March 26, 2008
CEO: Economy Won’t Slow CVS Down
Thomas Ryan, chief executive officer at CVS Caremark, didn’t say his company is recession proof but he doesn’t see the economy causing consumers to cut back significantly on the purchases they make at the company’s drug stores.
“People will keep filling prescriptions and taking care of personal hygiene and nutrition,” he said in an interview on Bloomberg Television.
About 85 percent of CVS Caremark’s revenues are generated from purchases of drugs and healthcare products.
According to Mr. Ryan, about three percent of CVS’s business is “affected by the economy.”
CVS is looking for sales growth of between 13 and 16 percent in 2008. The company expects its pharmacy benefits management and in-store MinuteClinic businesses to help it achieve that goal.
“We are leveraging our unique combination to help payers control costs more effectively, improve patient access and promote better health outcomes,” Mr. Ryan said. “Our integrated model provides us with an opportunity to gain share and create new sources of growth in 2008 and beyond.”
Discussion Questions: Do you see CVS and other drugstore chains as being less prone to the negative effects of an economic slowdown than other retail channels? Do you think Thomas Ryan was minimizing the challenges CVS faces in the non-prescription end of its business?
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Tom Ryan is right on the money. The prescription business will continue on because customers will not stop taking medicine, and with 85 percent of CVS Caremark’s revenues generated from drugs and healthcare, the economy will not have much impact.
With regards to non-prescription items, I view recessions as being only personal for most people. When someone loses his or her job and doesn’t have other income rolling in, then they purchase fewer items. Until then, I do not believe that most people cut back too much on drug store items based only on anticipation of a recession.
Yes, it is very simple, if they have a great strategy and can execute with precision. Just look at the demographics.
CVS has two major lines of products: prescription drugs and convenience store items. Prescription drugs are likely to be somewhat recession proof but the pressure for lowered prices will continue there as well.
The convenience store items are a different story. People may still pick up things while waiting for prescriptions or walking by items on their way to pick up prescriptions. However, depending upon how hard their pocket book is being hit with higher prices for gasoline, housing, and other goods, they may be less inclined to be buy as many impulse items or items that do have lower prices at other outlets they normally patronize.
It will be critical to monitor sales to make sure CVS is not reacting to a change that slowly creeps up on them.
Healthcare Retail in general has slightly higher elasticity to employment changes than Food Retail and only lower than Apparel and Sporting/Books and Music Retail. Across different Retail sectors, Healthcare Retail does have the lowest elasticity to inflation, though. This would indicate that as long as the biggest problem the economy faces is inflation and lower GDP without a significant reduction in employment levels, the Healthcare Retail sector should be insulated to some extent. (Actual elasticity comparison referred from “Economics of Consumer Demand“).
Five years ago, CVS was $12. Today it’s $40. Very few retailers can beat that record. Of course, very few retailers are so heavily subsidized by insurance companies and the government. Most prescription sales are partial or complete reimbursements from the state and federal governments and insurance folks. If the governments and insurance companies got more aggressive, they’d cut CVS’ margins way down. So the issue for CVS isn’t “recession” it’s “reimbursement.”
My vote goes to CVS…6300 well run stores, the largest loyalty program of any retailer, a few game changing moves in the past year–Minute Clinic as well as the Caremark ‘merger’. All in all, CVS sure seems to know what it’s doing.
Important to note: they haven’t launched a cheap generic program (to compete against Wal-Mart) while Walgreens has recently launched what it calls a ‘prescription club’….
They seem well positioned to compete whatever be the economic situation.
CVS does a very good job in merchandising value opportunities to shoppers. Whenever I am in the store, browsing while waiting for an RX order, I consistently find opportunities to save a little here and there on brands I use on a regular basis. I always end up with purchases I hadn’t planned on but feel good about.
Good strategy, good execution, clean stores and helpful employees make CVS a consistent choice. As economic pressure rises, my value visits to CVS could certainly increase.
