CVS pharmacy opened their first retail store

CVS pharmacy opened their first retail store in 1963. Since then they have maintained a strong market performance in the health clinic industry by focusing on customer service and their commitment to creating a better future in health care. CVS pharmacy provides three major services to their customers, which consist of retail pharmacy, Minute Clinics, and Pharmacy Benefit Management PBM [1] . CVS’ dominate success in the industry has transformed their company into the largest health care provider in the United States.

The first Consumer Value Store, or CVS, was opened in Lowell, Massachusetts by brothers Stanley and Sidney Goldstein and partner Ralph Hoagland in 1963. In the first stores, they sold health and beauty products. In 1967, CVS opened their first two stores with pharmacy departments in Warwick and Cumberland, Rhode Island. The company was then sold to Melville Corporation in 1969. Five years later, CVS achieved $100 million in annual sales. In 1978, CVS decides to differentiate itself from competition by opening small health and beauty stores in enclosed shopping malls. By 1996, CVS Corporation became a publicly traded company on the New York Stock Exchange under the CVS ticker and Stanley Goldstein is appointed the first chairman. CVS first launched their fully integrated online pharmacy website, CVS.com, in the United States. CVS became the first national pharmacy retailer to launch a loyalty card program called ExtraCare Card in 2001. In that same year, CVS pharmacy had annual sales that exceeded $22 billion dollars. [2] 

CVS is leading the industry in clinical and health management programs, specialty pharmacy expertise, and customer service. CVS currently has $99 billion dollars in annual revenues and were ranked 18th in the Fortune 500 in 2010. [3] CVS operates 7,000 pharmacy drugstores across the country, which is the most in the U.S. The company wide objectives and goals of CVS are operated from their headquarters in Woonsocket, Rhode Island. CVS also have more than 560 MinuteClinics in 25 states. The company PBM services provide customers with services to manage their pharmacy benefits and fill prescription by mail or provide clinical expertise. The strategic advantage that makes CVS the largest pharmacy health care provider in the United States is that it provides greater access, encourages healthy behaviors, and lowers overall healthcare costs for it’s customers. They provide access to a network of approximately 64,000 pharmacies not including the 7,000 pharmacy stores that they also operate. [4] 

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External Analysis

The general environment of CVS can be broken down into six subcategories. The first category is demographic. CVS services a wide range of demographics, along with the pharmacy industry. They serve people in low income groups to high income groups. They look to provide pharmaceutical services and a low cost convenience store to truly all demographics. The sociocultural aspect of the general environment hits on the lifestyle and culture of the U.S. Most industries in the U.S. are looking to increase convenience, something that the industry as a whole is excelling in. Most of the major players in the industry focus on the aspect of convenience because that is what the culture of the U.S. demands. One stop shopping at a close location helps this industry stay in businesses and caters to the need so of the fast-paced world.

The legal environment for CVS is a critical aspect of the company. Pharmacy services are heavily regulated by the government for obvious reasons; meaning that the legal ramifications that could come out of improper use or distribution of prescriptions is something that is taken into account by CVS and the industry. Technologically speaking, the pharmacy industry is just starting to use the internet world for prescriptions and retail. This technology will help bring the industry even faster results with prescription refills and will add to retail sales as a whole. The economic environment for the pharmacy industry has had ups and downs like any industry in the currently poor economy. It has remained stable over the last year overall, but is slightly down from 5 years ago, with the worst year being in 2009. [5] With the economy slowly recovering, the industry will probably see things get better and better. The last aspect is the global aspect of the industry. Most of the U.S. based pharmacy companies are not international. CVS for instances is only on Armed Forces bases outside of the U.S. and also a few U.S. territories such as Guam.

CVS is a big player in the Pharmacy Services and Retail Pharmacy segments. The industry structure can be looked at from several angles that lead to industry competitiveness. One side of the industry structure is the suppliers. The industry itself has a lot of similar suppliers for its main services or products, which are pharmaceutical products. These are consistent throughout the industry and most of the pharmacies carry the same prescription drugs and over the counter medicine. From a merchandising stand point, there are different suppliers for manufactured goods for each competitor. The products offered other than prescriptions are all fairly similar to competitors , with some of the bigger products lines being greeting cards, candy, film, over-the-counter drugs, beauty products and cosmetics, seasonal merchandise, and convenience foods and essentials4. Overall, the suppliers for the pharmacy services and retail pharmacy segments will always be there. The products offered might very slightly based on what supplier the companies use, but will probably be pretty consistent throughout the industry.

