of consumers’ minds. In just a few weeks, our lives have dramatically changed to limit the spread of COVID-19. PPE, disinfectants, rapid testing, treatments and, eventually, vaccinations are needed by the entire population. Having a broad, convenient footprint; professional expertise; and experience in the health industry is critical, and CVS is well equipped to provide them as the public grapples with the ­pandemic.

CVS has been on a journey to evolve itself from the U.S. drug stores of yesteryear into more of a true health destination. Many pharmacies still struggle with their transition from convenience into health as primary business generators and the role of the business in the minds of consumers. Yet, most forget how far they have come along (think soda fountains and Joe Camel next to drugs on windows and signs). To that point, CVS has moved the farthest by investing in the vertical gears of U.S. health care in an effort to reshape the ­system.

Through the direct ownership of Caremark and Aetna, CVS has begun the process of reshaping health and prescription benefits and delivery of care at its touchpoints. Most importantly, its perspective as to what a retail pharmacy as a wellness destination can be is far more ambitious. Take its development of Health Hubs (and its commitment to open many more), which greatly expand medical services available to customers and will provide more robust points of care that will be of significant value to consumers.

The vertical integration of health care within CVS Health and the expansion of care it is willing to undertake demonstrate its commitment to health care delivery in this country. The added value of the relationships with Schnucks and Target is the ability for an advanced deliverer of care to operate and potentially expand its service offerings at those locations. Given the average square footage of grocery and discounter locations, the opportunity to monetize underutilized space for expansion is highly plausible and a natural next step to benefit both retailers and ­customers.

While this strategy began to take shape long before the pandemic, the developing situation in the U.S. and across the world demonstrates how important this strategy is in the era of COVID-19. CVS Health has 10,000 points of care within mere miles of the majority of the 330 million Americans in our country. Expanded services in all locations, Health Hubs strategically placed in retail partners such as Schnucks, combined with control over the health care layers and deep understanding of customers, can incentivize the right behavior to direct patients to their closest CVS location for the most efficient place of care.

These actions can deflect the crush of demands on hospital systems and ERs by greatly expanding the medical care network. COVID-19 has greatly accelerated the need to swiftly and intelligently implement such a strategy, for the benefit of the present as well as the future. While I have no doubt that we will collectively come through this crisis, each passing day will make where we come out a less familiar place to where we were before the coronavirus began. I believe that we all agree that we will need an expansive and flexible health infrastructure to address what may become the new normal.

Tom Block is head of retail pharmacy at dunnhumby.

Source: https://www.massmarketretailers.com/the-significance-of-cvs-latest-buy/