Source: cvs.com/target
Will CVS and Target be stronger together under one roof?
One day in the near future, you’ll walk into a Target store. The pharmacy’s logo will still be red, but it will have a heart and read CVS instead of the familiar bullseye. The rebranding of the pharmacies and clinics inside Target stores has begun.
The first store to be converted to a CVS pharmacy within Target has been completed in Charlotte, NC. Within six to eight months, all 1,672 pharmacies inside of Target stores will be rebranded.
Back in June, the two companies announced a $1.9 billion deal for CVS to take over pharmacy operations inside of Target’s stores along with in-store clinics, which will be rebranded as MinuteClinic. CVS will also be opening in Target’s smaller stores as it expands its Express concept. The deal not only gives CVS deeper penetration into markets where it already operates, but a foothold in new ones, including Denver, Portland, Salt Lake City and Seattle. Target gets cash and the ability to concentrate on its core business.
The CEOs of CVS and Target both believe they can peacefully coexist under a single roof with the drugstore operator focusing on prescriptions and Target responsible for over-the-counter medicines and other non-prescription health needs.
“We know we have CVS customers who are shopping Target, and vice versa,” CVS Health CEO Larry Merlo told USA Today. “We think that this partnership really serves as a complement to the customer experience and customer accessibility.”
CVS is not particularly concerned about losing non-Rx sales to Target. Total prescription revenues for CVS Health including its PBM business was $83.2 billion last year, according to Pembroke Consulting (via Fortune). Walgreens had the next highest take at $54.4 billion. Target did $4.2 billion in prescriptions in 2015.
- CVS Health Introduces First CVS Pharmacy Locations within Target Stores – CVS Health
- CVS/pharmacy is now in Target – CVS/pharmacy
- CVS launches rebranding of Target Pharmacy – USA Today
- Q&A: CEOs of Target, CVS say pharmacy deal benefits both chains – USA Today
- CVS Opens First Pharmacies Within Target Stores – Fortune
- Will the Target/CVS pharmacy deal lead to a future merger? – RetailWire
Discussion Questions
What will be the biggest challenges for CVS as it rebrands Target’s pharmacies? Do you expect the deal to work to the benefit of both CVS and Target?
Poll
BrainTrust
Warren Thayer
Editor Emeritus & Co-Founder, Frozen & Refrigerated Buyer
Ben Ball
Senior Vice President, Dechert-Hampe (retired)
The only challenge I see is that CVS may lose non-prescription sales. To the extent that someone switches from a CVS store to a Target/CVS pharmacy, there are potential lost sales opportunities. It sounds like this may be outweighed by the likely increase in prescription business.
Target is selling its prescription business for cash. Assuming it’s a pure cash transaction, they give away $4 billion in sales per year for $2 billion in cash. If it’s a good financial deal for Target, great — depends on the margins.
I don’t see any more of a challenge than having Starbucks in supermarkets. Target has cash, CVS has ongoing revenue. Sounds like one of those exceedingly rare win-wins to me. I do think CVS will get a bit more benefit from the added brand recognition, but the CVS banner within Target may help Target grow a bit of incremental traffic.
The benefit comes from driving scale behind the pharmacy and prescription business. With Target partnering with CVS, they both will benefit.
From a consumer perspective, it will now provide more convenience through more locations of CVS pharmacies. However, the challenge for CVS is that it will also bring in more traffic to Target purchasing other department goods. CVS will need to develop a plan to retain non-pharmacy purchases within their own stores.
It will be interesting to see how CVS pharmacies within Target stores coexist with “competing” stand-alone CVS pharmacies in close proximity. It’s a benefit for CVS to grow its prescription business within a given market, but the overlap with Target for non-prescription products is substantial and may stress the relationship.
For Target, the deal is a win as it draws in more shoppers and enables it to focus more on its core categories. Adding a world-class pharmacy makes it more competitive with Walmart and a viable one-stop shop.
It’s a question of where CVS is getting its profit margins. As Stephen observes, they lose sales on all OTC medication and HBAs.