The threat of substitutes is a very serious issue in the pharmacy services and retail pharmacy segments. With grocery stores and stores like Wal-Mart and Target having pharmacies, it makes the threat of substitutes a priority for these segments because people already have to go to grocery stores and wholesale stores, which makes drug and convenience stores like CVS somewhat obsolete. If people go to pharmacies in these places, it is possible that it saves them time because they can consolidate errands into one trip versus going to two different stores. The way this problem is avoided slightly is by putting drug and convenience stores closer to neighborhoods than the average grocery stores, making a trip more convenient than going to the grocery store or to wholesale stores. Also offering drive-thru services helps lower the threat of substitutes. There are other forces such as the buyers and threat of entry that also must be taken into consideration.

Buyers and the threat of entry are two minor forces in this industry. Buyers have a small amount of power in this industry. For the most part, pharmacy services and retail pharmacies segments are very similar in most aspects of the industry. The buyer has the power to choose locations and types of stores they go to, but prices is not something that the customers have control over as far as picking stores with the lowest prices because there is little differentiation on the prices. The threat of entry is also a lesser force on this industry. While it might be easy to copy the strategy of retail pharmacy and pharmacy services, it is often very difficult to gain the respect or the reputation needed for the industry. People’s prescriptions are something that cannot be compromised, and to be able to compete with CVS or Walgreens or pharmacies in already established stores would be something that would be fairly difficult to repeat.

Industry competitiveness is the final force to take into consideration about the industry structure. There are two main factors that the pharmacy services and retail pharmacy segments compete on, which is customer service and convenience. The overall products and services that are offered are very similar, but these two factors are what make the industry competitive. There are things such as government regulation that factor into the other forces such as threat of entry and supplier. Without the customer service and convenience factors, this industry would fall apart. But what these two factors do is keep the industry competitive and at their best. There are usually several competing pharmacies in higher population areas, making it easier to find a substitute if a company cannot offer good customer service or convenience.

The main competitors of CVS are Walgreens, Rite Aid Corporation, and Wal-Mart. These competitors take up a large part of the pharmacy services segment and the retail pharmacy segment. Walgreens is a little larger chain of drug and convenient stores that provides a lot of the same services as CVS, making it its top competitor. Walgreens is the same type of store and has a little bit bigger presence in the international market. [6] Walgreens and CVS often try to battle for territory in populous areas with the locations close to neighborhoods. Rite Aid Corporation and Wal-mart are both competitors for pharmacy services, with Rite Aid Corporation dealing with sales of prescription drugs and Wal-mart competing for personal prescriptions.

Currently the market that CVS is in is very attractive. With the internet becoming a bigger role in the industry overall, it is doing nothing be help the industry with sales and getting prescriptions for customers. The Minute Clinics also help bring in more business that allows a customer to not only get diagnosed, but also get a prescription for their symptoms at the same place. The industry is recovering from hard economic times like most businesses, and it has actually increased by 34% in the past two years. [7] Last quarter, CVS made a profit of over $800,000, showing that even though the business as a whole is recovering from the recession still, it is still in a profitable position moving forward. [8] 

Overall, this industry is very competitive and there are a lot of alternatives for customers to choose from. There are two key success factors that tie in with how CVS is a competitive player in this market. The two factors are cost leadership and superior customer services. These two factors are discussed further in the next section, but they are incredibly important in this business and are the reason why CVS is as successful as it is.

Internal Analysis

As a result of the industry conditions, it is no surprise CVS has developed a focus strategy based on two main factors: cost leadership and superior customer service. “Our business strategy centers on providing innovative pharmaceutical solutions and quality client service in order to enhance clinical outcomes for our clients’ health benefit plan members while assisting our clients and their plan members in better managing overall healthcare costs”. [9] 

CVS uses a differentiation strategy for their Pharmacy Services. In contrast, they use a cost leadership strategy in their other retail product lines such as candy, greeting cards, and beauty supplies. They claim to offer many more Pharmacy Services to customers than other chains such as Walgreens. In the 2009 annual report, CVS repeats the how important ease of use is to its customers and resultantly to driving revenues. Their Prescription Benefits Management (PBM) services may be most important for providing superior customer service. The base of the PBM services is technology [10] . CVS’ information technology and information systems allow them to continually focus on improving service and offering more personalized products to customers. The company prides itself on being the first to market with newer products and services deemed profitable from analyzing PBM data. Constant adaptation is the ultimate strategy of CVS, allowing them to match their inventory with customers’ needs and preferences.

