One of the rationales behind the blockbuster $69 billion CVS Health -Aetna merger announced on Sunday is to help the drugstore giant make better use of its thousands of stores that dot the country.
At 9,700 pharmacy locations, including those within Target (TGT) stores, CVS has a sprawling footprint with which to offer customers everything from drug prescription pickup to health consultations to toilet paper. Once the Aetna deal closes sometime in 2018, assuming it passes muster with regulators, customers are likely to see more health clinic-style services at CVS stores, executives suggested on a conference call with investors on Monday.
It’s easy to see why: sales of general merchandise at CVS stores, items like paper towels, greeting cards and toothpaste, have been weak for a couple of years now as fewer people are coming into the stores, despite efforts by CVS to ramp up areas like beauty and health and wellness at hundreds of stores. People are buying these basic everyday items on Amazon.com (AMZN), at Walmart (WMT) and even at dollar stores more now, and with drive-through available at countless stores, many don’t even need to set foot in a store anymore. (Pharmacy sales on the other hand have been booming.)
Indeed, CVS Health’s “front-store” comparable sales have only increased one quarter in the last eight, even as comparable pharmacy sales have soared. At arch-rival Walgreens, the situation has been much the same.
But by buying Aetna, the third-largest U.S. health insurer with 22 million members, CVS is likely to go much further into customer care at its stores over time. CVS, which operates the 1,100 Minute Clinic centers (to about 400 similar centers at Walgreens), has already been testing things like vision and audiology centers.
“There is no question that we have the opportunities to repurpose some of the space in our stores to enable that to happen,” CVS Health Chief Executive Larry Merlo said on the call. “We know there’s a solution there in terms of being a complement to the physician.”
CVS’ clinics initially began with basic health care services like a cold or strep throat but now encompass more sophisticated services such as blood draws and keeping tabs on chronic conditions like diabetes. What’s more, a CVS store is an easy drive to tens of millions of Americans, an ordinary CVS with those services can turn into a new option compared to a hospital visit to get a blood test or get their blood pressure checked. Such clinics often operate more convenient hours than a hospital and cost less than a doctor visit. And this closer interaction with customers could reduce pressure on the overall health care system by reducing hospital stays, Merlo said on the call.
“The current U.S. healthcare system is failing too many people,” Merlo said.
At the same time, Wall Street seemed to be concerned by the size of the deal and the disruption it could cause to CVS as shares sank 5%. Moody’s applauded the deal but said it ‘will result in significant weakening of CVS’s credit metrics.” And Jefferies, an investment bank, said that “the transformation that CVS’s retail footprint will have to undergo, not to mention the capital and effort required to restructure its 9,000+ store footprint, poses meaningful operational risk.”
Nonetheless, expect to see less place for every day items at CVS stores eventually and more room for the higher value health care services, a move telegraphed by the company in 2014, when it changed its name from CVS Caremark to CVS Health. After all you can buy dental floss at a million places. But you can’t get your blood pressure measure checked just anywhere.
