“This is shaping up to be a very good year and we expect an even better 2010.” Such upbeat words have not been heard often in retail this year, but Tom Ryan, chief executive of US pharmacy retailer CVS, has every right to be on a high after turning in a strong set of second-quarter results.
Revenue from the retailer’s pharmacy operations increased to $13.8bn (£8.44bn) in the second quarter ending June 30 – up 17.2% on the same period last year on the back of last autumn’s acquisition of the 500-strong California-based Longs Drugs chain.
Even on a same-store sales basis the company’s growth looks hugely impressive. CVS’s 6.1% same-store sales rise compares favourably against the latest quarterly comparatives of its main specialist rivals; Walgreens posted 2.8%, while Rite Aid and Duane Reade registered 0.6% and 1.7% respectively.
Importantly, while all the main chains are seeing growth in their prescription sales, CVS is alone in enjoying a robust performance in its over the counter and general merchandise categories, where the lucrative private label and exclusive brand products lie.
As Walgreens and Duane Reade focus on overdue store remodelling programmes in an attempt to drive footfall and increase shopper exposure to private label, CVS is pursuing a different strategy. It is ploughing headlong into the expansion of its Caremark pharmacy benefit management (PBM) operations, with the result that revenues in that segment increased 22.1% in the quarter.
CVS’s vast PBM unit dwarfs the equivalent operations of its main rivals and, by offering Caremark patients the opportunity to collect 90-day prescriptions at CVS stores for the same discounted price that mail delivery customers enjoy, market share is being won.
The integration of PBM and drugstore operations is a controversial topic in the US, with independent pharmacists, unsurprisingly, being among the more vocal critics. The practice looks likely to come under closer scrutiny following a recent appeal by five senators calling for the Federal Trade Commission to review the 2007 merger between CVS and Caremark.
Nevertheless, the prospect of the merger being forcibly reversed looks a remote one at present, as consumers seem to be benefiting from cheaper prescriptions that the scale of the pharmacy giants can offer. What looks more likely is that Walgreen and Rite Aid will be forced to play catch up and ramp up their involvement in healthcare service provision.