CVS’ core competencies include their exceptional size, low market risk, and their ability to provide valuable services to their clients via their PBM services. [11] PBM and other services will be examined in more depth later as resource advantages. All of CVS core competencies are hard for competitors to imitate, provide value to the consumer, and can be used for multiple product lines.

As the largest “pharmacy health care provider in the US”, CVS is extremely large. CVS’ merger with Caremark, Inc. provided the company with a network of 64,000 pharmacies including more than 7,100 CVS pharmacy stores” [12] . CVS undoubtedly has a much better chance of receiving discounts from drug manufacturers due to the high market share they control. The fact that CVS provides such a great number of services to clients makes visiting a CVS store a one-stop shopping experience. This minimizes the amount of time customers spend finding the information or services they need. Ultimately it increases customer satisfaction and leads to repeat customers.

CVS’ low market risk with a Beta of 0.74 is associated with their very large, very diverse client base [13] . Because their clientele is so diverse, CVS is not dependent on any specific client. “No single customer accounts for 10% or more of our total revenues” [14] . The company’s diverse clientele allow them more freedom to match the needs of the overall market for the industry, capturing a larger percentage of the market share and maximizing profits. The number of outlets across the US allows clients with the most comprehensive, up-to date health solutions in the fastest manner possible as they do not need to travel to arrive at an outlet.

CVS has many resource advantages providing them competitive advantage. Similar to Sam’s Club or Kroger stores, CVS has a rewards program for its loyal customers. It is surprising that CVS competitors, such as Walgreens, fail to provide customers with a rewards system. This may be why there are over 65 million active Extra Care members that earn two percent back with every purchase in store and online and earn one Extra Buck for every two prescriptions purchased in-store and online [15] . After all, there is no customer who prefers to pay a higher price for the same product.

Another resource providing competitive advantage is the retail beauty section of retail stores. According to the CVS Caremark website, “CVS/pharmacy was named Mass Beauty Retailer of the Year at the 2007 Women’s Wear Daily Beauty Biz Awards”. Bloomberg Business Week states that CVS recently made some renovations to the beauty department, targeting female shoppers, by hiring several hundred beauty advisors. They have lowered shelves to eye level, repainted stores with designer colors and added exclusive brands, hair care products, skin care and cosmetics. [16] CVS’ senior vice president for marketing and advertising quoted the following: “These new ranges have created energy and momentum for us. Our beauty business is outperforming our overall store”. [17] According to Bloomberg Businessweek, beauty innovations for CVS have led to an “increase in same-store sales by 6.5%, helping fuel an overall 33% increase in earnings, and shares up 132% over a range of three years”. Overall, the upgrade and renovation to the beauty sections gives CVS a competitive advantage because it targets the female shopper concerned with her physical appearance that generally frequent stores more regularly and spend more on retail products than the average customer. Therefore, any kind of marketing upgrade that will attract their attention in front of the store and offer these products at a low cost will greatly add value to the company.

CVS’ most important competitive advantage comes from their PBM services and exceptional customer service. Conglomerate PBM services form what CVS refers to as the Minute Clinic. These clinics are open seven days a week, located in 500 stores crossing 25 states, “(are) the US leader in retail based health clinics, and (are) the largest employer of nurse practitioners and pharmacists”. [18] It is run by nurse practitioners and physician assistants who can prescribe medications immediately to the pharmacy and who have the ability to refer patients to nearby doctors if necessary. “75% of the US population lives within three miles of a CVS” [19] . Overall, the Minute Clinic gives CVS a competitive advantage of offering customers a cheaper, more convenient solution for treating routine sickness than making an appointment at a doctor’s office. They can instead get the same quality care on a walk-in basis, from the large staff of nurse practitioners that they would otherwise see at a family clinic, without an appointment. As you can see, CVS uses core resources to obtain competitive advantages, which overall helps them to generate revenue.