But if they are making money on their pharmacies then CVS does well and Target gets out of the distraction of managing a pharmacy (one of these is not like the other) and is likely just getting a straight percentage of sales from CVS. That’s generally how leased departments work.
I think it’s a smart deal, assuming the percentage is right for Target.
I do not perceive any serious threats to CVS as it rebrands. CVS has the image of a quality pharmacy. Its recent restriction of access to tobacco, while a controversial financial decision, has helped it to build its consumer image.
Both Target and CVS should win from this deal. Target gets to focus on its traditional non-food offerings while building its grocery business without the distraction or need to invest in the critical pharmacy business. CVS has access to the Target shopper whose “cheap chic” profile fits nicely with the CVS image.
CVS has great brand reputation for pharmacy. Target will benefit from this — for pharmacy as well as add-on sales from the additional traffic the pharmacies drive to stores — especially if they curate their stores to capture customers’ attention.
It will be hard for CVS to maintain much of an identity buried in a Target cavern. But I don’t think Merlo really cares about that. What he wanted is the incremental margin of extending his profitable pharmacy network. What Cornell wants is to get rid of the headaches and expense of managing pharmacy — not an insignificant benefit for Target — IF it can redirect that management focus and investment into getting other things right.
I don’t know. This is a tough one. My read on this is the depth of the non-prescription merchandise surrounding the pharmacy. This is an issue with many set-ups like this. Key is that they both need to agree on a mix of non-prescription merchandise that people really need, like good Band-Aids and a broad mix of CVS brand, Target brand and real Band-Aids. With the PLM boom this should interesting.
It’s interesting that few commenters have honed in on the fact that Target is receiving cash in its one-shot deal effort to bring customers into their stores via CVS. I think this has to be viewed and overlaid against the all-too-familiar security breaches and assortment fails that have plagued Target in recent years and have cost them customers. Perhaps this is the best they can do at this point to regain customers and assuage jittery stockholders. But it seems to me that it shows underlying weakness in both the Target brand and its management that they have decided to grow their business and improve trust in this way (via another company’s brand and competence) rather than focusing on and trying to recapture/build on “Tarjhey’s” unique soul and fashion sensibilities which once stood out from the retail herd.
This is an ideal win-win. Target got cash to cover its losses, a brand-friendly partner to run a business that supports its brand positioning (wellness) and an industry leader. CVS got “yuge” reach, a built-in database and a partner that will support its brand promise.
I walked an unimproved Target and did wonder about the area in front of the counter space. Certainly there will be unintended consequences: advertising, adjacencies, promotions, operating, supply chain and employee relations to name a few. Hopefully Target learned its lesson in Canada and appropriately applies it to the partnership. Nothing is a for-sure deal.
Or as we say, “retail ain’t for sissies!”
This is a win-win for both Target and CVS with CVS the bigger winner. We can debate it all we want, but CVS is getting all Target’s pharmacy business while still maintaining their own brick-and-mortar locations. Target, on the other hand, will certainly benefit with added revenue and lower operating costs including pharmacy-related payroll expenses.
I think it is a win win, though if there is a situation of a CVS pharmacy next to a Target in the same mall, the standalone store may take a hit on prescription business. The needs to shop at Target which adds a pharmacy visit to a bigger trip is different than those who want to go in/out in a pharmacy. CVS still has the branding in the store to remind people when they are not near a Target, they can go to a CVS pharmacy store. Target gets to focus on its core of retailing, without the distraction of handling non core things like pharmacy, coffee shop (Starbucks) or food (Pizza Hut).
Honestly, the biggest challenge is likely to be people who are annoyed that they can’t bundle their non-pharm (Target) purchases with their ‘scrips. These co-branded arrangements are confusing until people are educated (and somewhat of a nuisance even after they are).
But the biggest item of note here, I think, was the relatively paltry business Target did. Sure Target has far fewer stores than CVS or Walgreens, but it still seems like a massive underperformance … yet another one for Target.
