Analysis: CVS is innovative in health, but unimaginative in retail
On an overall basis, this is a robust set of numbers for CVS. Total revenue is up, the pharmacy services division is performing well, and net income rose by 92.5%. On its own, this provides a stable platform for the $69 billion acquisition of Aetna. However, that CVS stands to gain around $1.2 billion a year as a result of the recent tax cuts, improves the prospects for both the acquisition and the company's future growth prospects.
CVS has said that it intends to invest $425 million of its tax-cut windfall on improving staff salaries and benefits. It will also use some of the proceeds to pay down debt once the Aetna deal completes. The most exciting investment, however, is a further push into data analytics to improve health outcomes and lower costs for its customers. We believe that this, along with more health services in stores, will give CVS a much more significant role in the healthcare sector. Over the medium term, this should boost both revenue and earnings.
One of the things we like about CVS's plans is the idea of making its stores more of a destination for health solutions. The healthcare market is overly complicated and can be hideously expensive. Should it get Aetna under its umbrella, CVS has an opportunity to help simplify processes and improve outcomes for patients. The idea of developing the healthcare equivalent of the Apple Genius Bar in shops is an interesting idea and should help to drive customer traffic to CVS's extensive network of stores.
As much as CVS is forward thinking and innovative in health, it is an extraordinarily unimaginative and backward-looking retailer. This is one of the reasons why front of store sales are still in negative territory despite very weak prior year comparatives and a boost to sales from remedies for a particularly nasty flu and cold season.
Our data also show that CVS largely missed out on the holiday season bonanza, which saw consumers spend freely and at elevated levels. Beauty, for example, was a robust category both for self-purchasing and for gifting. CVS was well down the batting order when it came to the retailers customers planned to, and did, use. The same holds true for almost every non-health category CVS sells. While we accept that CVS does not need to have the pulling power of Sephora or Ulta, it should and could do much better.
Unfortunately, relatively few retail shoppers see CVS as a destination in its own right, even for categories like beauty, which are naturally allied to its proposition. Given the scale of CVS, which puts its stores within easy reach of most Americans, this is a massive lost opportunity.
The reason for this relative lack of interest is the weak retail proposition. Our consumer research shows that CVS ranks well below its peers on attributes like store design, product displays, retail customer service, ease of shop, inspiration, and brand selection. In short, it is hopeless at retailing. The sales it does make are only because of its scale and convenience; but if it attains this with little effort, a bit more care, and attention could transform its prospects.
Making stores welcoming places where shoppers want to come is not just important for retail sales. If CVS truly wants to become to health solutions what Apple Stores have become to technology solutions, it must understand that shop aesthetics, customer service, the simplicity of the proposition, and many other retail skills matter. Failure to develop these things will mean CVS continues to fall short of its potential.
CVS has said that it intends to invest $425 million of its tax-cut windfall on improving staff salaries and benefits. It will also use some of the proceeds to pay down debt once the Aetna deal completes. The most exciting investment, however, is a further push into data analytics to improve health outcomes and lower costs for its customers. We believe that this, along with more health services in stores, will give CVS a much more significant role in the healthcare sector. Over the medium term, this should boost both revenue and earnings.
One of the things we like about CVS's plans is the idea of making its stores more of a destination for health solutions. The healthcare market is overly complicated and can be hideously expensive. Should it get Aetna under its umbrella, CVS has an opportunity to help simplify processes and improve outcomes for patients. The idea of developing the healthcare equivalent of the Apple Genius Bar in shops is an interesting idea and should help to drive customer traffic to CVS's extensive network of stores.
As much as CVS is forward thinking and innovative in health, it is an extraordinarily unimaginative and backward-looking retailer. This is one of the reasons why front of store sales are still in negative territory despite very weak prior year comparatives and a boost to sales from remedies for a particularly nasty flu and cold season.
Our data also show that CVS largely missed out on the holiday season bonanza, which saw consumers spend freely and at elevated levels. Beauty, for example, was a robust category both for self-purchasing and for gifting. CVS was well down the batting order when it came to the retailers customers planned to, and did, use. The same holds true for almost every non-health category CVS sells. While we accept that CVS does not need to have the pulling power of Sephora or Ulta, it should and could do much better.
Unfortunately, relatively few retail shoppers see CVS as a destination in its own right, even for categories like beauty, which are naturally allied to its proposition. Given the scale of CVS, which puts its stores within easy reach of most Americans, this is a massive lost opportunity.
The reason for this relative lack of interest is the weak retail proposition. Our consumer research shows that CVS ranks well below its peers on attributes like store design, product displays, retail customer service, ease of shop, inspiration, and brand selection. In short, it is hopeless at retailing. The sales it does make are only because of its scale and convenience; but if it attains this with little effort, a bit more care, and attention could transform its prospects.
Making stores welcoming places where shoppers want to come is not just important for retail sales. If CVS truly wants to become to health solutions what Apple Stores have become to technology solutions, it must understand that shop aesthetics, customer service, the simplicity of the proposition, and many other retail skills matter. Failure to develop these things will mean CVS continues to fall short of its potential.