However, there is one area that CVS is in the process of improving: the quality of pill bottle labels. Senior Vice President of Marketing and Operations, Helen Foulkes, mentioned the following: “Our own focus group told us that consumers, particularly seniors, were frustrated by pill bottle labels with small type, too much information, and information that is poorly organized”. [20] This is important because on average, from a pharmaceutical standpoint, senior citizens generate the most profit as far as prescriptions are concerned because they are the biggest age group with the greatest need and dependence for prescription drugs. CVS estimates “56 percent of Americans age 50 and over take three or more prescriptions on a regular basis; in addition 13 percent manage medication for their spouse” [21] . Seniors often have more difficulty reading small font on pill bottles. Because senior citizens are the biggest target market for prescriptions and they will order prescriptions where it is easiest for them to understand and most convenient if CVS does not fulfill these needs, senior customers will go to a competitor such as Walgreens or Target pharmacy. Given the fact that half of Americans over 50 take at least three prescriptions, it is very important CVS provide easy to read labels.

Poor prescription labels are an issue CVS is currently confronting; however, it appears to be taking too long to implement these changes. It seems that the size of CVS has decreased their flexibility. CVS has researched a solution to make font larger, appear in a bolder color, and reduce the number of words on prescription bottles. They also want to include a clear medical description of the pills so customers know what they are taking, along with the refill date, prescription number, and store location to refill it. [22] CVS great size and decreased flexibility is a factor that weakens their competitive advantage.

In order to be competitive in the “drug store” industry, a firm must possess certain key success factors. First, drug stores need to have good locations. Like most businesses, it is good to be in high traffic areas, but with drug stores that is essential. Most people stop at places like this on their way home from somewhere; they do not make a specific trip to a drug store. Also, they want to be in convenient locations. Customers do not want to go out of their way to stop at a drug store, when they only plan on buying a few things. Drug stores should be on corners or in shopping centers that are easy to enter and exit. Customers do not want this trip to be a “hassle.” Secondly, they need a solid supply chain. Customers go to drug stores to pick up the few items they need right away, and cannot wait on buying. Things like, toilet paper, medicine, etc. While customers are there they will most likely pick up a few more things that are important. Therefore, these drug stores must have certain items always in stock. In order to do this, they need to constantly be taking inventory, talking with their suppliers, and stocking their shelves. If a customer finds a certain drug store is constantly out of items, they will easily begin going elsewhere. Finally, a key success factor is price competition. Because most items sold in these stores are sold in many other places, drug stores must compete on price. Yes, most customers go to certain drug stores out of convenience, but when there are other options in an area a customer will choose the one with the best prices.

Comparison to Competition

As discussed above, key success factor is the location of the CVS drug stores. CVS currently has over 7000 stores open and are continuously opening more stores. They have six criteria when it comes to opening a new store in a new location. That specific location must be highly visible, must be easily accessible with traffic control, be a free standing site in order to have a drive-thru pharmacy, have parking for at least 75 vehicles, and have a minimum population of 18,000 in the area. They have all these requirements in order to maximize the number of customers coming to their stores instead of going to the competition. Walgreens is the next largest competitor with over 6000 stores opened, and a planned 7000 stores by 2010. Their requirements for opening a store are very similar. Rite Aid, the third largest drug store chain, with 4800 stores in 31 states, mainly has locations in shopping centers, but also has freestanding locations. [23] In New York and L.A., you will find a Rite Aid on almost every block of the main shopping avenues. CVS and Walgreens have locations all over the country, where as Rite Aid has locations mainly on the east and west coast, with very few in the Midwest. After comparing the locations of these stores, CVS has the competitive advantage. They have the most locations, in advantageous populated areas.

Another key success factor is price competition. A customer has many options to buy these items so drug stores must keep their prices low. All three of these drug stores seem to be competitive on prices.

After reviewing the income statements of the top three drug store chains in the country, it seems as if CVS is doing the best in terms of revenues and expenses, but Walgreens is doing the best with keeping their costs of goods sold down. CVS has revenues of almost $100 billion [24] , whereas Walgreens is near $65 billion [25] , and Rite Aid has revenues of $25 billion [26] . While CVS has the largest revenues they also have the largest percent of costs of goods sold, with 79% of their revenues being COGS. Walgreens on the other hand is around 72%. CVS does, however, have a smaller percentage of expenses than Walgreens. CVS also had the largest before tax income in 2009 of $3,696,000,000. Walgreens wasn’t far behind with a before tax income of $3,164,000,000. Rite Aid, is the only one in this group who suffered a loss of $2,582,794,000.

