CVS (“Consumer Value Stores”), started out as a single operating store selling health and beauty products in Lowell, MA in 1963. From this humble beginning, it quickly expanded to 17 stores a year later and by 1967, operations included pharmacy retail. The company continued this pattern of growth and integration through the years by adding new storefronts in new markets and various acquisitions. Now with a presence that extends nationally beyond New England, CVS is one of the largest companies in the US with revenues exceeding $139 bn.
CVS Health is a health and wellness retailer that is committed to improving the well being of every customer. The company promises to deliver convenient access and quality services at affordable prices. Through a series of strategic moves, CVS has vertically integrated and scaled its business through four key areas:
- Retail/Pharmacy = traditional line of business in selling everyday products from beauty to food and dispensing prescriptions in brick-and-mortar retail stores.
- Caremark = Pharmacy benefits management (PBM) service that negotiates contracts between payors, manufacturers, and pharmacies and manages processing and fulfillment of prescription claims.
- MinuteClinic = retail clinic model that provides convenient access to common health services with high quality and low cost.
- Specialty = provides health management and pharmacy dispensing for patients with complex conditions.
CVS has managed to grow its core lines of business and broaden its base in terms of services and types of customers in a complimentary but also cannibalistic manner. Vertically integrating as a PBM and pharmacy has allowed CVS to benefit from increased efficiency in its supply chain. They have control over pricing contracts between payors and drug companies, which not only brings the company revenue through this service, but also gives them direct access to the networks of patients they manage and the reimbursement paid out to their pharmacy business. However Caremark PBM offers direct mail service to fulfill prescriptions, which competes against their core store retail business that relies on foot traffic.
Through new store openings and strategic acquisitions, most recently of Target Pharmacy, CVS has over 7,900 retail pharmacy stores and 70 million members under its PBM. CVS benefits from economies of scale and volume related discounts in pricing contracts. This model has uniquely allowed CVS to compete with Walgreens in a competitive and consolidated industry.
Alignment synergies between operating and business models have driven the impressive performance of the company over the last few years. Synchronization between the operating model and business model went even further in 2014 when CVS revamped its name and logo to CVS Health and made the decision to stop selling cigarettes. This strategic operating decision allows the company to compete more effectively in the health and wellness space and fulfill its promised value of improving consumer health.
CVS has shown its commitment to becoming a vertically integrated health care delivery company, but the strategy is a risky one. General merchandise retail margins (31.38%) have supported the lower margin pharmacy fulfillment service (5.39%). The core business of driving retail sales through reliable foot traffic from monthly drug prescriptions is being disrupted by their Specialty and PBM mail order prescriptions. This is balanced through the higher margins commanded on specialty drugs and the foot traffic generated through MinuteClinic services.
It will be key for CVS to focus on innovation as more retail and pharmacy services move online and through the mail. Through the creation of a new Digital Innovation Lab in Boston’s Back Bay, the company has increased its attention to digital strategy and mobile health. As a company that is not afraid to pursue vertical integration and self-disruptive services, CVS has proven to be successful as the chart below demonstrates and will allow them to become a long-term player in the large and growing healthcare industry.