The opportunity with the most challenge is for CVS to establish and maintain a separate secure network connection that consumers will feel comfortable with. In spite of how we may argue this as a non issue the consumer will have left over feelings of insecurity that must be vanquished from the beginning. Target may be having e-commerce ordering and fulfillment issues that will get in the way of CVS’s planned acceptance and growth that’s necessary to arrive at anticipated profit levels.
As for team Target, they might need some retraining to deal with disgruntled pharmacy customers looking to improve the prepared prescription wait times. Not an easy marriage for two companies that do not speak the same language or have much in common in practice and market approach.
I agree with others that see it mostly as a win-win for both. I actually have a question — how will the real estate work? In addition to the $1.9B, will Target receive a rental stream into the future for the space? Or a percent of sales?
Communication will be the biggest issue as both of these companies seek to coexist within the same store. There will be some cannibalization of OTC products, but the biggest issue will be communication with the consumer, and communication between both companies, their employees, and their suppliers.
Maintaining the CVS identity is a challenge. But even more so will be fluidity between the pharmacist/pharmacy and the other essential health and wellness categories. Unless CVS pharmacists in Target know precisely what Target is stocking (and where), they won’t be able to guide patients efficiently. Furthermore, what is the incentive for CVS pharmacists to link front-of-store products with Rx? That is a conundrum that will need to be sorted.
Depending on whether Target was getting serious profits from their pharmacies, this makes perfect sense. Typically, drug stores like CVS, Walgreens and the like, generate 90+% of their profits from the prescriptions in the back of the store. The whole front of the store generates some profits directly, but the big thing is driving TRAFFIC for the pharmacy business.
Exactly the same principle for Walmart back when they went into the grocery business. NOTHING drives traffic like FOOD & BEVERAGE, and Target has been weak at leveraging that principle to the advantage of the rest of their stores, also.
SO … this partnership, Target/CVS allows Target to focus on their own self-image — superior quality general merchandise, with some complementary traffic/loyalty coming from possibly more competently managed scrip AND growing small health clinics. This could be a terrific partnership.
Maybe Target should work out a partnership with Kroger to manage their grocery business? Throw in Amazon to manage online sales and you could have a blockbuster retail engine. (Sorry about mentioning Block Buster!)
The problem here is always whether partners will play nice. And it isn’t just the legalese. If, after CVS builds a great health business INSIDE Target, Target gets greedy, in the end Target will be the loser. In the meanwhile, CVS is GREATLY expanding their own national reach.
I am a pharmacist (inactive). This is a complicated deal and impossible to evaluate absent extensive due diligence that I presume both Target and CVS engaged in, and even then the actual result may turn out much different than either expected.
Based on very limited observations at CVS and Target such as staffing, lines, wait times, etc. I suspect that the Target pharmacy operation was not very profitable, so getting $1.9 billion ($1,136 million per store) sure beats just shutting them down. Assuming an average prescription price of $60, and a 365 day year, Target stores filled on average about 115 a day Pharmacists cost about $50 an hour plus benefits. Pharmacy Techs about $12-15 an hour.
While the retail price of prescription drugs are much higher than when I was active, the margins are a lot less, you have the expenses of insurance billing, and wait forever to get paid. But if CVS can net 5% of sales, that is a return of 11% EBIDT. I suspect CVS is projecting more than that based on a rosy prediction of increased sales. Those predictions often are too rosy.
This partnership is mutually beneficial, but the scales are slightly tipped toward Target. Similar to having Starbucks concepts in-store, by adding additional services Target continues to becoming a one-stop shopping mecca. CVS has high brand affiliation with prescriptions and the clinic atmosphere and the name change alone could be enough to get Target customers picking up prescriptions while already in the store. I’d predict that that this isn’t the last partnership we will see Target explore with a different brand.
P.S. Years ago I asked myself why Target wanted to open pharmacies in its stores. Now I know the answer. To sell them to CVS for $1.136 mil per store.