An Rx for Women
CVS Caremark aims to be a one-stop shop for stressed customers
CVS Caremark wants to be Mr. Right to the 4 million female customers who shop there every day. "Women are really stressed out across the country. Everything falls to them," says Gordon Howard, who runs the pharmacy chain's mid-Atlantic region. So, he continues, the company asked itself about its typical customer: "How do we delight her?"
The answer? Make her life easier. During focus group research over the past several years, women—who make up 80 percent of CVS shoppers—told the company that they wanted a store that was easier to navigate, had shorter wait times for prescriptions, and offered more beauty products. CVS has so far remodeled 20 percent of its 6,200 stores to reflect those desires. The result, says analyst Adam Fein of Pembroke Consulting, is a retail format "that is very appealing to working women....[The stores] are larger, newer, and more modern-looking, which is what consumers are looking for."
Score another one for CVS, which is engaged in a heated battle with rival Walgreens for pharmacy chain supremacy. CVS currently holds 12 percent market share vs. 14 percent for Walgreens. The store's bold redesign has been strategically coupled with its just completed $26.5 billon merger with pharmacy benefit manager Caremark, which administers prescription drug and health programs for insurance carriers and employers.
Strong shares. The big-picture goal: to become a one-stop shop for consumers' health needs by offering services traditionally available through PBMs, such as obesity-prevention and smoking-cessation programs, inside its stores. The combined company also hopes that the new benefits business will, in turn, drive retail sales at its stores, which heavily populate the West and East coasts, as well as the Southeast and Texas. So far, investors love the plan and how it's being executed. CVS shares, up 30 percent for the year, continue to outperform those of Walgreens and Rite-Aid. The company last week announced record third-quarter earnings, up 143 percent over the same period last year, largely because of the merger. Same-store sales rose 5 percent. Analysts expect earnings to rise from $1.60 per share this year to $2.32 in 2008. "[CVS Caremark] has the most sophisticated healthcare offering today," says Lisa Gill, a managing director at JPMorgan Securities.
And how will the company fend off retailing behemoth Wal-Mart? Well, Wal-Mart, which has 7 percent of the retail pharmacy market, may be bigger overall and cheaper, but there are a lot more CVS stores. Location is often the determining factor when a tired 30-something mother is deciding whether to pick up her son's ear infection medication at CVS or Walgreens. Larry Merlo, president of retail for CVS Pharmacy, says that over 50 percent of the U.S. population lives within 2 miles of a CVS store. Even though other stores may offer cheaper deals, such as Wal-Mart's $4 generics, Merlo says those savings can't compete with the convenience of the remodeled CVS stores, with their clear aisles straight to the pharmacy and remodeled counters for faster turnaround. Some stores also have drive-through windows. (The company says customers should be in and out in less than 15 minutes.) "Think about having to drive 10 to 15 miles to Wal-Mart, parking 50 yards away and walking to the door, then another 20 to the pharmacy," he says. "Is it really worth the hassle...to go through that to save $2 on one prescription?"
Habits. Analysts tend to agree with that assessment. Gill says that because Wal-Mart's list of $4 generics is limited to a small, older selection of drugs and the large stores tend to be less user friendly, the program has not changed people's shopping habits.
While 70 percent of store revenues still come from the pharmacy side of the business, CVS redesigned the stores to encourage mothers to do a little shopping for themselves. At some of the recently renovated locations, employees staffing the new healthy skin centers offer quick skin tests for moisture and discoloration. CVS has also ramped up its offering of higher-end skin, beauty, and bath products, such as $16.49 lavender, chamomile, and sage bath salts, to assist women looking for a little "me time." Again, focus groups tipped off the company. "We heard, 'Yes, I go into CVS to take care of my family, but what I love about CVS is that I can take care of myself,'" says Helena Foulkes, senior vice president of healthcare services. "There is a need in the marketplace for someone to help women, and this is where we can start to fill in the gap," she says.
Internally, the company divides its female customers into three segments, named after CVS: Caroline, the 25-to-34-year-old who may be single or newly married; Vanessa, the 35-to-54-year-old who is usually caring for children and possibly parents; and Sophie, the 55-plus woman who tends to use a lot of prescription medications. The Vanessas, says Foulkes, make up the lion's share of CVS customers and are the ones most in need of me time. In October, the company rolled out its new women-centered ad campaign, featuring a caring, female CVS pharmacist, now running during Dancing With the Stars, Oprah, and The Ellen DeGeneres Show. The narrator says, "It's in your nature to care for others. To listen, to advise, to always be there. Isn't it nice that there's a pharmacy that cares as much as you do?"
Marti Barletta, author of Marketing to Women, says women, especially those in the 50-plus category, respond well to caregiving themes. "I think I would rather go to a place that talks to me like that...than a place [that] says, '79 cents off on shampoo this week,'" she says. But there is a bit of risk here. Some women may feel that the ad campaign is condescending, says Michele Miller, author of WonderBranding, a blog on marketing to women.
CVS's recent expansions into pharmacy benefit management with Caremark and into convenience care with MinuteClinics are part of the company's efforts to turn itself into a full-service shop. The MinuteClinics, staffed with nurse practitioners who can treat and prescribe medicines for common illnesses, also appeal to stressed-out parents. So far, about 345 stores have MinuteClinics, and the company plans to add 55 more by the end of the year.
The clinics also appeal to the growing number of uninsured, who now number 47 million, according to the Census Bureau. Judith McKelvey of Lincoln, Va., recently visited a local CVS MinuteClinic to get a flu shot. Because she lacks health insurance, she says, a visit to a doctor would have cost her $47, plus a fee for the shot. "Here, it's just $30, and it's quick," she says. She decided to shop for Halloween candy after receiving a $2 coupon from her flu shot.
That's the kind of synergy CEO Tom Ryan is hoping for. "It doesn't hurt that about 25 percent of the people who use MinuteClinic have never been in a CVS pharmacy and we have the chance to convert those customers," he told analysts earlier this year.
Is bigger better? The stores also stand to gain foot traffic from the merger with Caremark, which makes up about 40 percent of the new company's operating profits. While mergers are often problematic, analysts and industry experts say bigger is probably better in this case. "You are taking care of customers across their continuum of need," says Helen Darling, president of the National Business Group on Health, a nonprofit that represents large employers.
For investors, though, there is still some uncertainty. Edmund Nicklin, a portfolio manager for the Westport Funds, an investment management group that owned about 650,000 shares of CVS Caremark as of the end of September, says it's not yet clear whether CVS will provide the superior in-person service to Caremark customers that the company promises. And Mitchell Corwin, stock analyst at Morningstar, worries about the usual integration issues that inevitably arise when combining two very different companies that have historically served different customers. "This more vertical business model on this type of scale is untested," he says.
The customers driving CVS sales appear not to share those reservations. According to J. D. Power & Associates, CVS ranks high in customer satisfaction. One reason, says David Stefan, executive director of healthcare at J. D. Power, is that customers reported some of the lowest wait times at CVS.
And that—time—is what many shoppers value most.
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