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October 1, 2024
Will CVS Health Overcome Its Challenges With Layoffs and a Business Split?
CVS Health is laying off about 2,900 employees, primarily from corporate roles, as part of a cost-saving initiative aimed at achieving $2 billion in savings. This move follows a previous layoff of 5,000 workers last year and reflects challenges faced by the company due to rising medical costs, competitive pressures, and declining prescription reimbursement rates.
CVS Health reported in August that rising medical costs negatively impacted its profits, prompting a reduction in its 2024 earnings outlook. The company posted a Q2 net income of $1.77 billion, down from $1.90 billion the previous year, despite a revenue increase to $91.23 billion. Adjusted earnings per share are now expected to fall between $6.40 and $6.65 for 2024, down from $7. CVS’s insurance segment, including Aetna, saw revenue rise by 21% to $32.48 billion, but operating income fell short of expectations.
According to CNBC, the company said that declining reimbursement rates for prescription drugs and reduced foot traffic in the retail section — where CVS offers items ranging from pantry essentials to cosmetics and cleaning products — dragged down the unit’s sales for the quarter.
In response to these challenges, CVS implemented a $2 billion cost-cutting initiative, which includes leveraging artificial intelligence and continuing a store closure plan, having already shut 851 of 900 targeted locations. Despite these difficulties, CVS remains the largest drugstore chain in the U.S., serving over 26 million Aetna insurance customers.
CVS is now continuing its cost-savings plan by laying off the 2,900 workers, which will primarily target corporate positions, with CVS assuring that frontline employees in stores, pharmacies, and distribution centers will not be affected, as reported by CBS News.
Additionally, CNBC shared that CVS is leaning on its private-label products to attract budget-conscious consumers who have shifted away from national brands in response to inflation.
Reuters also revealed a development that CVS is reportedly exploring: a potential breakup of the company, separating its retail and insurance segments. According to people familiar with the matter who requested anonymity, the board of directors is discussing strategies with the company’s financial advisers to enhance shareholder value amid pressure to improve financial performance. CVS currently has a market value of $79 billion and significant long-term debt of around $58 billion.
To facilitate a possible business split, CVS Health might establish two separate publicly traded entities, though this move is still subject to the board’s approval — CVS could still choose a different strategy. A key discussion point revolves around whether CVS Health’s pharmacy benefits manager unit should stay aligned with the retail division or be merged into the insurance segment, according to Reuters.
When asked about holding talks to explore strategies like a breakup, a CVS spokesperson did not directly comment. They stated, “CVS Health’s management team and Board of Directors are continually exploring ways to create shareholder value. We remain focused on driving performance and delivering high quality healthcare products and services enabled by our unmatched scale and integrated model.”
At the end of 2023, CVS announced plans to revolutionize prescription drug pricing by changing its pharmacy reimbursement model. This reform aimed to simplify the complex pricing system and potentially lower consumer costs for medications. Prem Shah, president of CVS Pharmacy, highlighted the shift toward a more transparent and sustainable compensation model that aligns reimbursement with the quality of services provided. The new model, called CVS CostVantage, is set to launch in 2025 for commercial payers and will integrate drug costs, a predetermined markup, and a fee into a clearer pricing formula. While some medications might see price reductions, others could experience increases.
This initiative aims to enhance pricing transparency in an industry often dominated by intermediaries, as CVS responds to growing calls for clarity in drug pricing amid rising costs for Americans. Earlier in 2023, CVS Caremark also faced changes in partnerships, as Blue Shield of California chose to align with competitors like Amazon Pharmacy.
Discussion Questions
What impact will CVS Health’s layoffs and restructuring have on employee morale and consumer trust in the retail sector?
What challenges and opportunities could arise from separating CVS’s retail and insurance segments regarding operational efficiency and shareholder value?
How might CVS Health’s new reimbursement model change consumer perceptions of prescription drug pricing?
Poll
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Neil Saunders
Managing Director, GlobalData
James Tenser
Retail Tech Marketing Strategist | B2B Expert Storytelling™ Guru | President, VSN Media LLC
Mark Self
President and CEO, Vector Textiles
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For years CVS neglected its core retail business, which is now, by and large, in a very weak state. They’ve lost massive amounts of share in beauty to specialists like Ulta and Sephora and to generalists. They’ve also lost share in general merchandise to Walmart, Target, dollar stores and many others. The solution, they thought, was to diversify into healthcare and all manner of other areas – with acquisitions that cost $88 billion in the past 6 years alone. The problem is that healthcare is incredibly difficult to disrupt, and success has been patchy. The result is a bloated company that is unfocused. That said, while a split may unlock some temporary value for shareholders, I am not sure it will solve much. What the business really needs is a better operating structure and stronger management that enhances retail as well as developing the other business units.
It’s still better than Walgreens. Faint praise
Ha! I’d have been disappointed if you didn’t mention Walgreens, Paula! I agree with you! Both from a customer service side, but also from a business angle. Walgreen is a hot mess right now!