Generally all CEOs minimize their challenges. It’s their job to paint a rosy picture and be a cheerleader.
However, well run drug stores should continue to thrive. People will put their health and well being above other things. Prescription drugs are becoming more and more affordable every day with all the free, $3, and $4 programs.
I think I’m leaning toward Susan on this one.
The prescription business will remain (more or less) constant but where those prescriptions are filled is still an issue. Well paid executives like to believe all those arguments about people loving their pharmacist and being unwilling to shift where they get their prescriptions filled and–all things being economically equal–they may be right.
But, all things are rarely economically equal and higher gas prices, an unstable real estate market, recession and under-employment may send shoppers to lower cost providers.
My own doctor routinely tells his patients which pharmacies have the lowest prices on which drugs (since they all seem to have a different discount list) and, for someone on a fixed or limited income and several medications, the savings are significant.
Thomas Ryan’s job is to be a cheerleader. Let’s hope he doesn’t drink all of his own Kool Aid.
It’s an interesting question. On the one hand, one might think that consumers will look to save money on front-end type goods, and seek out the lowest available prices, at retailers such as Wal-Mart, Family Dollar, and Dollar General.
On the other hand, these stores are not always conveniently located, and with fuel prices being as high as they are, many consumers are calculating the cost of driving to their local discount store, which might not be too local. These consumers might make the decision to purchase their everyday products from stores that are located close to their homes, and CVS is well-positioned with its 6000+ stores.
While only time will tell, Mr. Ryan might be proven correct on his prediction. He has been right on many occasions, and this might be another instance that proves he is one of the smartest retail executives in America today.
Certainly people will continue to get items needed for healthcare but they will be more likely to shop price, and with the onslaught of $2 generic pricing this may have an impact. However, Mr. Ryan is practicing the art of positive thoughts when he minimizes the impact on the non-prescription end of the business.
Mark hit it on the head–Pharmacy is all about the reimbursement. CVS has shown that they are willing to play hardball and not accept plans that don’t reimburse at the level their model needs; if they can stick to this, then they will be able to keep consumers in their files.
Pharmacy files are key–once you get your prescriptions at one store that accepts your plan, it’s sort of like your checking account: even though you can move it, you don’t want to be bothered doing so.
Now, while drive-through is a reflection that consumers getting scripts don’t often convert to front-store purchases, as consumers consolidate their trips due to rising gas prices they MIGHT rationalize a Food or C-store trip and make those fill-in trips at Drug. If stores can co-locate with Minute Clinics, where the consumer is already out of the car, so much the better.
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Tom Ryan is right on the money. The prescription business will continue on because customers will not stop taking medicine, and with 85 percent of CVS Caremark’s revenues generated from drugs and healthcare, the economy will not have much impact.
With regards to non-prescription items, I view recessions as being only personal for most people. When someone loses his or her job and doesn’t have other income rolling in, then they purchase fewer items. Until then, I do not believe that most people cut back too much on drug store items based only on anticipation of a recession.
Yes, it is very simple, if they have a great strategy and can execute with precision. Just look at the demographics.
CVS has two major lines of products: prescription drugs and convenience store items. Prescription drugs are likely to be somewhat recession proof but the pressure for lowered prices will continue there as well.
The convenience store items are a different story. People may still pick up things while waiting for prescriptions or walking by items on their way to pick up prescriptions. However, depending upon how hard their pocket book is being hit with higher prices for gasoline, housing, and other goods, they may be less inclined to be buy as many impulse items or items that do have lower prices at other outlets they normally patronize.
It will be critical to monitor sales to make sure CVS is not reacting to a change that slowly creeps up on them.
Healthcare Retail in general has slightly higher elasticity to employment changes than Food Retail and only lower than Apparel and Sporting/Books and Music Retail. Across different Retail sectors, Healthcare Retail does have the lowest elasticity to inflation, though. This would indicate that as long as the biggest problem the economy faces is inflation and lower GDP without a significant reduction in employment levels, the Healthcare Retail sector should be insulated to some extent. (Actual elasticity comparison referred from “Economics of Consumer Demand“).
