CVS is taking a pragmatic and very classic approach with improving its pharmacy image and services because at the end of the day this is a pharmacy where consumers desire medical attention, credibility, and great service behind the counter. No one is more credible than a good pharmacist in the neighborhood. However, both Walgreens and CVS need to be careful with the sku-reductions in the front end. Sku rationalization should be treated with a scalpel, not a sledge hammer. Consumers still shop chain drug for innovative items, specialties, niche brands, and sku variations that might not have the same unit movement as the all the usual stuff that can be found in any supermarket, let alone drug stores. Both CVS and Walgreens say that they want to be different than the other. However the sku rationalization process used by many entities these days is starting to make all stores look and feel the same for consumers with fewer choices than ever before.

At least as important as the Caremark acquisition, the ExtraCare program will be a major factor in CVS’s long-term success. The article hints at this with the comment “the chain has managed to grow its front-end business along with pharmacy.” Since they aren’t taking the same aggressive SKU-rationalization tack as Walgreens, where is this growth coming from? In my opinion (and, any CVS folks in the audience please chime in), ExtraCare is the driver. Shoppers at CVS know that they will get valuable, relevant offers at the bottom of each and every register tape. And even though some of the offers can take a big bite out of CVS’s revenue ($3 in ExtraBucks off a $10 order isn’t chump change), CVS has done a great job of engaging brands and getting them to pony up to help subsidize the program, because participating brands experience a major sales lift. Combined with strong shopper targeting capabilities, CVS can virtually guarantee that every shopper leaves the store with a compelling reason to return in the palm of their… Read more »

SKU Rationalization process as David correctly pointed out should be treated as a scalpel. Decision on the number of SKUs to be reduced should take variety of factors into account rather than just margin and volumes. Key factors which are not typically considered are: – Customer Choice Set – Certain set of SKUs though low on performance, if not present in the store, would make customers walk out of the store empty handed. These SKUs have to have to be there. – Demand Transfer – Typically when a SKU is delisted, a percentage of its demand is transferred to other like SKUs. If this demand is not considered, the probability of stock-outs of listed SKUs increases. Also, if the demand transfer percentage is very low (20-30%), it would mean that by delisting that SKU, the retailer is forgoing about 70-80% of sales. – Implications of delisting SKUs – If the retailer is high on inventory on SKUs that are delisted, marking down such SKUs would increase the costs rather than decreasing them. While reducing costs… Read more »

The Extracare program has obvious benefits for consumers and I believe that the first mover advantage taken by CVS represents a serious hurdle for Walgreens or other competitors to overcome.

One of the less obvious advantages of CVS Extracare is increased ability to manage store inventories and deal more effectively with CPG suppliers to the chain. This allows the scalpel to be used as another comment made note.

My personal observations and interaction with Extracare tells me that more use could be made of the purchase data being collected. Nonetheless, CVS has set the standard as I discuss in an article CVS ExtraCare Wins the Gold Medal

Not to simplify the answer, but CVS stores are a lot more pleasant to shop than Walgreens stores. The perception is that CVS tends to have more innovative products on their shelves, and Walgreens looks to find bargain items that can be thrown in a sale bin.

Give the customer a better shopping experience, and the customers will shop more. I think CVS is doing this, and it is resulting in increased sales, and increased marketshare. And Walgreens continues to search for answers.

I think CVS is tapping into a huge emotional undercurrent in the market. It’s not even that it’s a service that’s convenient–our family has medco, which is completely online, so the CVS program would probably be less convenient–it’s that they’re speaking into customers’ insecurities about healthcare in general and showing they care with one-stop shopping.

Of course, if they also handle the piece about communicating with local docs to get renewals, and they have the time to form personal relationships between customers and pharmacists, that’s really convenient–and with the mail-order piece added in, the whole thing is huge. That’s almost like having an old-fashioned family doctor.

(And given the current state of the medical arts, the pharmacist probably knows at least as much!) 😉

The discounts at the register are icing on the cake.

I think what the article reflects is more a matter of timing than a difference in strategy. CVS went down the slow store growth, cut SKUs 15%, reduce net inventory 20%, cut SG&A by 200 bps, etc path 2 years ago. This was accompanied by a corresponding increase in emphasis on Private Label and a push for “increased vendor funding.” The result was a 2 pt profitability advantage to Walgreens. As we might expect, Wall Street cheered and Walgreens took notice.

Having said that, the differences in CCR at Walgreens and what CVS is currently doing with ExtraCare will be most interesting to see play out over the next 12 months.

While the executive and strategic reasons for the program make sense, from a consumer’s perspective they are lost on me. The ExtraCare program provides discounts if you can manage all the details of the offers that are tagged on to the end of receipts. The lower prices for prescription transfers motivates switching prescriptions to CVS. However, I find the pharmacists at my CVS to be unhelpful and unresponsive. I find things not on sale are routinely very expensive. Their great programs lured me in to try. The actual service keeps me from going there regularly.

CVS is continuing to build long term customer loyalty through its CAREMARK program, focus on pharmacy, developing the right product selection for the store, creating an easier shopping experience and–listening to its shoppers.

The importance of long-term relationships in the chain drug sector should not be underestimated. It’s a model that Shoppers Drug Mart in Canada has implemented with great success. CVS looks to be on a clear path to sustainable growth with their strategy.