Answering the layoff question is pretty easy: it won’t be popular with either customes or (fellow) employees…tho it sounds like the numbers are a small portion of the workforce. Answering the bigger question – what ails them and how to fix it, is, of course, much harder; I was startled by the revenue figure – namely the size of it – unitl I remembered they owned Aetna…which of course complicates any kind of peer-based analysis -what other drug store owns an insurance company? what other insurance company is part of a retailer? Their various ideas for reform(s) sound great, but don’t all such ideas(?) …never to be heard from again.
The industry faces continued disruption, regulatory pressures, and evolving consumer needs and expectations, making it essential for CVS to remain competitive and perform at it’s own peak levels.
Since CVS cut its 2024 earnings forecast for a third consecutive quarter in August, investors such as Glenview Capital are pushing for changes at the company to improve its operations. So the board of directors and CVS’ top management are no doubt feeling some pressure.
Is CVS in a position to survive layoffs and company splits? As business environments have changed, types of competition have changed, healthcare is changing, consumer buying patterns, pharmacy, and health insurance have changed, CVS will likely succeed if adjustments are made timely and correctly, and I believe they “mostly” will. Db
Good God. I have been enjoying having cvs as my pharmacy. The layoffs are a terrible idea. Following Walgreens lead? My insurance is through Aetna but it’s operated by CVS Caremark (I don’t know what it means, tbh. I just know it works)
So break it up. Get back to basics and do it well
Neil is correct that CVS has lost some focus on the merchandising side while it also struggles with steeper competition and operating costs on the healthcare side. The same may be said about its only “peer” in the industry, Walgreens Boots Alliance.
I don’t think it is coincidental that these challenges afflict a sector that is highly concentrated. CVS controls more than 25% of U.S. prescription drug sales through its 9,400 stores. Walgreen, nearly 15% in its 8,600 locations.
The next largest drug store chain, Rite Aid, boasts 1,740 units, and there are 4,500 independent pharmacies under the Health Mart Systems umbrella.(Statista)
Nearly all of these pharmacy counters are embedded at the rear of hard-to-define retail stores that blend elements of convenience stores, beauty and personal care, greeting cards and seasonal goods, too often with mediocre assortments and inconsistent on-shelf availability. It makes me wonder whether the big drug chains earn any profits at all on the front end (even more so now that so many items are locked in Lucite cases to deter shoplifters).
In CVS latest 10-K for 2023 it reported that the Front Store accounts for 21.2% of total revenues. I’m guessing a far smaller percent of total profits but we can’t be sure, as it merges “pharmacy and consumer wellness” revenues under a single heading in its published reports.
Bottom line, CVS is a chain retailer that doesn’t seem to prioritize retailing very much because prescriptions and pharmacy benefits are much more profitable. There are in-store investment opportunities there – increasing service levels for non-prescription wellness and personal care is one – but the company seems to be laser-focused on its infernally complex drug business. Not sayin’ they are wrong, but…
This is an indicator that the pharmacy store model of putting a store on every corner based on demographics is failing. The Pharmacy chain model is going to mirror the slow death of Department stores if something new is not tried, and in that sense I believe this split is smart.
Whether is works, however is another story altogether and I am eager to see it play out.
The retail pharmacy segment has faced significant disruptions and competitive pressures for well over a decade. For a segment dominated by CVS and Walgreens, they are being hit from all sides across all categories of their core retail business. Customers have far more compelling shopping options, especially at Walmart, Target, and Amazon, as well as the omnipresent beauty retailers Sephora and Ulta. Additionally, with the rise of online pharmacy ordering, what is the real value of going to CVS or Walgreens? The two chains struggle to drive value and a differentiated experience for their core customers.
In addition to these competitive forces, the rise of retail crime has significantly impacted the retail pharmacy sector. The plexiglass as a strategy at retail pharmacies is a misguided one. What is intended to help prevent retail crime has become a sales deterrent, as the plexiglass eliminates any sense of psychological safety and comfort when we shop at a typical CVS or Walgreens.
Aside from the very misguided CVS investments in primary health care, with committing nearly $1B to the acquisitions of home healthcare provider Signify Health and Oak Street Health, there has been an acceleration of retail pharmacy closures due to several factors:
CVS, Walgreens, and Rite Aid are forecasted to close nearly 1,500 Stores in the next few yearsCVS says it will close 900 stores by the end of 2024 – 10% of all its shops – as it moves to an online strategy amid a rampant increase in shopliftingThis realignment is based on an evaluation of changes in population, consumer buying patterns, and future health needs
Personal Case Study: The convenience of having a walk to CVS in my neighborhood has been evaporating – prescriptions cannot always be filled in a timely basis as drug is not in stock and the handful of beauty products always purchased there are either no longer carried or behind plexiglass with nary a sales associate in site making shopping for a substitute impossible. Basic first aid items and cold medicine are available and accessible, and the ability to access vaccines are appreciated so I do take advantage of that. With the loss of confidence in CVS’ ability to service my walk in needs, my visits to CVS are less than 10% of what they have been in the past. How cutting corporate staff will change that trajectory, I don’t know.