Analysis of US Drug store chains Knowledge Foundry Business Solutions May 2009 Authors: Raj Bhatt ([email protected]), Vivek Bothra This document is not intended to provide tax, legal, insurance or investment advice, and nothing in it should be construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any security by Knowledge Foundry Business Solutions.
Research report on US drugstore chains: CVS Caremark, Walgreens, RiteAid
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Contents
• Comparison of metrics
• Company-specific details
Source: NACDS, Credit Suisse
Drug retailing is a mature and competitive business
Store chains and mail order have been gaining strength over independent stores in dispensing prescriptions
Source : NACDS, Credit Suisse
0%
20%
40%
60%
80%
100%
2001 2002 2003 2004 2005 2006 2007 2008
Chains IndependentsFood Stores Mass MerchandisersMail Order
Market Share of Prescription Rx Sales
Drugstore chains are perceived to be convenient and trustworthy for dispensing prescriptions
CVS, Rite Aid and Walgreen are the major US chain drug store chains
CVS has lower contribution margin but higher sales per sq ft and sales per
employee
CVS’ high inventory turnover may be due to the Caremark PBM
business
Rite-Aid has negative operating margins
driven by low sales/ sq ft and low productivity
843
429
813
0
300
600
900
Cvs Corp. Rite Aid Walgreen
Operating Margin
-10%
-5%
0%
5%
10%
2006 2007 2008
Years
Perc
enta
ge Cvs Corp.Rite Aid
Walgreen
Operating Margin
-30%-25%-20%-15%-10%
-5%0%5%
10%
Q1 Q2 Q3 Q4
2008
Perc
enta
ge Cvs Corp.Rite Aid
Walgreen
CVS has had a consistently higher operating margin–Rite-Aid had negative margins in 2008
CVS carries less than 45 days of inventory whereas RAD and WAG carry more than 60 days
Although CVS has faster inventory
turnover, the competition is catching up
Inventory (Days of Sales)
0
25
50
75
100
2006 2007 2008
Years
Cvs Corp.Rite AidWalgreen
Inventory (Days of Sales)
0
25
50
75
100
Q1 Q2 Q3 Q4
2008
Cvs Corp.Rite AidWalgreen
CVs turnover may be driven by the PBM
business
CVS has had consistently higher employee productivity than Rite-Aid and Walgreen
Sales/Employee
0
100000
200000
300000
400000
500000
600000
2006 2007 2008
Years
Dol
lars Cvs Corp.
Rite AidWalgreen
Sales/Employee
0
20000
40000
60000
80000
100000
120000
Q1 Q2 Q3 Q4
2008
Dol
lars Cvs Corp.
Rite AidWalgreen
Rite-Aid has much lower sales per square foot than its rivals
Pls. note that the 2008 CVS number does not include Longs’ Drug store which have a much lower average of $598 per sq. ft
Sales/Square foot
0100200300400500600700800900
2006 2007 2008
years
dolla
rs
Cvs Corp.Rite AidWalgreens
These numbers are for the retail segment
… and smaller, right-staffed stores
Avg Store Sq Foot
1386612500
10472
0
5000
10000
15000
CVS Rite aid Walgreens
Employee/Store
2923
34
0
10
20
30
40
CVS Rite aid Walgreens
Company-specific details
CVS Caremark is positioning itself as an integrated healthcare company
CVS covers most states except the North-West
CVS was primarily an east coast
retailer till 2003
Minute Clinics are staffed by nurse practitioners and currently focus on acute conditions
(e.g., Flu)
Its store-brand sales have increased 47% over the past four years
• Completed acquisition of Longs Drugs and Rx America – to gain strength on the West Coast
• Successfully launched Proactive Pharmacy Care – a Pharmacy Benefits Management program– to compete against traditional PBM programs as well as drug retailers• Proven to improve adherence to prescriptions• Uses plan design based on a ‘Customer Engagement Engine’ that uses customer
behavior, evidence-based medicine• already $8.9 BN in sales• More than 8 MM ExtraCare Health cards• 250 Maintenance Choice enterprise customers
• Focusing on specialty pharmacy -- 30 conditions including hemophilia, MS, RA • 20 mail order pharmacies and 52 specialty retail pharmacies • generating revenue of $ 10+ BN
• Pharmacy service initiative (PSI) and IT initiative (RxConnect ) to improve the prescription filling process
• Launched call center to free up pharmacists time – and improve customer service
Key strategic initiatives at CVS Caremark
Walgreens has a rich history of innovation
• 1950 – self service stores
• 1968 – Child-proof containers
• 1981 – Satellite-linked stores
• 1991– POS scanners
• 1992 – Drive-through pharmacies
• 1999- online prescription history
• 2002 – multi-language prescription labels
• 2005 – online digital photo printing
Walgreens has a wide spread store network
Key strategic initiatives at Walgreens
• Slowing store growth
• Re-inventing the customer experience • ‘Affordable Essentials’ program• Prescription Savings program has 1.7 MM+ members –offers discounts on more
than 5000 generics; and 90-day supplies at a dollar a week• Optimizing assortment at a store level – to sell more front-end items• Optimizing pricing and promotions• Rolling out new ‘Customer-Centric Retailing (CCR)’ format• Enhance shopping experience by improving sightlines, layout and signage• Collaborating with vendors to leverage insights e.g., Baby care layout
• Transforming community pharmacy by the POWER program (centralizing data entry, data review and clinical review of prescriptions)• Allows pharmacists to strengthen their role as trusted clinicians• Reduces overall pharmacy costs• Rolled out in all Florida stores and now launching in Arizona
Key strategic initiatives at Walgreens (contd.)
• Expanding health & wellness and specialty pharmacy• 273 Take Care clinics and 364 Worksite Health Centers catering to 180+
enterprise clients and millions of consumers• Specialty/ Infusion centers
• Rewiring for growth – driving major cost reduction and productivity gain• Strategic sourcing of indirect spend• Reduce corporate overhead and store labor• Balance workload to free up pharmacists’ time
Rite-Aid has a strong presence on the east coast and in select west coast markets
Source: Rite Aid presentation
Key strategic initiatives at Rite-Aid
• Focused store growth program
– Growth focused on key strategic markets
– Segmented stores using sales and profitability performance (High EBITDA margin stores; High volume, lower EBITDA margin stores; Good volume; Low volume)
– Emphasis on relocations
– “Customer World” pharmacy centric store format prototype