I can’t comment on the pricing and competition aspect of this initiative without more research. What I will say is this: The baby boomers are a significantly larger generation than their parents and they’re going to live longer than their parents. It will add up to unprecedented sales of prescription drugs for about the next 25 years.

If I had a dollar to spend in my drug store operation, I would put it into the pharmacy end of the business.

Setting aside CVS’s PRM program and the different strategic directions the companies are pursuing, when I shop in both stores, CVS is simply executing better than Walgreen in the front end. CVS stores are better organized, better merchandised, better assorted and better executed.

Chain drug is evidently a two-headed beast. The merchandise sales in the front of the store are one business and the prescription sales in the back are another. Both are essential and complementary, so I don’t see a point in debating which is a better strategy.

I say chain drug success demands brainpower in both skulls….

Merchandising discipline in the front of the store is a must do. Walgreens’ current effort to focus assortments is very important and promising. It may drive more fill-in visits. But I expect it will have little impact on prescription revenues, because they are weakly linked to shopping frequency.

CVS’s progress in offering pharmacy services and prescriptions evidently brings in lots of revenues and might help slightly with front-of-store traffic. But careless merchandising will limit overall success, especially bloated assortments that depress overall turns.

In short, if you want to win in this game, you’d better be darn good at both disciplines, and then some.

I think there is an issue that is not part of your question, but is very important to the answers: Wal-Mart (WMT). WMT has taken direct aim at the growing pharmacy business–especially generic brands–as the overall US population ages. WMT seems intent on dominating this business much as they have in the grocery/supermarket area, and is prepared to force pricing to a level that may be unprofitable to capture market share, including competing for the entire pharmacy benefit in corporate major medical plans. Keep in mind that WMT is probably the best low margin retail business manager in the world. With CareMark as part of its enterprise, that gives CVS a major “leg up” on both WAG and especially RAD. It also sets up the possibility that WAG will need to make a similar acquisition to CareMark in order to compete effectively, and avoid a serious margin squeeze. The other issue WMT has brought into the retail drug industry is the “in store” medically staffed clinic. Considering the expansion WMT is planning for these clinics,… Read more »

My own experience with CVS–and if I may be so presumptuous as to speak for others–along with the experience of many others here in the Bay Area has been less than positive: so far we’ve seen (or soon will see) the replacement of a long-time nameplate with the who-in-the-H###-are-they? CVS one, the institution of PITA “savings cards,” and a rise in price points (admittedly based on the all-important but limited candy bar sample)…though I won’t say the relationship is doomed, the first date has been decidedly unkewl!

As a CVS customer who has shopped in Walgreens stores I agree with Joel Warady that a big difference is that Walgreens interior design and placement of merchandise is pretty junky by comparison. (Although many CVS stores in urban locations are messy and poorly run, they still look better than Walgreens stores).

And I agree with the other comment that ExtraCare is a pain. I never use Carebucks. But I do give the number to get the member price on sales items.

In the DC region, CVS has locations all over and are very convenient, and that matters more to me than figuring out how to use Carebucks. (Note that I don’t have any drug prescriptions, so my use of the store is occasional, more about health and beauty products and convenience goods.)

Making ExtraCare benefits relatively simple to use is an opportunity for CVS…as is self-checkout. Their current system is clunky and subject to breakdown if you do anything out of the ordinary.

CVS has one of the most successful loyalty programs in the market. They mine it extensively and are very committed to a pro-active “voice of the customer” approach to customer service, product selection, customer engagement. It is the envy of the industry.

It’s true that CVS is better now than before. However, with Walgreens’ inventory reduction, I can see how that during a restructuring process, their stores do not look cleaner than before (and I have noticed). CVS is doing better for now, but it does not mean that Walgreens will fall.

Walgreens ONLY plans long term. The fact that Walgreens is going through a storm (transition), it does not mean the sun will not shine again. A word of loyalty; since 1901 people continue to shop Walgreens–without a card! We should compare apples to apples. For example, let us match self-service to self-service, or store-to-store sales (and not a PBM as Walgreens does not have a Caremark).

However, customers do dictate behavior, and no company should ignore that. I do notice CVS growth is good, but they can’t buy everyone! Walgreens growth is mostly internal, I do not think they like to shop out as much.

As we all know in this age of MapQuest and GPS, there are often two paths to the same destination.

It is actually refreshing to see two powerhouses deploying different strategies. My belief is that the winner will not be easily revealed and that it is possible that both will capture the hearts (and wallets) of consumers. At the end of the day, that’s the true measurement of success.

One of the greatest differences between Walgreens and CVS is the leverage of customer information. On your first visit to CVS, you are incented to sign up for a rewards card, that gives you some instant values and discounts for future purchases.

The greatest benefit of rewards cards is customer data. Matching customers to their transactions is the critical link that permits CVS to create customized communications and offers to drive customer retention and profitability.

Rather than seeking to drive operational efficiencies (which are also important, but to a less degree), CVS is focusing on understanding customers and leveraging that information. My hope is that they extend their insight all the way to the shelves and begin to “rationalize” their merchandise, not based on efficiencies, but on the purchases and patterns of their Best Customers, without whom no business can survive.

CVS may be a less dominating player in the pharmacy category than Walgreens, but this type of initiative is very promising for their future.