Analysis: CVS held back by underinvestment in stores, lack of flair in retail ops

CVS has posted very strong overall revenue growth, mostly thanks to the acquisition of Aetna.

However, even without this, other divisions have performed well with growth coming from both the pharmacy services and retail pharmacy divisions.

Within retail, a longer cold and flu season and the shift of Easter into the second quarter, both helped to drive up total front of store revenues and to support a modest increase in underlying same-store sales. That said, we still believe that CVS has the potential to ramp up its retail performance and that it is still largely failing to seize on opportunities which could dramatically improve its retail fortunes.

The first opportunity is that for CVS to transform its stores into true wellness centers where consumers can go for advice, basic healthcare services and to find out about new health technology and wellness initiatives. Overall, this is a massive area of economic growth and there is currently no single player that truly exploits the space on a national scale. With its store reach and trusted brand, CVS has the potential to be that player. However, in our view, it is held back by its underinvested in stores which, with their dark and dingy atmosphere, suggest malady rather than vitality.

To be fair, the company is testing a new concept called HealthHub in several stores in Houston, TX. These stores and the design of the hubs represent an advancement from traditional shops; however, we do not believe the design or thinking is anywhere near radical enough. It represents a modest step forward rather than the leap up which CVS needs to take if it wants to become the Apple of wellness and health.

The second opportunity is for CVS to improve its standing in the beauty segment of the market. Despite rapid growth in the category, CVS has had its lunch eaten by Sephora and Ulta and its share of the beauty market has fallen substantially over recent years. There is an argument that suggests consumers will not buy premium or even mid-scale beauty brands at drug stores and that the focus is more on essentials and cheap everyday purchases.

In our view that argument is flawed. What consumers buy at drugstores is a consequence of what drugstores sell and the way they sell it. In this respect, CVS is the author of its own fate. As Target has shown over the past year, it is possible to transform a functional beauty offer into a compelling destination and to secure good growth from the transformation. In developing its embryonic BeautyIRL concept, CVS needs to take a leaf out of Target’s playbook, including examining how the company successfully developed a compelling own brand offer.

Away from stores, we are encouraged by some of the steps CVS is taking to compete with Amazon as the online giant makes a move into the drug delivery market. After a trial in several major cities, CVS’s CarePass fee-based membership program – which offers free delivery on drugstore products and medicines – is being rolled out nationwide. In our view, this is a necessary defensive step and one that CVS has been quick to take.

However, although members receive a monthly coupon to spend in store, we believe that the scheme has the potential to erode footfall to physical destinations over the longer term – an outcome that would be unhelpful for profits and revenue. This is one of the reasons why investment in and the reinvention of stores is so vital, so that customers have reasons to visit them that go beyond buying products.

Overall, CVS is a strong business with many advantages. However, it has always been let down by a lack of imagination and flair in its retail operation. If it wants to seize future opportunities and protect its front of store business that thinking now needs to change.

Neil Saunders is managing director of Global Data Retail