In terms of assets, CVS is once again doing the best with $61 billion in assets, with $1 billion of that being cash or cash equivalents [27] . Walgreens has assets of $25 billion with one billion of those being in cash or cash equivalents [28] . Rite Aid only has $8 billion in assets [29] . While CVS has the most assets they also are in the most debt. CVS currently has debt of $11 billion with total liabilities equaling $25.9 billion. Rite Aid has total debt of $6.4 billion, and Walgreens has debts of $2.3 billion with total liabilities equaling $11.8 billion. Walgreens has a ratio of liabilities/ assets of 47%, which is lower than CVS’s of 42%. [30] 

After comparing CVS, Walgreens, and Rite Aid’s financial statements, they lead to the conclusion that CVS is in a better position financially than the other two competitors. CVS has the largest revenue by a large margin, the largest profit, the most assets, and a better asset to liability ratio. CVS has a large amount of debt, but they have the funds to cover their debt. They also have a high cost of goods sale, which is lowering their profits. Overall, CVS is doing the best in this market. They have the most stores, competitive prices, and have the best financial standing at this point in time.

Recommendations for strategy

CVS pharmacy can increase their market share by expanding their company into Europe. Their market share will greatly increase because they would be able to reach new markets in new countries. CVS could reach countries such as France, Germany, Spain, Italy, and the U.K. It is feasible to choose Europe to expand globally because the price structure of European pharmacy products is relatively similar to the price structure that the United States has, so CVS could make profits without making dramatic costs reductions. [31] Countries such as Canada or Mexico would not be a good idea for global expansion because pharmacy products sell for low prices in those countries.

This expansion would be a risky long-term investment that can make a huge impact on the company. To reduce risk, CVS should join in a joint venture with a European company. This would greatly reduce risk because a European company will already have the company infrastructure needed to be successful in this market. [32] CVS should look to team up with a successful company that has similar company goals and objectives. It is also important that this company has a strong presence in the industry. If CVS can successfully find a quality company to have a joint venture with, they will have the potential to be a successful company in the future and should be able to increase their revenues, profits, and market share.

The majority of PBMs make money by saving their clients’ money. This is reflected in CVS’ strategy in the pharmaceutical segment: they want to help their clients better manage healthcare costs. The best way to assist clients in managing healthcare costs, i.e. reduce costs, is by providing alternatives to the expensive brand name drugs prescribed by doctors. Generic drugs are a very viable alternative. Many pharmacies and doctors even claim some generic drugs to work as well or better than name brands. There is clearly a demand for these cheaper generic drugs. In 2009, 2008 and 2007 respectively generic drugs accounted for 69.9%, 67.4% and 63.2% of prescriptions dispensed at CVS [33] . This increasing percentage of generic drugs dispensed clearly indicates consumers are more willing to buy generic over name-brand drugs. Not only is the demand growing for generic drugs, dispensing them is more profitable for CVS. “Selling generic drugs results in less revenue due to their lower cost, but they result in more profits” [34] . The irrefutable fact is that the profit margins on generic drugs are greater than those on brand name drugs.

It is clear that both CVS and its customers benefit from using or dispensing generic prescriptions. The irony of the situation is that 30% of CVS’ customers still choose to purchase the more expensive name brand drugs. While roughly 70% of drugs dispensed by CVS are currently generic brands, it could still be improved. CVS should view every single purchase of a brand name drug as a loss because profit margins are lower for brand name drugs than generic drugs. If they had been able to sell the same customer the generic version of said drug, they would have increased profit. It is for this reason we suggest CVS begin marketing generic drugs more heavily. This campaign should focus on three main benefits of generic drugs:

They are cheaper for the customer

They provide the same benefit as name brand drugs

Both the customer and CVS benefit from dispensing generic drugs

After reviewing the financials of CVS, it is evident that their cost structure is too high.  CVS had a very large revenue stream of almost 100 billion dollars in 2010, which was more than 30 billion dollars greater than their closest competitor, Walgreens, and more than 70 billion dollars greater than another competitor, Rite Aid.  However, after having revenues that high, they had an operating income of 6.4 billion dollars, which was only 3.2 billion dollars larger than Walgreens. [35]   CVS’s operating expenses were actually smaller than Walgreens, so that means the cost problem is located in the cost of goods sold. 

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