Store clusters, brands help front-store business
CVS Caremark’s front-store business continues to experience solid performance despite a weak economy — success that can be credited to such factors as a skilled merchandising team, a focus on store brands and a clustering initiative that tailors stores’ merchandise mix based on how the stores are shopped in certain locations.
“The latest data shows that CVS has gained front-store share versus last year when compared to drug store and multi-outlet competitors. Our market share growth in the second quarter was 123 basis points and 18 basis points, respectively,” Larry Merlo, CVS Caremark president and CEO, told analysts during the company’s recent second- quarter conference call.
As mentioned, one way in which the company is striving to better meet shoppers’ needs is through its store clustering initiative.
“The reality is that one size does not fit all in retail these days. Every store has its own customer profile, and we can drive sales by better meeting customer needs,” Mark Cosby, EVP of CVS Caremark and president of CVS/pharmacy, told analysts during Analyst Day in late December.
CVS’ initial foray into My CVS began in 2009 as it varied assortments based on trip-based segmentation and rolled out two different clusters: the food convenience cluster and Urban Cluster.
Starting in 2009, its food convenience cluster — which doubles the amount of space dedicated to consumables — rolled out to 4,000 stores over the course of nine months. The result: a 12% increase in trips.
Meanwhile, the Urban Cluster has been “a big win” for the retailer and has demonstrated the power of My CVS in store clustering.
“The Urban Cluster can viewed as the general store where we implemented this cluster in stores with limited food competition. The cluster focuses on expanded grocery, the addition of fresh on-the-go foods, and we have implemented self-serve checkout units,” Cosby said. The results: an 8% boost in sales and 9% increase in profits.
By year-end 2011, 420 Urban Cluster stores were completed, and the retailer remains on track to complete 50 new urban cluster locations this year.
Now, the retailer is looking beyond trip-based segmentation and is testing several demographic-based and volume- based approaches.
“The company is looking at developing a unique selection for stores in low-income markets, as well as those with a large Hispanic customer base; other clusters are likely, but no specifics were provided,” stated Barclays Capital analyst Meredith Adler in a research note.
Company spokesperson Mike DeAngelis acknowledged that CVS/pharmacy has several other cluster concepts in development, but said the company is not yet prepared to comment, as it plans to begin introducing the concepts beginning in 2013.
Private brands, which provide higher margins, also are a major focus and a driver of front-store business for CVS/pharmacy. They currently account for about 17% of front-store sales, and it is estimated that they can reach 20% of sales over the next few years as the company makes efforts to bring the penetration in food and cosmetics closer to where it is in OTC and other healthcare items.
Moving beyond dispensing and toward adherence
CVS Caremark is also working to reinvent the role of its retail pharmacists and is gaining share by focusing on customer service, greater adherence, increased access and patient care improvements.
Pharmacy same-store sales increased 3.1% in 2011 — pushing CVS/pharmacy’s share of the total U.S. retail prescription market to 19.5%, up nearly six percentage points since 2004.
No doubt that much of the growth is credited to CVS Caremark’s more than 22,000 retail pharmacists, as their role increasingly shifts from primarily dispensing prescriptions to also providing services, including flu vaccinations and face-to-face patient counseling with respect to adherence to drug therapies, closing gaps in care and more cost-effective drug therapies.
For example, the company’s Retail Pharmacy adherence program is now in its fifth year and continues to experience strong performance. In the first half of this year alone, the CVS Caremark pharmacy teams proactively delivered 40 million live customer interventions across all of its stores, helping to improve adherence.
Then there is CVS Caremark’s Pharmacy Advisor program, which enables pharmacists to engage with PBM members who are diagnosed with chronic conditions, including diabetes and cardiovascular disease. The pharmacists counsel their patients about the importance of being adherent to their medications and identify gaps in care that they educate the patient about and can bring to their physician’s attention. A recent analysis showed that after one year in the Pharmacy Advisor program, certain members using CVS/pharmacy retail locations had a 17.2% decline in gaps in care.
With nonadherence costing the U.S. healthcare system an estimated $300 billion annually in avoidable healthcare costs, it is clear that improving adherence is critical.
Another growth driver for retail pharmacy profits is generics. CVS Caremark sees significant opportunities on the horizon to further increase its generic dispensing rate.
Between 2012 and 2015, about $90 billion of branded drugs are scheduled to go generic. Generic penetration currently is approximately 73%, but it could rise to 85% to 90% as many new generics are introduced in the market.
It should also be noted that CVS Caremark expects to retain many of the scripts it gained as a result of the Walgreens-Express Scripts impasse and has set retention strategies in motion to help it achieve that goal.
Integration key to managing specialty patients
Specialty may be the fastest-growing segment, but it may also be the most complicated, as this segment is comprised of very complex medications to treat such serious diseases as cancer, multiple sclerosis and hemophilia. The good news for CVS Caremark is, unlike the typical PBM, it can serve specialty patients through multiple touch points that include specialty mail pharmacies, as well as CVS/pharmacy and retail specialty pharmacy locations.
Specialty pharmacy is expected to be a $15 billion business for CVS Caremark, growing 17% annually over the past two years as it has added PBM lives and the category itself has grown.
During the second quarter, the specialty business continued to achieve significant growth as revenues rose a robust 44%. According to the company, that growth was driven by new PBM clients, new product launches and drug price inflation.
As part of its effort to further advance the business, CVS Caremark has developed programs to manage the portion of drugs that are billed directly to the payer under the medical plan and that fall outside of the traditional PBM contract terms. As previously reported by Drug Store News, this largely involves injectable drugs that are administered in a clinical setting, and the drug is then billed by the physician to the payer. Through the program, CVS Caremark believes it can generate savings of 15% to 20%.
During CVS Caremark’s Analyst Day in December, Per Lofberg, EVP of CVS Caremark and president of Caremark Pharmacy Services, told analysts that its integrated assets afford CVS Caremark a unique opportunity to further improve its value proposition in the specialty field.
“By more tightly coordinating these member touchpoints and including a subset of CVS retail pharmacies, much like Minute Clinics are established in close to 10% of CVS retail stores, we can make a meaningful improvement in results for patients and clients. And this is another example of how we are reinventing pharmacy to help members improve their health,” said Lofberg. “This integration will provide patients with a truly seamless experience, from initial intake to dispensing and adherence management. It will give patients easier access to their medications, as well as personal access to expert clinical pharmacists.”