Five years ago, CVS was $12. Today it’s $40. Very few retailers can beat that record. Of course, very few retailers are so heavily subsidized by insurance companies and the government. Most prescription sales are partial or complete reimbursements from the state and federal governments and insurance folks. If the governments and insurance companies got more aggressive, they’d cut CVS’ margins way down. So the issue for CVS isn’t “recession” it’s “reimbursement.”
My vote goes to CVS…6300 well run stores, the largest loyalty program of any retailer, a few game changing moves in the past year–Minute Clinic as well as the Caremark ‘merger’. All in all, CVS sure seems to know what it’s doing.
Important to note: they haven’t launched a cheap generic program (to compete against Wal-Mart) while Walgreens has recently launched what it calls a ‘prescription club’….
They seem well positioned to compete whatever be the economic situation.
CVS does a very good job in merchandising value opportunities to shoppers. Whenever I am in the store, browsing while waiting for an RX order, I consistently find opportunities to save a little here and there on brands I use on a regular basis. I always end up with purchases I hadn’t planned on but feel good about.
Good strategy, good execution, clean stores and helpful employees make CVS a consistent choice. As economic pressure rises, my value visits to CVS could certainly increase.
Generally all CEOs minimize their challenges. It’s their job to paint a rosy picture and be a cheerleader.
However, well run drug stores should continue to thrive. People will put their health and well being above other things. Prescription drugs are becoming more and more affordable every day with all the free, $3, and $4 programs.
I think I’m leaning toward Susan on this one.
The prescription business will remain (more or less) constant but where those prescriptions are filled is still an issue. Well paid executives like to believe all those arguments about people loving their pharmacist and being unwilling to shift where they get their prescriptions filled and–all things being economically equal–they may be right.
But, all things are rarely economically equal and higher gas prices, an unstable real estate market, recession and under-employment may send shoppers to lower cost providers.
My own doctor routinely tells his patients which pharmacies have the lowest prices on which drugs (since they all seem to have a different discount list) and, for someone on a fixed or limited income and several medications, the savings are significant.
Thomas Ryan’s job is to be a cheerleader. Let’s hope he doesn’t drink all of his own Kool Aid.
It’s an interesting question. On the one hand, one might think that consumers will look to save money on front-end type goods, and seek out the lowest available prices, at retailers such as Wal-Mart, Family Dollar, and Dollar General.
On the other hand, these stores are not always conveniently located, and with fuel prices being as high as they are, many consumers are calculating the cost of driving to their local discount store, which might not be too local. These consumers might make the decision to purchase their everyday products from stores that are located close to their homes, and CVS is well-positioned with its 6000+ stores.
While only time will tell, Mr. Ryan might be proven correct on his prediction. He has been right on many occasions, and this might be another instance that proves he is one of the smartest retail executives in America today.
Certainly people will continue to get items needed for healthcare but they will be more likely to shop price, and with the onslaught of $2 generic pricing this may have an impact. However, Mr. Ryan is practicing the art of positive thoughts when he minimizes the impact on the non-prescription end of the business.
Mark hit it on the head–Pharmacy is all about the reimbursement. CVS has shown that they are willing to play hardball and not accept plans that don’t reimburse at the level their model needs; if they can stick to this, then they will be able to keep consumers in their files.
Pharmacy files are key–once you get your prescriptions at one store that accepts your plan, it’s sort of like your checking account: even though you can move it, you don’t want to be bothered doing so.
Now, while drive-through is a reflection that consumers getting scripts don’t often convert to front-store purchases, as consumers consolidate their trips due to rising gas prices they MIGHT rationalize a Food or C-store trip and make those fill-in trips at Drug. If stores can co-locate with Minute Clinics, where the consumer is already out of the car, so much the better.