CVS Health’s proposed acquisition of Target’s in-store pharmacy business appears to be a win-win for both companies.
The $1.9 billion deal announced last week will vault CVS ahead of Walgreens, making it the largest pharmacy retail chain in the US. More significantly, by increasing its size and volume, CVS will be in a stronger position to bargain for better deals from drug wholesalers, driving down prices on prescription drugs.
By turning over its more than 1,600 in-store pharmacies to CVS, Target, which has been losing money on pharmacy, will be free to focus on reviving its core business, while receiving $20 million-$25 million in annual rent payments. Also, the CVS name is likely to draw more pharmacy customers to Target stores, increasing the opportunity for cross-shopping.
As the pharmacy business becomes ever more complex and competitive, retailers with noncore pharmacy operations may find it increasingly difficult to navigate the evolving health care environment. That’s why the deal makes good sense for Target and possibly other retail chains as well.
While the CVS-Target deal is the first big pharmacy outsourcing arrangement by a big-box store or supermarket, a recent Reuters article suggests there may be more to come as large supermarket chains and mass merchants with struggling pharmacies look for professional drugstore partners of their own. “Grocery store chains must be taking the news today and thinking hard about it,” Todd Huseby, a partner at AT Kearney, told Reuters. “Pharmacy is not really a core competence.” He cited Safeway and Albertsons as two supermarket chains that might consider such a deal. As future success in pharmacy hinges on being a low-cost buyer of generic drugs and dispensing specialty medications, supermarkets and discounters may find the business challenging. While some supermarkets, including Kroger and Safeway, increased the number of prescriptions filled last year, their prescription market share declined. By comparison, drugstore chains increased their prescription market share.
With drugstore operators facing a saturated landscape for building new stores, stores-in-stores provide an opportunity for growth and access to new markets at relatively low cost.
Industry Impact: The CVS-Target deal may be a model for struggling supermarket and other retail chains looking for professional drugstore partners of their own.
Alexandra Biesada shops everyday, whether she wants to or not, and pines for the days when it was strictly a recreational activity. She has covered the retail beat for Hoover’s since 2001. Follow her on Twitter.