December 21, 2006
BrainTrust Advice 2006: ‘Told You So, CVS’
There was a whole lot of buying going on at CVS this year. The drugstore chain was in wheeling and dealing mode as it started by buying MinuteClinic, an operator of in-store health clinics, followed by a purchase of 700 standalone Sav-On and Osco drugstores from Albertsons and, most recently, agreeing in principle to acquire the pharmacy benefits manager Caremark (deal pending).
Tom Ryan, the chain’s chief dealmaker as well as chairman, president and CEO, has looked for acquisitions he believes will put CVS out in front of, in his view, the “logical evolution” of the pharmacy industry.
RetailWire has followed the doings at CVS quite closely and members of the BrainTrust haven’t been shy in sharing their opinions every step of the way.
Buys MinuteClinic
“This is an excellent strategy for CVS. This allows them to ultimately make a CVS location a total health one-stop. Imagine, for non-serious life threatening illness, coming to
CVS to see a physician, then getting the medication filled while you shop for other sundries. CVS is clearly a leader and innovator. I see down the road an alliance between the
clinic division and the PharmaCare division to reduce healthcare costs for corporations.” – Bernie
Slome, VP Business Development, ICC/Decision Services
“I sense a glut of in-store clinics coming our way. Everyone’s going to have a clinic; it’s a matter of which retailer is the best at branding it and keeping up simple but high
quality care. I read the other day about one store starting to give meningitis shots. My advice — be careful what you offer.” – Len
Lewis, President, Lewis Communications, Inc.
Buys Sav-On and Osco
“One thing to note is the boost these Osco/Sav-On units will get from being associated with CVS in terms of manufacturer support — especially OTC and HBA manufacturers. We have
seen these stores immediately jump from ‘C or D’ to ‘A or B’ in terms of strategic priority as soon as they are disassociated from the poor performing (at least for HBA) Albertsons
chain banner. This means more focus and resources and, therefore, a built-in growth factor for these units as part of CVS.” – Ben
Ball, Senior Vice President, Dechert-Hampe
Agrees to buy Caremark
“The potential payoff seems to be in the pharmacy benefits management business. I hate to spoil my almost perfect track record of disagreeing with analysts, but this time I agree.
The drug store companies that somehow have the resources to be in position to address whatever ways healthcare in this country morphs stand to win, and win big. He with the broadest
service portfolio seems to be ahead, at least for now.” – Ryan Mathews, Founder,CEO,
Black Monk Consulting
“CVS wants to own the prescription business, whatever the channel. To reduce their costs, insurance companies favor mail order prescriptions. Walgreens makes plenty of money
without the mail order business. Nothing in the prescription drug business is likely to change that situation in the foreseeable future. If Walgreens can’t buy a mail order business
at a reasonable price right now, there would seem to be no urgency.” – Mark Lilien,
Consultant, Retail Technology Group
Discussion Questions: What do you see as the most significant development at CVS in 2006? What advice do you have for CVS heading into 2007?
- CVS Deal for Caremark Addresses Competitive Issues – RetailWire 11/02/06
- With the Advent of In-Store Clinics, is Whole Health Finally Coming of Age? –
RetailWire 9/21/06
- CVS Gets Into Quick Clinic Biz – RetaiWire 7/13/06
- The Other Albertsons’ Acquisition – RetailWire 6/05/06
- Done Deal: Albertsons Sold – RetailWire 1/23/06
BrainTrust
Recent Discussions
Discussion Questions
Poll
CVS needs to expand MinuteClinic quickly, yet fast location expansion in retailing can invite trouble. CVS paid a very high price for MinuteClinic, so they need to get their money’s worth. Folding in the Sav-On/Osco locations needs to be done with TLC since all mergers break some eggs (intended or not) with staff and customers. The hardest task: making sure the $20 billion purchase of Caremark is worthwhile. Express Scripts bid $26 billion. There’s a point in many auctions where the winner is the loser because they pay too much.
The MinuteClinic and its implementation should be a big win for CVS. A number of our major retail and healthcare clients are aware of this growing trend and are monitoring it closely. From their perspective they will be watching how the retailers will embrace and leverage this service and how customers will respond to this service. Store design and customer experiential design will be critical to maximizing the success of this service. Understanding the customer and being sensitive to their privacy and situation will weigh heavily upon the pharmaceuticals and healthcare vendors interest in funding these ‘channels.’
The biggest challenge CVS will face is letting Caremark go, IF in fact, the Express Script offer is both a) sound and b) too high. It will be a Herculean task of honest evaluation, ego containment and expectations management to walk away from this deal if they should. Even skeptics like Ryan agree it is the right strategic move for the time, but as Mark points out today every deal has its breaking price.
With regard to the events of 2006, picking up the Osco/SavOn stores will still have the greatest immediate impact on CVS. But we wouldn’t discount the impact of MinuteClinic in the future if CVS expands it aggressively with a preemptive positioning. Price and convenience will be important contributors to the success of this concept to be sure. But somehow we feel consumers will look for a quality assurance in these services that is at least equal to the endorsement of the pharmacist. That may wind up being the key to chain drug success over other potential convenience locations for clinics.
Slow down! This is my advice to CVS. Bigger is not better, and more is not necessarily stronger or more efficient.
Growth through acquisition is OK, but absorbing companies into your organization and sharing the core competencies that the new larger organization offers takes time, resources, and is not always a positive factor. There are many organizations that step forward into growth through acquisition, then realize that they really went back two steps. To best implement this strategy (IMHO) — it is better to grow slowly and manage your profitability and organizational health.
Wal-Mart will price cut and cater to the financial gurus on Wall Street, but that will not dramatically impact overall results of CVS or Walgreens.
Can you see the middle and upper income shoppers flocking to a Wal-Mart super center and/or Neighborhood food store
just to buy generic medication? There has to be another compelling reason!
The two major drug store players have different strategic agendas and will continue to grow — Walgreens organically and
CVS by acquisition… if there is anything left! Hmmmmmmmmmmmmmm
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CVS needs to expand MinuteClinic quickly, yet fast location expansion in retailing can invite trouble. CVS paid a very high price for MinuteClinic, so they need to get their money’s worth. Folding in the Sav-On/Osco locations needs to be done with TLC since all mergers break some eggs (intended or not) with staff and customers. The hardest task: making sure the $20 billion purchase of Caremark is worthwhile. Express Scripts bid $26 billion. There’s a point in many auctions where the winner is the loser because they pay too much.
The MinuteClinic and its implementation should be a big win for CVS. A number of our major retail and healthcare clients are aware of this growing trend and are monitoring it closely. From their perspective they will be watching how the retailers will embrace and leverage this service and how customers will respond to this service. Store design and customer experiential design will be critical to maximizing the success of this service. Understanding the customer and being sensitive to their privacy and situation will weigh heavily upon the pharmaceuticals and healthcare vendors interest in funding these ‘channels.’
The biggest challenge CVS will face is letting Caremark go, IF in fact, the Express Script offer is both a) sound and b) too high. It will be a Herculean task of honest evaluation, ego containment and expectations management to walk away from this deal if they should. Even skeptics like Ryan agree it is the right strategic move for the time, but as Mark points out today every deal has its breaking price.
With regard to the events of 2006, picking up the Osco/SavOn stores will still have the greatest immediate impact on CVS. But we wouldn’t discount the impact of MinuteClinic in the future if CVS expands it aggressively with a preemptive positioning. Price and convenience will be important contributors to the success of this concept to be sure. But somehow we feel consumers will look for a quality assurance in these services that is at least equal to the endorsement of the pharmacist. That may wind up being the key to chain drug success over other potential convenience locations for clinics.
Slow down! This is my advice to CVS. Bigger is not better, and more is not necessarily stronger or more efficient.
Growth through acquisition is OK, but absorbing companies into your organization and sharing the core competencies that the new larger organization offers takes time, resources, and is not always a positive factor. There are many organizations that step forward into growth through acquisition, then realize that they really went back two steps. To best implement this strategy (IMHO) — it is better to grow slowly and manage your profitability and organizational health.
Wal-Mart will price cut and cater to the financial gurus on Wall Street, but that will not dramatically impact overall results of CVS or Walgreens.
Can you see the middle and upper income shoppers flocking to a Wal-Mart super center and/or Neighborhood food store
just to buy generic medication? There has to be another compelling reason!
The two major drug store players have different strategic agendas and will continue to grow — Walgreens organically and
CVS by acquisition… if there is anything left! Hmmmmmmmmmmmmmm